<PAGE>
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, 1996
OR
[ ] 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 11 3/8% Senior Notes Due 2000
Name of Each Exchange on Which Registered None
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 20, 1996.
At December 20, 1996, Forecast "Registered Tradename"
Capital Corporation had 2,500 shares of Common stock
outstanding.
<PAGE>
The Forecast Group "Registered Tradename", L.P. and
Forecast "Registered Tradename" Capital Corporation
Form 10-K Annual Report
For the Year Ended October 31, 1996
PART I
Item 1 Business ...........................................
Item 2 Properties .........................................
Item 3 Legal Proceedings ..................................
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ...............................
Item 6 Selected Consolidated Financial Data ...............
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of operations................
Item 8 Financial Statements and Supplementary Data ........
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...............
PART III
Item 10 Directors and Executive Officers of the Registrant .
Item 11 Executive Compensation..............................
Item 12 Security Ownership of Certain Beneficial Owners and
Management ........................................
Item 13 Certain Relationships and Related Transactions .....
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K .......................................
Financial Statements and Supplementary Data...................
<PAGE>
PART I
ITEM I - BUSINESS
General
The Forecast Group "Registered Tradename", L.P.,
("Forecast" "Registered Tradename" or the "Company") designs,
constructs and markets single-family detached homes targeted at
"entry-level" and "first time move-up" home buyers, and is a
leading homebuilder (based on the number of homes closed) in
the metropolitan areas of Southern California, Northern
California and Phoenix, Arizona. Since 1971, the Company has
built and closed sales of approximately 10,700 new homes,
including 1,006 new homes during the fiscal year ended October
31, 1996.
Geographic Markets
The Company presently conducts its homebuilding activities
through three separate divisions. Initially, the Company's
operations were concentrated in Southern California, primarily
in regions known as the Inland Empire and Antelope Valley. The
Inland Empire encompasses portions of Riverside and San
Bernardino Counties and the Antelope Valley encompasses
portions of northern Los Angeles County and southern Kern
County. In 1995, the Southern California division expanded into
northern San Diego County.
In 1989, the Company diversified its operations into the
Sacramento Valley area of Northern California and in 1992
further diversification took place through expansion into the
Phoenix, Arizona metropolitan area. The Company's strategy of
diversification into the Northern California and Arizona
markets has resulted in additional home sales, closings and
profits which have partially counteracted the decline
experienced by the residential housing market of Southern
California from 1990 through 1995. Geographic diversity
provides greater balance to the Company's earnings and reduces
the Company's exposure to potentially adverse economic
conditions in any one geographic area.
Forecast is a California limited partnership. Forecast's
sole general partner is Forecast Homes, Inc., a California
corporation ("FHI"), which is wholly owned by Mr. James P.
Previti. Forecast Capital Corporation ("Capital") is a
California corporation and a wholly-owned subsidiary of
Forecast which was formed solely to facilitate the offering of
11 3/8% Senior Notes due in December 2000 (the "Offering"). The
Offering was completed in February 1994 in the aggregate
principal amount of $50,000,000. The Notes are the joint and
several obligation of Forecast and Capital; however, Forecast
received all net proceeds of the Offering.
Operating Strategy
Key elements of the Company's operating strategy include
the following:
1. Focus on Entry-Level Housing. The Company primarily builds
affordable entry-level homes in markets with potentially high
absorption rates. The Company's homes sell for approximately
$84,990 to $244,990 and generally within FHA/VA maximum loan
limits for the areas in which the Company operates. Some of the
benefits of FHA/VA financing include smaller down payments,
lower interest rates and guidelines which allow home purchasers
to qualify for a loan when conventional financing would be
unavailable. As a result, a majority of the Company's home
buyers obtain FHA/VA financing. The Company targets buyers of
entry-level homes because, among other reasons, (i) the depth
of the market for new homes is greatest in the entry-level
segment; (ii) first-time home buyers' purchase of a home from the
Company is not dependent upon the sale of an existing home; and
(iii) entry-level homes best accommodate the use of efficient
standardized production and construction methods.
2. Select Markets Anticipated to Have High Absorption Rates.
The Company regularly conducts market research and demographic
analyses of both its existing and potential markets to predict
the likely absorption rates of affordable entry-level housing
in those markets.
3. Purchase Entitled Land or Condition Land Purchases on
Obtaining All Necessary Entitlements Before Closing Escrow on a
Land Purchase. Management believes that purchasing entitled
land at low prices is a key component to profitability for the
Company. When desirable unentitled land is available for
purchase, the Company conducts an investigation into the timing
and likelihood of obtaining the necessary entitlements, and
will often condition its purchase upon the receipt of such
entitlements. As a consequence, the Company generally will not
close escrow on unentitled land until the final entitlements
have been received. This strategy allows the Company to begin
selling and constructing homes quickly after closing land
purchases, thus reducing the costs and risks associated with
lengthy entitlement procedures.
4. Maintain an Inventory of Land Generally Expected to be
Developed Within Two Years or Less. The Company generally
maintains inventories of land expected to be developed within
two years or less in an effort to match land costs with current
market prices for finished homes. Whenever possible, the
Company negotiates phased purchasing or "rolling options" to
minimize its investment in land inventory and the associated
carrying costs.
5. 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 requires
the mortgage company, typically its Rancho Mortgage "Registered
Tradename" affiliate, to confirm that the home buyer has the
apparent ability to qualify for the purchase of the home.
Management believes this pre-sales qualifying procedure results
in sales that are more likely to close, thereby reducing the
cancellation rate.
6. Defer Construction of a Home Until After a Sales Contract
Has Been Executed and a Deposit Has Been Received. In general,
the Company does not commence construction of a home until
after a sales contract has been signed and a deposit has been
received. The Company limits the construction of speculative
homes based, on the specific market conditions, in any single
community. As a result, the vast majority of the Company's
homes are delivered to homebuyers within a few days after
construction is completed.
7. 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. As a result of
this approach, the Company's average construction time is less
than 90 days. Each product line is periodically value
engineered to identify potential cost savings.
8. Demand a Commitment to Quality. The Company acts as general
contractor for each of its projects and requires its
subcontractors and suppliers to use high quality, durable
materials in the construction of its homes. The construction
manager for each project is responsible for ensuring that each
home meets the Company's standards for quality workmanship and
materials. The Company measures product quality and customer
satisfaction by conducting formal surveys with each homebuyer.
Summary of Residential Communities
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 October 31, 1996, the Company owned
1,956 of the lots available for future home closings and had
another 279 building lots under its control through land
acquisition contracts.
<TABLE>
- -----------------------------------------------------------------
# of Building Building Total Sales Sales
Active Lots Lots Under Building Backlog Price
Communities Owned Contract Lots as of Range
Available 10/31/96
(1) (2) (3)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
So. California 20 1,171 163 1,334 55 $84,990-
244,990
No. California 11 481 62 543 21 $108,990-
213,990
Arizona 7 304 54 358 89 $95,990-
153,990
- -----------------------------------------------------------------
Company Total 38 1,956 279 2,235 165
=================================================================
</TABLE>
____
(1) Building lots under contract include lots the Company has
the right to acquire under option provisions in certain
acquisition contracts and there can be no assurance
that 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, excluding any lot premiums and buyer
selected options, which vary from project to project.
