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, 1998
[ ] 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) 9877788
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
11 3/8% Senior Notes Due 2000 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 15, 1998.
At December 15, 1998, Forecast "Registered Tradename" Capital
Corporation had 2,500 shares of Common stock outstanding.
<PAGE>
PART I
ITEM I - BUSINESS
General
The Forecast Group "Registered Tradename", L.P., ("Forecast"
"Registered Tradename" or the "Company") designs, builds and sells
affordably-priced single family detached homes primarily to
entry-level and first time move-up buyers in California and Arizona.
The Company currently operates in four distinct geographic regions
(Northern California; Southern California; San Diego County; and
Phoenix, Arizona), and is a leading homebuilder in its targeted
submarkets (based on the number of homes closed) with operations
throughout most major metropolitan areas and employment centers
within these markets.
The Company is the successor to the residential real estate
development business founded in 1971 by Mr. James P. Previti, the
Chairman of the Board and President of the general partner of The
Forecast Group "Registered Tradename", L.P. From 1971 through
1989, the Company's operations were focused on the Southern
California regions known as the Inland Empire and Antelope
Valley. In 1989, the Company expanded operations into the
Sacramento Valley region of Northern California. Further
diversification and expansion occurred in 1992 when the Company
commenced operations in the Phoenix, Arizona metropolitan area
and in 1995 when the Company expanded into northern San Diego
County. Since 1976, the Company has closed more that 12,800
homes, including 1,228 homes during the fiscal year ended October
31, 1998.
Geographic Markets
The Company's operations service the metropolitan areas
surrounding Los Angeles, Orange County, San Diego, San Francisco
and Sacramento, California and Phoenix, Arizona. The Company
believes that each of these areas represents an attractive
homebuilding market with significant growth opportunities, and
that its geographic diversity provides a greater balance to the
Company's earnings, thereby reducing the Company's exposure to
potentially adverse economic conditions in any one geographic
area. The Company also believes that each of its local
operations is well established in its respective markets and that
it has developed a reputation for building superior quality homes
at competitive prices. The Company maintains the flexibility to
tailor its product mix within a given market depending upon
market conditions.
Operating Strategy
The Company believes that its history of building high
quality entry-level and first-time move-up homes in California
and Arizona, and its conservative operating strategy, have
enabled the Company to successfully weather cyclical downturns
and position the Company to capitalize on the improving
California market. The Company's strategy has been to (i) select
markets that exhibit favorable demographic trends for the
construction and sale of affordably-priced, single family
detached homes in the entry-level and first-time move-up market
segment, (ii) provide its customers with quality homes which
reflects a superior value in comparison to the prices of
competitor's homes, and (iii) employ an operating strategy
designed to reduce the risks and costs inherent in the
homebuilding business, while also maximizing its return on
investment capital in relation to such risks.
Key elements of the Company's operating strategy include
the following:
Geographic Diversity and Growth Markets. The Company
competes in a variety of geographical markets and attempts to
react quickly to allocate capital to those markets which it
believes provide attractive growth characteristics and
opportunities for superior returns. The majority of the
Company's markets have experienced significant population and
employment growth in recent years. California and Arizona, the
states where the Company's homebuilding activities are located
were ranked among the top ten for population growth for the years
1995 through 2000, as projected by the U.S. Census Bureau. The
company strives to maintain a strong competitive position in all
of its submarkets and generally is among the top single family
homebuilders in its submarkets. The Company, through its full
time in-house research and marketing staff, and through the
selective use of third-party sources, regularly conducts market
research and demographics analyses of both its existing and
potential markets to predict the depth and breadth of demand for
affordably-priced houses. Based on its current market research,
the Company believes that it has opportunities to expand in its
existing markets and has identified several new geographic
markets which possess attractive characteristics well-suited to
the Company's homebuilding practices.
Focus on Entry-level and First-Time Move-up Homebuyers.
Throughout its history the Company has focused on entry-level and
first time move-up homebuyers because it believes they represent
the largest segment of the homebuilding market, and also during
cyclical downturns are the least affected segment in terms of a
reduction in the demand for homes. Also, this segment includes
first-time homebuyers whose home purchases are not dependent on
the sale of an existing home. Affordably-priced homes generally
qualify for FHA/VA financing and other state sponsored home
buying financing programs, which permit lower down payments and
in some instances may provide lower interest rates, thereby
expanding the Company's customer base.