Land Acquisition
In considering the purchase of land for the development of
a new home community, the Company reviews such factors as
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 absorption rate for new housing;
transportation availability and the estimated costs of
development. Generally, if requisite governmental agency
approvals have not been obtained, the Company enters into a
conditional agreement to purchase a parcel of land, making
only a nominal deposit on the property. The general policy of
the Company is to complete a purchase of land only when it can
reasonably project commencement of 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 being
able to obtain all requisite approvals 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
50 to 200 homes.
Development and Construction
The Company functions as the general contractor for the
construction of its homes and communities. Virtually all
construction work for the Company is performed by subcontractors.
The Company's employees coordinate the construction of each
community and the activities of subcontractors and suppliers, and
subject their work to quality and cost controls and compliance
with zoning and building codes. Subcontractors typically are
retained on a phase-by-phase basis to complete construction at a
fixed price. Agreements with the Company's subcontractors are
generally entered into only after competitive bidding. The
Company is not dependent to any material degree 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 and Marketing
The Company normally builds, decorates, furnishes and
landscapes model homes for each community and maintains on-
site sales offices. Management 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
generally are not permitted, but home buyers may select various
other optional construction and design amenities.
The Company sells virtually all of its homes through
Company sales representatives, who typically work from sales
offices in the model homes or from on-site trailers located in
each subdivision. To a lesser extent, the Company also uses
independent cooperative brokers to sell 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 makes extensive use of advertising and other
promotional activities, including newspaper and magazine
advertisements, brochures, direct mail and the placement of
strategically located signage in the immediate areas of its
communities. As the Company typically offers multiple
communities within a single market area, it is able to utilize
regional advertising that highlights all Company projects within
the same market area.
Homeowner Warranty
The Company provides homeowners with a limited one year
warranty wherein the Company will correct deficiencies 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. 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 homebuyers in addition
to those provided by the Company. California law establishes a
ten-year period and Arizona an eight-year period during which a
home buyer may seek redress for latent defects in the
architectural design or actual construction of its new homes. The
Company generally maintains reserves with respect to units
previously sold for the purpose of covering future warranty
expenditures.
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. In terms of price,
expertise and knowledge of local markets and the governmental
permitting and approval processes, the Company believes it
competes favorably in each of the geographic areas in which it
operates.
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 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, electric, 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, 1996, the Company employed 159 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 3,260 and 2,100 square feet of office space in
Sacramento and Phoenix, respectively. The Company's corporate
headquarters and Sacramento office are leased from affiliates of
Mr. Previti. See "Item 13 - Certain Relationships and Related
Transactions". Management believes the Company's existing offices
are adequate for its present needs.
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 of
holders during the Company's fiscal year ended October 31, 1996.
<PAGE>
PART II
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 financial
data should be read in conjunction with the consolidated
financial statements, related notes, and other financial
information included herein.
<TABLE>
- -----------------------------------------------------------------------------
Year Ended October 31
----------------------------------------------
($'s in 000's) 1996 1995 1994 1993 1992
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Operating Data:
- --------------
Homes Delivered:
# of Homes Delivered 1,006 915 849 1,022 916
======= ======= ======= ======= =======
Avg Price of Homes Del. $140.8 $139.4 $124.7 $120.7 $125.8
Sales Backlog (1):
# of Homes in Sales Backlog 165 200 155 56 175
======= ======= ======= ======= =======
Agg Value of Homes in Sales$22,659 $25,657 $20,530 $6,432 $21,302
Backlog
Avg Price of Homes in Sales $137.3 $128.3 $132.5 $114.9 $121.7
Backlog
Statement of Operations Data:
Homebuilding Revenues $141,652 $127,538 $105,849 $123,339 $115,245
Cost of Homes Sold 117,702 113,792 90,624 100,703 94,108
Selling & Marketing Expenses 15,215 12,114 9,075 8,804 7,914
G & A Expenses 7,006 7,508 8,032 10,172 9,870
Provision for Losses on
Real Estate Inventory 0 2,937 1,400 0 0
Loss on Abandoned Land Options 3 139 1,125 0 0
- ------------------------------------------------------------------------------
Operating Income (Loss) 1,726 (8,952) (4,407) 3,660 3,353
- ------------------------------------------------------------------------------
Interest Income 274 200 256 158 270
Interest & Fee Expense (2) 0 119 346 4,851 7,415
Other Income 14 472 609 257 509
- ------------------------------------------------------------------------------
Income/(Loss) before Income
Taxes and Extraordinary Gain 2,014 (8,399) (3,888) (766) (3,283)
- ------------------------------------------------------------------------------
Income Tax Expense (Benefit)(3) 0 0 0 199 1,018
Extraordinary Gain on Extinguishment
of Senior Notes 1,876 3,312 0 0 0
- ------------------------------------------------------------------------------
Net Income (Loss) $3,890 ($5,087) ($3,888) ($975) ($4,301)
==============================================================================
Balance Sheet Data:
- ------------------
Real Estate Inventory $80,760 $82,572 $93,573 $58,526 $62,668
Total Assets 102,186 97,241 113,926 79,897 80,830
Debt 60,195 60,925 72,163 33,088 41,094
Partners' Equity $26,924 $23,234 $27,022 $30,910 $28,472
Other Data:
- ----------
Gross Margin % 16.9% 10.8% 14.4% 18.4% 18.3%
EBITDA (4) $11,329 $692 ($1,173) $6,922 $6,995
Interest Incurred (5) $7,884 $8,073 $5,764 $3,179 $3,875
Coverage Ratio (6) 1.4 0.1 n/a 2.2 1.8
Debt to Equity Ratio (7) 2.2 2.6 2.7 1.1 1.4
</TABLE>
-----------------------------------
(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) Includes credit enhancement fees of $4,270,000 and
$6,716,000 for the years ended October 31, 1993 and 1992
respectively. No credit enhancement fees were incurred for
the years ended October 31, 1996, 1995 and 1994.
(3) As a partnership, Forecast is not subject to U.S. federal
and state income taxes for periods subsequent to the
Reorganization. Pursuant to the Indenture, distributions
for taxes may be made to partners in Forecast. See notes
to consolidated financial statements.
(4) "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.
(5) 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. Interest incurred excludes the
credit enhancement fees described in footnote (2) above.
(6) "Coverage Ratio" means the ratio of EBITDA to Interest
Incurred as calculated in accordance with the definition
of such term in the Indenture.
(7) "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. The most recent
peak in the industry cycle occurred in 1988 and 1989, which was
followed by a downturn in 1990 coinciding with the national
recession. California entered the recession later than most other
areas of the country. Since that time, economic conditions and
real estate values in California, particularly in Southern
California, have been relatively depressed in comparison to other
areas of the U.S.
The Company commenced a geographic diversification strategy
in fiscal 1989 in order to reduce its dependence on the Southern
California real estate market. The following table sets forth
certain information by geographic region for the fiscal years
1996, 1995 and 1994.