Commitment to Customer Satisfaction. The Company is
committed to providing customer satisfaction through quality
construction and customer service. Throughout the Company's four
geographic markets, Southern California, Northern California, San
Diego County and Arizona, customer satisfaction surveys indicted
that more than 95% of those customers who purchased homes from
the Company in 1997 were satisfied with their purchase and would
recommend a home built by the Company to a friend. The Company
believes that its long history of providing high quality
affordably-priced homes has resulted in many referral sales.
Build a Standardized Product that can be Constructed
Quickly, Efficiently and Cost Effectively. Each product line
built by the Company has several different elevations and
floorplans, but essentially consists of standardized features
that allow relatively quick, cost effective construction. Each
product line is periodically value engineered to identify
potential cost savings.
Experienced Management and Decentralized Operations.
The Company's senior corporate officers and division presidents
are highly-experienced and average over 20 years in the
homebuilding business. Mr. James P. Previti, Chairman of the
Board and President of the general partner of The Forecast
Group "Registered Tradename", L.P., founded the Company's
predecessors in 1971 and has played a prominent role in the
California Building Industry Association. Each division is
run by a local division president, who has in-depth familiarity
with the geographic area within which the division operates,
and who supervises area and district managers with specific
profit and loss responsibilities in their designated areas.
Use of Sophisticated Management Information Systems.
The Company employs an information system used by many of the top
homebuilders in the country to track costs and construction
activities on multiple projects. The Company, on a real-time
basis, can analyze production costs, status of pending sales and
inventory levels, lot premiums, homes in escrow, homes closed and
profit margins both for the Company as a whole, for each
individual community and for each individual lot within each
community. This system allows the Company to closely monitor and
control its level of completed but unsold homes, detect trends
early and to more effectively deploy capital and resources to
respond to such trends and adjust its production capacity
accordingly.
Conservative Land Policy. The Company seeks to
maximize its return on capital employed by limiting its
investment in land and by focusing on inventory turnover. To
implement this strategy and to reduce the risks associated with
investment in land, the Company's land acquisition process is
controlled through a formal corporate land approval committee to
help ensure that transactions meet the Company's standards for
financial performance and risk. In the ordinary course of its
homebuilding business, the Company utilizes both direct
acquisition and a variety of option contracts to control the
number of lots it maintains in inventory for use in the sale and
construction of homes. The choice of which vehicle is used is
dependent on which vehicle the Company deems to be more
advantageous given the Company's profit objectives, capital
constraints, and local market conditions. The Company also
generally seeks to close escrow on land only after all of the
necessary entitlements are received, thereby allowing operations
to commence within a relatively short time period thereafter. By
doing this, the Company is generally able to maintain inventories
of land that are expected to be developed within two to three
years or less in an effort to match land costs with current
market prices for finished homes.
Maintain Strict Cost Controls. The Company believes
that maintaining stringent cost controls is a key factor in
improving profitability. The Company controls costs and reduces
risk by: (i) generally purchasing land that is already entitled
for residential development; (ii) managing the construction
process to maintain low levels of unsold inventory and maximize
inventory turnover; (iii) utilizing high quality durable building
materials and standardized design plans; (iv) utilizing
experienced subcontractors, especially those with which the
Company has long-standing relationships; and (v) using its
competitive advantage in its submarkets to obtain volume
discounts on construction materials and favorable pricing from
subcontractors.
Require HomeBuyers to Pre-Qualify Financially Prior to
Approving a Sales Contract. Prior to entering into a sales
contract with a prospective homebuyer, the Company seeks to have
the Mortgage Company, typically its Forecast Home Mortgage, LLC
("Forecast Mortgage") affiliate, confirm that the homebuyer 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.
Summary of Residential Projects
The following table presents information relating to the
Company's markets and communities in which construction is either
in progress or in the planning process. All homes are single
family detached. As of October 31, 1998, the Company owned 2,149
lots available for future home closings and had another 3,313
building lots under its control through acquisition contracts.