<TABLE>
For the Year Ended October 31
----------------------------------------------------------------------------
($'s in 000's) 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C>
Number of Homes Delivered:
- -------------------------
Southern California 432 377 368
Northern California 280 305 328
Arizona 294 233 153
-----------------------------------------
Total 1,006 915 849
=========================================
Housing Sales:
- -------------
Southern California $60,577 $50,962 $44,990
Northern California 43,484 44,741 44,275
Arizona 37,590 31,835 16,584
--------------------------------------
Total $141,652 $127,538 $105,849
======================================
Gross Profit:
- -----------
Southern California $10,420 $6,336 $5,565
Northern California 6,304 5,416 6,872
Arizona 7,226 1,994 2,788
--------------------------------------
Total $23,950 $13,746 $15,225
======================================
Gross Profit Margin:
- -----------------
Southern California 17.2% 12.4% 12.4%
Northern California 14.5% 12.1% 15.5%
Arizona 19.2% 6.3% 16.8%
--------------------------------------
Total 16.9% 10.8% 14.4%
======================================
</TABLE>
During the fiscal year ended October 31, 1996, the Company
reported revenues of $141.7 million and net income of $3.9 million,
which includes a $1.9 million extraordinary gain from the early
retirement of a portion of the Company's Senior Notes. The operating results
for fiscal 1996, while showing improvement over fiscal 1995, were
negatively impacted by several significant factors: (1) the
lingeringeffects of the recession in Southern California where the Company
has historically derived a majority of its homes sales and (2) heightened
competition in each of its three geographical markets which caused
the Company to incur a greater cost for land, increased selling and
marketing expenses and increased customer incentives and, in some
cases, decreased sales prices. However, management believes that
recent economic reports of increasing job formation and stabilizing
interest rates are likely to boost consumer confidence and result
in more potential homebuyers over the next few years.
Seasonality
The Company's results of operations are highly seasonal.
The Company's annual operating cycle typically begins with fewer
customer orders from October through December, followed by stronger orders
from January through June and moderate orders from July through
September. Since home deliveries typically follow customer orders by up to
120 days, the Company's revenues are usually lowest in the first and
second quarters which parallel seasonally slow sales periods.
Backlog
The Company's backlog at October 31, 1996 and 1995 was 165
homes with an aggregate sales value of $ 22.7 million, and 200 homes
with an aggregate sales value of $25.7 million, respectively. Sales of
the Company's homes are made pursuant to standard sales contracts
generally entered into only after customers have been prequalified for
financing of their selected home. The Company only recognizes revenue
on homes covered by sales contracts when such sales are closed and
title passes to the buyer. The period of time between the execution
of a sales contract for a home and the closing generally varies
from as little as one month to as long as three to four months
depending on, among other things, the stage of the development on any
single lot, and weather conditions.
Results of Operations
A comparative summary of operating results for fiscal years
1996, 1995 and 1994 is presented in the following table:
<TABLE>
($'s in 000's) For the Year Ended October 31
---------------------------------
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Amounts as a Percentage of
Revenues:
- -------------------------
Homebuilding Revenues 100.0% 100.0% 100.0%
Cost of Homes Sold 83.1% 89.2% 85.6%
-------- -------- -------
Gross Profit 16.9% 10.8% 14.4%
-------- -------- --------
Operating Expenses:
Selling & Marketing Expenses 10.7% 9.5% 8.6%
General & Administrative 4.9% 5.9% 7.6%
Expenses
Provision for Impairment of 0.0% 2.3% 1.3%
Real Estate Inventory
Loss on Abandoned Land Options 0.0% 0.1% 1.1%
-------- -------- --------
Total Operating Expenses 15.7% 17.8% 18.5%
-------- -------- --------
Operating Income (Loss) 1.2% (7.0%) (4.2%)
======= ======= =======
Average per Home Closed ($):
- --------------------------
Homebuilding Revenues $140,807 $139,386 $124,675
Cost of Homes Sold 117,000 124,363 106,742
-------- -------- --------
Gross Profit 23,807 15,023 17,933
-------- -------- --------
Operating Expenses:
Selling & Marketing Expenses 15,124 13,239 10,689
General & Administrative 6,964 8,205 9,461
Expenses
Provision for Impairment of
Real Estate Inventory - 3,210 1,649
Loss on Abandoned Land Options 3 152 1,325
-------- -------- --------
Total Operating Expenses 22,091 24,807 23,124
-------- -------- --------
Operating Income (Loss) $1,716 ($9,784) ($5,191)
======= ======= =======
Other Data:
- ----------
Number of Homes Closed 1,006 915 849
Number of Homes Sold 971 960 948
Number of Homes in Sales Backlog 165 200 155
Aggregate Value of Sales Backlog $22.7 $25.7 $20.5
($ millions)
</TABLE>
Fiscal 1996 Compared To Fiscal 1995
Homebuilding revenues for the year ended October 1996 were
$141.7 million, an increase of $14.2 million or 11% from the year ended
October 1995 as the number of homes closed increased to 1,006 at an
average sales price of $140,800 compared to 915 homes closed at an
average sales price of $139,400 in the prior year.
Cost of homes sold for the year ended October 1996 was
$117.7 million, an increase of $3.9 million from the year ended October
1995. The increase generally corresponds with the greater closing
volume;however, gross margins increased as percentage of housing revenues
to 16.9% during fiscal 1996 from 10.8% during fiscal 1995. This
increase over the prior year is generally attributable to the Company's
improved land position as newer communities with more favorable land costs
were being opened and a normal provision for warranty expense.
General and administrative expenses were $7.0 million or
4.9% of revenues in fiscal 1996 down from $7.5 million or 5.9% of revenues
during fiscal 1995 as a result of the Company's efforts to maintain
overhead expenses at a level commensurate with homebuilding operations.
Selling and marketing expenses increased to $15.2 million or
10.7% of homebuilding revenues for the year ended October 31, 1996, from
$12.1 million or 9.5% for the year ended October 31,1995. The increased
expense is attributable to both higher closing volumes and increased
competition in the Company's markets which in turn required increased
customer incentives.
During the year ended October 1996, the Company repurchased a
portion of its Senior Notes having a aggregate outstanding principal
amount of $5,315,000. These repurchases resulted in an outstanding
principal balance of $34,475,000 as of October 31, 1996 and an
extraordinary gain of $1,876,000 being booked in fiscal year
1996. In 1995, the Company repurchased $10,210,000 of its Senior Notes
resulting in an extraordinary gain of $3,312,000. No impairment loss
was recorded in fiscal 1996, compared to a provision of $2,937,000 in
fiscal 1995, as a result of the application of FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.
Fiscal 1995 Compared To Fiscal 1994
Homebuilding revenues for the year ended October 1995 were
$127.5 million, an increase of $21.7 million or 20% from the year ended
October 1994 as the number of homes closed increased to 915 homes closed
at an average sales price of $139,400 compared to 849 homes closed at an
average sales price of $124,700 in the prior year.
Cost of homes sold for the year ended October 1995 was $113.8
million, an increase of $23.2 million from the year ended October
1994. The increase generally corresponds with the greater closing
volume, however gross margins decreased as a percentage of housing
revenues to 10.8% during fiscal 1995 from 14.4% during fiscal
1994. This decrease is generally attributable to the mix of units sold
in lower margin communities during fiscal 1995. In comparing fiscal
1995 to fiscal 1994, the finance cost component increased to 4.2% of
housing revenues from 2.1% and warranty costs increased to 1.5% of housing
revenues from 0.6%. Results for the year ended October 31, 1995
includea provision for warranty costs of approximately $1.9 million.
Approximately $1.2 million of this amount represents unusually
high warranty costs incurred primarily on projects which have been
completed and for product lines that have been discontinued. Management does
not expect this level of warranty costs in future periods.
Selling and marketing expenses increased to $12.1 million or
9.5% of homebuilding revenues from $9.1 millions or 8.6% in fiscal
1994. The increase generally corresponds with the Company's greater sales
volume. To remain competitive and maintain its market share, the Company
has increased selling and marketing expenses and increased customer
incentives.
General and administrative expenses were $7.5 million or
5.9% of revenues in fiscal 1995 down from $8.0 million or 7.6% of revenues
during fiscal 1994. In absolute terms, the decrease in general and
administrative expenses was $0.5 million but represented a reduction
of 1.7% of revenues. During 1995, the Company reduced its staff
by more than 10% as part of a concerted effort to reduce all overhead
as a percentage of housing revenues. Additionally, the Company replaced its
defined contribution retirement plan with a non-contributory 401(k)
plan and implemented a number of other significant decreases in employee
costs and office expenses.
In the fourth quarter of fiscal 1995, the Company elected to
early adopt the provisions of FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (Statement 121). Under Statement 121, if the sum of
the estimated undiscounted cash flows is less than the carrying value
of the assets, an impairment loss must be recorded. During the fourth
quarter of fiscal 1995, management prepared detailed projections
of future undiscounted cash flows for all real estate projects where
impairment indicators were present. Based upon that analysis, the
Company concluded that six of those real estate developments were
impaired, due primarily to deterioration of net selling prices and
the rate of absorption. The resultant impairment loss recognized by
the Company upon the adoption of Statement 121 in the fourth quarter
of fiscal 1995 was $2,937,000.
The process involved in the determination of future cash
flows 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 repayments or refinancing of existing
indebtedness. As the amount and timing of the realization of cash flows
from the Company's real estate developments is dependent upon such future
uncertain events and conditions, the ultimate realization may be materially
different from amounts presently estimated in determining fair value.
During the year ended October 1995, the Company repurchased a
portion of its Senior Notes having an aggregate outstanding
principal amount of $10,210,000 resulting in an extraordinary gain of
$3,312,000.
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 lengthy periods of time in advance of revenue
realization. The Company generally finances its operations with secured
borrowings from commercial banks, financial institutions and private
investors, unsecured borrowings in the public market, and with available
cashflow from operations.
The Company has commitments for $25.5 million under several
revolving credit facilities with commercial banks and financial
institutions of which $9.0 million was outstanding at October
31,1996. In addition, the Company had community specific facilities to
provide aggregate funding of $23.3 million of which $11.4 million was
outstanding and $11.9 million is available to build out the
respective communities. The Company also benefits from a line of credit
which is secured by some of its model homes for an amount not to exceed
$5.8 million of which $5.3 million was outstanding as of October 31,
1996. Borrowings under the credit facilities are secured by liens on
specific real property owned by the Company. The aggregate outstanding
principal balance under the Company's credit facilities was $ 25.7
million as of October 31, 1996.
In February 1994, the Company issued $50 million in Senior
Notes through a public debt offering, of which $34,475,000 were still
outstanding on October 31, 1996. The notes are due in December
2000. Interest at the rate of 11 3/8% per annum is payable semiannually
on June 15 and December 15 of each year.
During the year ended October 1996, the Company repurchased a
portion of its Senior Notes having an aggregate outstanding
principal amount of $5,315,000 from Mr. Previti and in the open
market. Net of allocable issuance costs, the resultant income of
$1,876,000 is reported as an extraordinary gain in the Company's consolidated
financial statements for the year ended October 31,1996.
The Indenture governing the Senior Notes requires the
Company to maintain a minimum net worth of $25 million. As of October 31,
1995, the Company had not satisfied the net worth requirement, however, the
minimum net worth was restored in fiscal 1996. See note 5 of notes
to consolidated financial statements for further discussion regarding
the net worth requirement.
The Indenture covenants also limit total outstanding
recourse debt to $15 million unless, at the time the recourse debt is incurred
and after giving effect to the proceeds therefrom, certain threshold
tests are met for interest coverage and debt to equity ratios, as
defined in the Indenture. The Company did not meet those ratios as of
October 31, 1996, the Company's outstanding recourse debt was approximately
$6.5 million and approximately $8.5 million in additional "recourse"
debt could be incurred. The Company is not precluded from incurring
debt on a non-recourse basis.
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.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the consolidated financial statements,
Report ofIndependent 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.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Forecast is a limited partnership and has no officers or
directors. The sole general partner of Forecast is Forecast
"Registered Tradename" Homes, Inc. ("FHI"). FHI manages the
business and affairs of Forecast. Capital is a wholly-owned subsidiary of
Forecast. The directors and executive officers of FHI and
Capital are as follows:
Name Age Position
---- --- --------
James P. Previti 50 Chairman of the Board and President
Joseph M. Carman 47 Executive Vice President, Forward Planning
Frank Glankler 46 Senior Vice President, Chief Operating Officer
Larry R. Day 47 Senior Vice President, General Counsel and Secretary
Thomas Connelly 47 Senior Vice President and Chief Financial Officer
Jack Firestone 75 Director
Steven K. Fowlkes* 42 Director
Peter T. Healy 45 Director
Leo Previti** 43 Director
* Member of Audit Committee
** Member of the Compensation Committee
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 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 and President of FMC, and Inland Empire Investments Inc. ("IEI"), each
of which are affiliates of the Company. Mr. Previti is also the
Chairman of the Board of Rancho Mortgage "Registered Tradename"
Corporation, an affiliate of the Company. See "Relationships with
Affiliates." Mr. Previti is the brother of Leo Previti.
JOSEPH M. CARMAN joined the Company's predecessor as
Director and Vice President in charge of forward planning in 1988. Mr. Carman
is also a director and officer of IEI. From 1982 to 1985, Mr. Carman
was Vice President of operations for TAC Development, Inc., a California
corporation, that engaged in land development.
FRANK GLANKLER has served as a Senior Vice President and
Chief Operating Officer since December after returning to the company in
July 1995 as Vice President of Operations. 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 a 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. He was elected to GP'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
State of California and Vermont, and is a licensed California real
estate broker.
THOMAS CONNELLY joined the Company as Senior Vice President
and Chief Financial Officer in November 1996. Mr. Connelly previously
served as Senior Vice President of Washington Homes, Inc. since
August 1988 and Chief Financial Officer from September 1994 until
September 1996. He continues to serve as Director having first been elected
in September 1992. Mr. Connelly has over 21 years experience in real
estate finance and development and has received an MBA degree in
finance from The State University of New York at Buffalo where
also received a BA in Economics.
JACK FIRESTONE, a private investor, became a Director of the
Company in January 1996.
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'Melveney &
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.
The Board of Directors of FHI is elected annually by Mr. James
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 generally 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
whose total compensation for services rendered during fiscal 1996
exceeded $100,000 (collectively, the "Named Executive Officers"):
<TABLE>
Summary Compensation Table
- --------------------------------------------------------------------------
Annual Compensation------------
All Other
Name Principal Position Salary Bonus Compensation
- --------------------------------------------------------------------------
<S> <S> <C> <C> <C>
James P. Previti President $150,000 $ 0 $ 0
Frank Glankler Chief Operating Officer
& Sr. Vice President 105,000 27,926 7,200
Larry Day Senior Vice President
& General Counsel 105,000 0 7,200
Joseph Carman Exec. Vice President 105,000 0 0
</TABLE>
Forecast and Mr. James Previti are parties to an employment
agreement whereby Mr. Previti's annual compensation is $150,000,
plus a quarterly bonus of 5.0 percent of the pretax consolidated net
income of the Company. The Indenture prohibits any amendments to such
employment agreement, and is renewable for successive periods of one
year, each at the discretion of the Board of Directors. Mr. Previti's
existing contract extends through October 31,1997. See notes to
consolidated financial statements.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of November 1, 1996, the
beneficial ownership of the partnership interests in Forecast by
(a) each of the directors of GP and Capital, (b) the directors
and officers of GP and Capital as a group, and (c) each person known
to the Company to own beneficially more than 5% of Forecast's
limited partnership interests or general partnership interests.
<TABLE>
- -----------------------------------------------------------------------------
Name of Beneficial Owner [1] Type of % of % of
Interest Profits/ Class
Losses/
Capital
- -----------------------------------------------------------------------------
<S> <S> <C> <C>
James P. Previti [2] General Partner 100.00% 100.00%
James P. Previti [3] Limited Partner 100.00% 100.00%
Joseph M. Carman [4] Limited Partner 1.50% 1.52%
All directors and officers as a group General Partner 101.50% 101.50%
(9 persons) [2][4]
All directors and officers as a group Limited Partner 101.50% 101.50%
(9 persons) [3][4]
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%
</TABLE>
[1] The address of each beneficial owner is: 10670 Civic
Center Drive, Rancho Cucamonga, California 91730.
[2] Reflects beneficial ownership resulting from ownership
of all of the outstanding capital stock of GP.
[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.
[4] Reflects the subscription for limited partnership
interests in Forecast by Mr. Carman consummated upon
completion of the Offering.
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 previously owned by the James
Previti Family Trust (the "Trust") in various corporations and partnerships.
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 co
trustee.
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.
Land Sales
In March 1996, the Company sold a 8.1 acre parcel of land
located in Murrieta, California 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 of $1,679,000 of
indebtedness related to the parcel sold.
Receivables From Affiliates
As of October 31, 1996, receivables from related parties
include the note receivable related to the sale of land in Bullhead
City, Arizona in the amount of $641,000 bearing interest at 9.5% and
due in April 1997, a note receivable in the amount of $844,000 related
to a land sale in Murrieta, California bearing interest at 10% and
due March 1997, and a promissory note from Mr. Previti in the amount
of $1,083,000, which is secured by a limited partnership interest
in River Road Ventures (a California general partnership), is due
June 15, 1997 and bears interest at 10.5% per annum.
The Company also holds a non-recourse promissory note made by
Mr. Carman in the amount of $463,650, in connection with his purchase
of a 1.5% limited partnership interest in the Company purchased in
fiscal 1994, and also holds a $300,000 note due from Forecast "Registered
Tradename" Homes, Inc. in connection with its initial investment in the
Company. See Note 3 of Notes to Consolidated Financial Statements.
Management Services
The Company entered into management services agreements with
several affiliates as a part of the reorganization in 1993,
described above. 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. The Company charged
$142,000 in management fees to affiliates under these agreements
during fiscal 1996.
Transactions with Mortgage Banking Affiliate
Rancho Mortgage "Registered Tradename" Corporation
("Rancho"), a corporation in which Mr. Previti is the sole stockholder, was
formed in 1987, primarily to provide financing for customers of the Company.
As a mortgage banker, Rancho completes the processing of loan
applications, performs credit checks, submits applications to mortgage lenders
for approval and originates and sells mortgage loans. Rancho has
warehouse lines of credit to fund the mortgage loans on an interim basis.
The FHA and VA have each approved Rancho as a qualified mortgage lender.
During the year ended October 31, 1996, Rancho provided
mortgage financing for approximately 60% of the homes sold by the Company,
and the Company's customers accounted for approximately 65% of
Rancho's loan originations. The Company believes that the pricing of
mortgage loans for its customers is substantially equivalent to the pricing
available from unaffiliated mortgage companies.
Insurance Brokerage Services
IEI, an affiliate of the Company and owned by the Trust is a
licensed insurance broker that does business as Inland Southern
Insurance Services ("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 the provision of
its customer lists.
The Company purchases 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 approximately 15,500 square feet of
office space for its corporate headquarters from Previti Realty Fund,
L.P., under a lease expiring in 1998 and approximately 7,800 square
feet of office space for its Sacramento office under a leasing expiring
June 30, 2004. The leases contain "triple net" provisions requiring
the Company to pay insurance, taxes and operating expenses associated with
each building. The minimum rent may be increased annually based
upon changes in the Consumer Price Index. The Company believes that
the terms and conditions of these leases are equivalent to such
provisions as would be available on an arms' length, fair market value basis.
Loans Payable
From time to time, Mr. Firestone and Mr. Carman have made non
recourse loans to the Company to partially fund the acquisition of specific
communities. The loans bear interest at 12% and are repaid as
homes are closed in the respective communities. As of October 31,1996
the Company was obligated to Mr. Firestone for $250,000 and Mr. Carman
for $50,000, respectively for such loans. The loans were made on
terms commensurate with those generally available for similar loans.
<PAGE>
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 Mortgage Corporation, Forecast
Corporation, Inland Empire Personnel Inc. and Forecast
Development, L.P.
1.2 Articles of Incorporation of Forecast "Registered
Tradename" Capital Corporation.
1.3 Bylaws of Forecast Capital Corporation.
2.1 Form of Indenture by and among The Forecast Group, L.P.,
Forecast 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,
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 S-1 and Amendments thereto dated November 24,
1993, January 18, 1994, February 7, 1994 and February 11, 1994
and are incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the
last quarter of the period covered by this report.
<PAGE>
<PAGE>
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 "Registered Tradename" GROUP, L.P.
By: FORECAST "Registered Tradename" CAPITAL CORPORATION
By: /s/ James P. Previti
--------------------
President
By: FORECAST HOMES, INC.
A California Corporation
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 "Registered Tradename" GROUP, 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 20, 1996
and President
(Principal Executive Officer)
/s/ Thomas Connelly
- --------------------
Thomas Connelly Senior Vice President December 20, 1996
(Principal Financial & Accounting Officer)
/s/ Joseph M. Carman
- ---------------------
Joseph M. Carman Executive Vice President December 20, 1996
Forward Planning
/s/ Larry R. Day
- -----------------
Larry R. Day Senior Vice President December 20, 1996
General Counsel & Secretary
FORECAST "Registered Tradename" CAPITAL CORPORATION
Name Title Date
---- ----- ----
/s/ James P. Previti
- --------------------
James P. Previti Chairman of the Board December 20, 1996
and President
(Principal Executive Officer)
/s/ Thomas Connelly
- --------------------
Thomas Connelly Senior Vice President December 20, 1996
(Principal Financial & Accounting Officer)
/s/ Joseph M. Carman
- ---------------------
Joseph M. Carman Executive Vice President December 20, 1996
Forward Planning
/s/ Larry R. Day
- -----------------
Larry R. Day Senior Vice President December 20, 1996
General Counsel & Secretary
<PAGE>
The Forecast Group "Registered Tradename", L.P. and
Forecast "Registered Tradename" Capital Corporation
Index to Financial Statements
The Forecast Group, L.P.
-------------------------
Report of Independent Auditors...................................
Consolidated Balance Sheets as of October 31, 1996 and 1995 .....
Consolidated Statements of Operations and Partners' Equity
for the Years Ended October 31, 1996, 1995 and 1994......
Consolidated Statements of Cash Flows
for the Years Ended October 31, 1996, 1995 and 1994 .....
Notes to Consolidated Financial Statements ......................
Forecast Capital Corporation
----------------------------
Report of Independent Auditors...................................
Balance Sheets as of October 31, 1996 and 1995 ..................
Statements of Operations and Shareholders' Equity (Deficit)
for the Years Ended October 31, 1996, 1995 and 1994 .....
Consolidated Statements of Cash Flows
for the Years Ended October 31, 1996, 1995 and 1994 ......
Notes to Financial Statements....................................
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
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, 1996 and 1995, and the related
consolidated statements of operations and partners' equity, and cash flows for
each of the three years in the period ended October 31, 1996. 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 generally
accepted auditing standards. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
December 16, 1996
<TABLE>
The Forecast Group "Registered Tradename", L.P.
Consolidated Balance Sheets
($'s in 000's)
October 31
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Assets:
Cash and Cash Equivalents 12,350 8,090
Accounts Receivable 466 665
Accounts and Notes Receivable,
Related Parties 5,239 2,495
Real Estate Inventory 80,760 82,572
Property and Equipment, Net 1,171 1,234
Other Assets 2,200 2,185
--------- ---------
Total Assets 102,186 97,241
========= =========
Liabilities & Partners' Equity:
Accounts Payable 11,443 9,584
Accrued Expenses 3,624 3,498
Notes Payable:
Senior Notes at 11 3/8%
due December 2001 34,475 39,790
Collateralized by R.E. Inventory 25,720 21,117
Other Notes Payable - 18
-------- --------
Total Notes Payable 60,195 60,925
-------- --------
Total Liabilities 75,262 74,007
Commitments and Contingencies (Note 9)
Partners' Equity 27,688 23,998
Less: Capital Notes Receivable
from Partners (764) (764)
--------- ---------
Net Partners' Equity 26,924 23,234
--------- ---------
Total Liabilities & Partners' Equity 102,186 97,241
========== =========
</TABLE>
<TABLE>
The Forecast Group "Registered Tradename", L.P.
Consolidated Statements of Operations and Partners' Equity
($'s in 000's)
For the Year Ended October 31
-------------------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Homebuilding Revenues $141,652 $127,538 $105,849
Cost of Homes Sold 117,702 113,792 90,624
-------- -------- --------
23,950 13,746 15,225
-------- -------- --------
Operating Expenses:
Selling & Marketing Expenses 15,215 12,114 9,075
General & Administrative Expenses 7,006 7,508 8,032
Provision for Impairment of
Real Estate Inventory - 2,937 1,400
Loss on Abandoned Land Options 3 139 1,125
-------- -------- -------
Total Operating Expenses 22,224 22,698 19,632
-------- -------- -------
Operating Income (Loss) 1,726 (8,952) (4,407)
Other Income (Expenses):
Interest Income 274 200 256
Interest & Fee Expense - (119) (346)
Other Income and Expenses 14 472 609
-------- -------- -------
Total Other Income (Expenses) 288 553 519
-------- -------- -------
Income (Loss) before Extraordinary Gain 2,014 (8,399) (3,888)
Extraordinary Gain on Extinguishment
of Senior Notes 1,876 3,312 -
-------- -------- -------
Net Income (Loss) $3,890 ($5,087) ($3,888)
======== ======== =======
</TABLE>
<TABLE>
The Forecast Group "Registered Tradename", L.P.
Consolidated Statements of Cash Flows
($'s in 000's)
For the Year Ended October 31
----------------------------------------
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income (Loss) $ 3,890 $ (5,087) $ (3,888)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Generated from (Used for)
Operating Activities
Extraordinary Gain on Extinguishment
of Senior Notes (1,876) (3,312) -
Depreciation and Amortization on
Property and Equipment 281 240 135
Loss (Gain) on Sale of Property
and Equipment 5 41 (1)
Decrease in Accounts Receivable 199 228 563
Dec/(Inc) in R.E.Inventory 1,812 11,001 (35,047)
Dec/(Inc) in Other Assets (203) 314 84
Inc/(Dec) in Accounts Payable and
Accrued Expenses 2,035 (1,648) (761)
Inc/(Dec) in Other Liabilities (50) 50 (397)
-------- -------- --------
Net Cash Generated from (Used for)
Operating Activities 6,093 1,827 (39,312)
-------- -------- --------
Investing Activities:
Additions to Property and Equipment (226) (426) (609)
Proceeds from Sale of Property and Equip 3 78 49
Principal Received on GNMA Certificates - - 1,155
Decrease in Certificates of Deposit - - 1,150
-------- -------- --------
Net Cash Generated from (Used for)
Investing Activities (223) (348) 1,745
-------- -------- --------
Financing Activities:
Issuance of Senior Notes at 11 3/8%
due December 2001 - - 50,000
Costs Associated with Issuance of
Senior Notes - - (2,316)
Retirement of Senior Notes at 11 3/8%
due December 2001 (3,251) (6,485) -
Decrease (Increase) in Accounts and Notes
Receivable, Related Parties (2,944) (436) 985
Proceeds from Notes Payable 72,614 39,003 55,287
Proceeds from Notes Payable,Related Parties 2,221 - -
Principal Payments on Notes Payable (68,029) (38,510) (66,212)
Principal Payments on Notes Payable,
Related Parties (2,221) (222) -
-------- -------- --------
Net Cash Generated from (Used for)
Financing Activities (1,610) (6,650) 37,744
-------- -------- --------
Inc/(Dec) in Cash and Cash Equivalents 4,260 (5,171) 177
Cash/Cash Equivalents at Beg. of Period 8,090 13,261 13,084
-------- -------- --------
Cash/Cash Equivalents at End of Period $ 12,350 $ 8,090 $ 13,261
======== ========= ========
</TABLE>
<PAGE>
THE FORECAST "Registered Tradename" GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 general partner is Forecast Homes, Inc. ("FHI"), a California
corporation, which owns a 1% interest in the profits, losses and
capital of the Company. Forecast 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 wholly-owned entities engaged in single-family
residential real estate development. 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.
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 the fourth quarter of fiscal 1995, the Company elected to
early adopt the provisions of FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of " ( Statement 121 ). Under 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 undiscounted cash flows 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 longlived
assets that are held for disposal be reported at the lower of the
assets' carrying amount or fair value less costs of disposal.
Upon adoption of Statement 121 in the fourth quarter of
fiscal 1995, management analyzed future undiscounted cash flows for all
real estate projects where impairment indicators were present. Based
upon that analysis, the Company concluded that six of those real estate
projects were impaired, due primarily to continuing deterioration
of net selling prices and the rate of sales. The Company then
estimated the fair value of those projects with a resulting impairment loss
of $2,937,000 which was reflected in the fourth quarter of fiscal
1995.
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 repayments 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 required down payments are received,
continuing investment and involvement criteria are met, and title
is conveyed to the buyer at close of escrow.
Selling expenses include escrow charges, commissions, sales
incentives, advertising and promotion and the cost of model home
center operation and maintenance and 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,
interest, and property taxes equally to homes within a particular
subdivision or parcel.
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 five to seven years.
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 homebuyers 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, 1996 and 1995 are
costs associated with the issuance of Senior Notes in the amount of
$1,043,000 and $1,493,000 (net of accumulated amortization of
$868,000 and $606,000, respectively). The Company is amortizing these costs
over seven years and treats the amortization as additional interest
incurred.
Income Taxes
The Company, as a partnership, is not subject to federal
and state income taxes since the results of its operations will be
allocated to the partners for inclusion in their respective income
tax returns.
Reclassifications
Certain amounts in the prior years have been reclassified to
conform to the current year financial statement presentation.
3. ACCOUNTS AND NOTES RECEIVABLE, RELATED PARTIES
Accounts and notes receivable, related parties, consist of
the following:
<TABLE>
($'s in 000's) October 31
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Note receivable from Mr. Previti,
Collateralized by a partnership
interest in River Road Ventures $1,083 $1,083
Note receivable from Mr. Previti,
secured by an interest in
Senior Notes 1,699 --
Note receivable from Newport Murrieta
Land Co., secured by real property
in Riverside County, California 844 --
Note Receivable from Previti Realty
Fund secured by real property
in Mohave County, Arizona 641 641
Receivables from other affiliates, net 907 479
Receivable from Rancho Mortgage Corp. 65 292
----- -----
Total $5,239 $2,495
====== ======
</TABLE>
As of October 31, 1996 and 1995, 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 a limited partnership
interest in River Road Ventures (a California general partnership), is
due June 15, 1997 and bears interest at 10.5% per annum.
The note receivable for $1,699,000 due from Mr. Previti as of
October 31, 1996 represents funds advanced , including interest,
to facilitate Mr. Previti's purchase of the Company's Senior Notes
from third parties. The loan bears interest at 12% and is due in April
1997 (see Note 5).
A note in the principal amount of $844,000 is secured by
property in Riverside, California (see Note 6) is due in March 1997 and
bears interest at 10% per annum.
Another note in the principal amount of $641,000 is secured
by property in Bullhead City, Arizona (see Note 6). The promissory
note is due in April 1997 and bears interest at 9.5% per annum.
The Company has two other promissory notes from related
parties which were received in lieu of capital and are not included
above. One note from FHI in the amount of $300,000 represents FHI's
initial investment in the Company. The note is due on demand or in the
event of no demand on the earliest of (1) the end of the Company's
taxable year in which FHI's interest in the Company is liquidated or (2)
December 31, 2002, with interest at the Applicable Federal Rate
(as defined in the note) payable on December 31 of each calendar year.
The second note represents an obligation of Joseph M. Carman, an
officer of the general partner in the form of a $464,000 non-recourse note
payable to the Company dated February 1994. The note is secured by Mr.
Carman's 1.5% interest in the Company and bears interest at the prime rate
with all interest and principal due in October 1999. Both of these
capital notes are reported as a reduction of Partners' Equity in the
consolidated balance sheets.
Mr. Carman entered into an agreement with the company
concerning the purchase and sale of his limited partnership interest which
provides that he may require the Company to purchase his
partnership interest at any time after February 1, 1995 at a price equal to
the product of (a) 4.5% and (b) the pretax profits of the company from
November 1, 1993 to the end of the most recent fiscal quarter,
less 6% per annum times the average partner's equity of the Company
(excluding equity attributable to Mr. Carman's interest in the Company) over
the same period (the "Put Price"). The agreement also provides that
the Company may require Mr. Carman to sell to the company his
interest if he is no longer employed by the Company at a price equal to the
greater of (i) cost plus accrued interest on the promissory note used to
finance the purchase of the partnership interest or (ii) the relevant
Put Price.
4. Real Estate Inventory and Related Notes Payable
Real Estate Inventory and related notes payable consist of
the following:
<TABLE>
($'s in 000's) October 31, 1996
------------------------
Real Estate Notes
Inventory Payable
---------- ------
<S> <C> <C>
Land Held for Development $15,067 $0
Residential Projects in Process 57,442 20,449
Model Homes 8,251 5,271
--------- -----
Total $80,760 $25,720
========= =======
October 31, 1995
----------------------
Real Estate Notes
Inventory Payable
---------- -----
Land Held for Development $13,029 $1,679
Residential Projects in Process 62,486 16,226
Model Homes 7,057 3,212
--------- -----
Total $82,572 $21,117
========= =======
</TABLE>
Notes payable secured by real estate inventory bear interest
at rates ranging from the prime rate (8.25% at October 31, 1996) plus
.5% to prime plus 3.25%. The interest rate on $2.2 million of the
loans outstanding at October 31, 1996 which bear interest at the prime
rate plus .5% will increase to the prime rate plus 1.0% if the Company
fails to maintain average deposits with the lender of $3 million.
Principal payments on notes payable collateralized by real estate held for
development and sale are generally due within one year. Notes payable
collateralized by residential projects in process are generally
repaid as units in the related projects are sold.
At October 31, 1996 and 1995, undisbursed amounts under
construction loans were approximately $4,142,000 and $6,222,000,
respectively. Draws of undisbursed amounts under construction
loans are subject to varying requirements of the lenders including
progress of construction. Approximately $2,183,000 and $9,060,000 of the
notes payable outstanding as of October 31, 1996 and 1995,
respectively, were guaranteed by Mr. Previti.
The following summarizes the components of interest expense
(including that associated with related party and other notes payable):
<TABLE>
($'s in 000's) For the Year EndedOctober 31
----------------------------
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Interest Incurred and Capitalized $7,884 $7,954 $5,418
Interest Incurred and Expensed -- 119 346
------ ------ -----
Total $7,884 $8,073 $5,764
====== ====== ======
Capitalized Interest Amortized
to Cost of Sales $7,158 $5,420 $2,234
Interest Paid $8,111 $8,546 $3,584
</TABLE>
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. The notes are joint and
several senior obligations of the Company and Forecast Capital Corporation
("Capital"), with interest only payments due semi-annually on June15
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 is approximately $30,338,000 based on the
market price as of October 31, 1996.
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
ratios and debt coverage ratios. Although the Company did not meet
those ratios as of October 31, 1996, its recourse debt as of that
date was only $6.5 million, therefore the Company was not required to
be in compliance with the ratios. The Company is not precluded from
incurring debt on a non-recourse basis.
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 is less than $25
million, the Company is then required to make an 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. The Company may credit
against any such offer, the principal amount of Senior Notes previously
acquired by the Company.
For the fiscal quarters ended October 31, 1995 and January
31,1996, the Company was not in compliance with the minimum net
worth covenant. However, the Company had purchased or redeemed a
sufficient amount of Senior Notes necessary to meet repurchase obligations
resulting from its failure to satisfy the minimum net worth
requirement. Subsequent to that date the Company has been in
compliance with the minimum net worth covenant and, while there
are no assurances, management believes that future income from operations
and gains from the redemption of Senior Notes will be sufficient to
assure that the minimum net worth requirement is maintained.
6. RELATED PARTY TRANSACTIONS
In 1986, one of the Company's predecessor entities issued
two lifetime annuities to Mr. Previti in exchange for the transfer of
Mr. Previti's interests in certain properties. The two annuities
together provided for the payment of $188,895 per annum (subject
to certain adjustments) to Mr. Previti until his death. In
conjunction with a reorganization in October 1993, the Company assumed the
liability for the annuities. In July 1995, Forecast "Registered
Tradename" Mortgage Corporation ("FMC"), a limited partner of the
Company, made a net capital contribution to the Company of
$1,299,000 by assuming the Company's liability for the two annuities.
In May 1995, the Company sold to an affiliate a parcel of land
located in Bullhead City, Arizona which 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 consideration
for the sale, the Company accepted a note receivable from Previti Realty
Fund which is secured by the property (see Note 3).
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 $332,000, $407,000 and $412,000 for the fiscal
years ended October 31, 1996, 1995 and 1994, respectively. See Note 10
for aggregate operating lease commitments of the Company.
Mortgages for certain of the Company's customers are
provided by Rancho Mortgage Corporation ("Rancho Mortgage"), a corporation in
which Mr. Previti is the sole stockholder. During the normal course of
business, the Company has entered into certain transactions with
Rancho Mortgage for loan commitments under various governmental programs
to facilitate its customers ability to obtain financing. Commitment
fees were approximately $1,432,000, $1,087,000 and $1,075,000 during
1996, 1995 and 1994, respectively, and include $0, $0 and $209,000
respectively, for mortgage processing fees.
In 1996, 1995 and 1994, Rancho Mortgage incurred management,
administration, servicing rights and credit enhancement fees to
the Company in the amount of approximately $40,000, $40,000 and
$79,000,respectively.
The Company has entered into management services agreements
with several affiliates, whereby the Company provides certain executive
management, 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 $142,000, $145,000 and $480,000 in management fees to affiliates
under these agreements during fiscal 1996 , 1995 and 1994,
respectively.
In January 1995, the Company sold a 3.5 acre parcel of land
located in Galt, California to a partnership controlled by Mr. Previti.
The parcel was originally part of a larger property purchased by the
Company in 1993 and subsequently rezoned, primarily for single-family
residential development. Based on the approved zoning, the 3.5
acres was an out-parcel which could not be used by the Company for single
family residential purposes. The total consideration given by the
partnership to the Company was $1,587,000. This amount includes reimbursable
costs of $1,287,000 calculated as a prorata share of the Company's
acquisition costs, plus an allocation of development costs paid by the Company
in connection with the rezoning, an allocation of common area costs
which benefited the entire development and certain other direct costs of
the out-parcel. As consideration for the Company's role in rezoning
and developing the property, the partnership also paid a developer's
fee to the Company in the amount of $300,000. The total consideration
owed to the Company from the land sale was deducted from amounts due to
Mr. Previti or other affiliates controlled by Mr. Previti, such
amounts having arisen in connection with the purchase of Senior Notes.
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. (see Note 3)
7. EXTRAORDINARY ITEM
During the years ended October 31, 1996 and 1995, the
Company repurchased a portion of its Senior Notes having an aggregate
outstanding principal amounts of $5,315,000 and $10,210,000,
respectively. The Senior Notes were purchased from Mr. Previti
and in the open market. Net of allocable issuance costs, the resultant
income of $1,876,000 and $3,132,000 is reported as an extraordinary gain
in the Company's financial statements for the years ended October 31,
1996 and 1995. FHI's Board of Directors has authorized management to
repurchase additional Senior Notes through affiliates, at cost
plus accrued interest, or on the open market when such transactions are
deemed to be in the Company's best interests. As of October 31,
1996, affiliates of the Company owned additional Senior Notes which were
acquired at substantial discounts from their aggregate outstanding
principal amount of $5,400,000.
8. PROFIT SHARING AND PENSION PLANS
In fiscal 1995, the Company adopted a non-contributory
401(k) plan covering substantially all employees. There was no
contribution expense related to the plan in fiscal 1996 and 1995. Prior to
fiscal 1994, the Company participated in a non-contributory, qualified
employee profit sharing plan and a defined contribution pension
plan. The plans were terminated in fiscal 1994 and the Company incurred
no expense in connection with the plans during the year ended October
31, 1994.
9 COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has an agreement with Rancho Mortgage whereby
all gains and losses on the sale of loans made to purchasers of the
Company's homes incurred by Rancho are absorbed by the Company
(see Note 6).
The Company leases office facilities under noncancelable
operating leases expiring through 2004. Aggregate rental costs incurred
under such leases were $413,000, $473,000 and $494,000 for the years
ended October 31, 1996, 1995 and 1994, respectively. Future minimum
annual rental payments of $235,000, $129,000, $131,000, $133,000,
$136,000 and $374,000 are due during 1997, 1998, 1999, 2000, 2001 and
thereafter, respectively (see note 6).
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.
<PAGE>
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, 1996 and 1995 and the related statements of operations and
accumulated deficit, and cash flows for each of the three years in
the period ended October 31, 1996. 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 generally
accepted auditing standards. 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, 1996
and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended October 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach
December 16, 1996
<TABLE>
Forecast "Registered Tradename" Capital
Corporation Balance Sheets
October 31
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Assets:
- -------
Cash $ 300 $ 100
-------- ---------
Total Assets $ 300 $ 100
========== ==========
Liabilities & Shareholders' Deficit:
- ------------------------------------
Accounts Payable $ 400 -
Accounts Payable, Related Parties 2,300 700
-------- --------
Total Liabilities 2,700 700
--------- ----------
Common Stock, $1.00 par value:
Authorized 10,000 shares
Issued and Outstanding 2,500 shares 2,500 2,500
Accumulated Deficit (4,900) (3,100)
--------- ---------
Total Shareholders' Deficit (2,400) (600)
---------- ---------
Total Liabilities & Shareholders' $ 300 $ 100
Deficit
=========== ===========
</TABLE>
<TABLE>
Forecast "Registered Tradename" Capital Corporation
Statements of Operations and Shareholders' Equity (Deficit)
For the Year Ended October 31
-----------------------------
1996 1995 1994
-----------------------------
<S> <C> <C> <C>
General & Administrative Expenses $ 1,000 $ 200 $ 500
Income Tax Expense 800 800 1,600
-------- -------- --------
Net Loss (1,800) (1,000) (2,100)
======== ======== ========
Shareholders' Equity (Deficit) at
Beginning of Period (600) 400 2,500
Net Loss this Period (1,800) (1,000) (2,100)
-------- -------- --------
Shareholders' Equity (Deficit) at
End of Period (2,400) (600) 400
======== ======== ========
</TABLE>
<TABLE>
Forecast "Registered Tradename" Capital Corporation
Statements of Cashflows
For the Year Ended October 31
-----------------------------
1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Net Loss $(1,800) $(1,000) $(2,100)
Increase in Accounts Payable and
Accrued Expenses 2,000 700 -
-------- -------- --------
Increase (Decrease) in Cash and
Cash Equivalents 200 (300) (2,100)
Cash/Cash Equivalents at Beg. of Period 100 400 2,500
-------- -------- --------
Cash/Cash Equivalents at End of Period $ 300 $ 100 $ 400
======== ======== ========
</TABLE>
<PAGE>
FORECAST "Registered Tradename" CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
1. ORGANIZATION AND OPERATIONS
Forecast "Registered Tradename" Capital Corporation (the
"Company") was incorporated in California on September 20, 1993.
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 dependent upon its parent
for funding.
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."
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 12350000
<SECURITIES> 0
<RECEIVABLES> 5705000
<ALLOWANCES> 0
<INVENTORY> 80760000
<CURRENT-ASSETS> 102186000
<PP&E> 1171000
<DEPRECIATION> 281000
<TOTAL-ASSETS> 102186000
<CURRENT-LIABILITIES> 75262000
<BONDS> 34475000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 102186000
<SALES> 141652000
<TOTAL-REVENUES> 141652000
<CGS> 117702000
<TOTAL-COSTS> 139926000
<OTHER-EXPENSES> (14000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2014000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 1876000
<CHANGES> 0
<NET-INCOME> 3890000
<EPS-PRIMARY> 0
<EPS-DILUTED> 00
</TABLE>