<TABLE>
- ----------------------------------------------------------------
Bldg. Total Sales Sales
No. of Bldg. Lots Bldg. Backlog Price
Active Lots Under Lots as of Range
Market Communities Owned Contract Avail. 10/31/98
(1) (2) (3)
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Southern
California 7 1,148 1,284 2,432 56 $104,990
-
190,490
Northern
California 9 470 894 1,364 89 $112,240
-
237,490
Arizona 2 262 1,005 1,267 49 $102,990
-
150,330
San Diego 2 269 130 399 39 $162,490
-
257,780
- ----------------------------------------------------------------
Company Total 20 2,149 3,313 5,462 233
================================================================
</TABLE>
(1) Building lots under contract include lots the
Company has the right to acquire under option
provisions in certain acquisition contracts; thus, there
can be no assurance the Company will actually acquire these
lots.
(2) Sales backlog refers to sales contracts that
have not yet closed. There can be no assurance
that closings of homes will occur.
(3) Reflects base price, excluding any lot premiums
and buyer selected options, which vary from community to
community.
Land Acquisition
The Company initiates projects in markets that it believes
will exhibit satisfactory sales absorption rates at or above its
investment targets for its projected number of new homes. The
Company selects markets characterized by their proximity to urban
areas that have convenient access to local and regional commuter
corridors. The Company's homes are predominately located within
commuting distance to major employment centers.
Additional factors the Company considers before purchasing
land for the development of a new home community include:
proximity to existing developed areas; population growth
patterns; availability and quality of existing public services
such as water, gas, electricity, sewers and schools; employment
growth rates; the perceived sales absorption rates for new
housing; transportation availability; the estimated costs of
development; and the proximity of competing homebuilders. The
general policy of the Company is to complete a purchase of land
only after it has conducted a thorough feasibility study at no
financial risk to the Company, and when it can reasonably project
commencement of development and construction within a specified
period of time. Closing of the land purchase is, therefore,
generally made contingent upon satisfaction of conditions
relating to the property and to the Company's ability to obtain
all requisite entitlements from governmental agencies within a
certain period of time. The Company customarily acquires
unimproved or improved land zoned for residential use which
appears suitable for the construction of the number of homes the
Company believes fits with its projected sales absorption rates
and expected demand within that market.
The Company has the capability to purchase and develop
unentitled land, but in doing so acts to minimize the risks
associated with such land by generally conditioning the closing
on the attainment of all necessary entitlements. "Entitled" land
is generally defined as land that has received all necessary land
use approvals for residential development from the appropriate
state, county and local governments, including any required tract
maps and subdivision approvals.
Although the Company's profitability is affected by changing
land prices, the Company attempts to minimize this risk by
acquiring land under terms that meet its operating schedules and
selling excess lots to other builders who do not compete at the
same price point as the Company. The Company has also utilized
rolling options and phased land purchases in order to control
larger amounts of land without the attendant financing and
carrying costs.
The amount of land purchased by the Company has fluctuated
substantially from period to period based on when entitlements
were obtained, prices, availability of financing, existing land
inventory, projected demand for homes and other factors. In
general, the Company's practice is to have a land inventory,
either owned or under contract, equal to approximately three
years of planned operations. As of October 31, 1998 the Company
owned 2,149 lots, which the Company believes is adequate for
approximately 15 months of operations at current sales absorption
levels. In addition, the Company controls approximately 3,313
lots under binding and non-binding agreements which provide the
Company with the option to purchase such lots in the event that
the Company's targeted markets continue to exhibit increased
sales absorption levels. These lots controlled by the Company
would allow for an additional 30 months of operations based on
increased sales absorption levels.
Construction
The Company acts as the general contractor for the
construction of its projects. Virtually all construction work for
the Company is performed by subcontractors. The Company's
employees supervise the construction of each project, coordinate
the activities of subcontractors and suppliers, subject their
work to quality and cost controls and assure compliance with
zoning and building codes. The Company's subcontractors follow
design plans prepared by architects who are retained by the
Company and whose designs are geared to the local market.
Subcontractors typically are retained on a phase-by-phase basis
to complete construction at a fixed price. During its history,
the Company has established long-term relationships with a number
of subcontractors, and sometimes negotiates price and volume
discounts with manufacturers and suppliers on behalf of
subcontractors in order to take advantage of its volume of
production. The Company is not dependent to any material extent
upon the services of any one subcontractor and believes that, if
necessary, it can generally retain sufficient qualified
subcontractors for each aspect of construction. The Company
believes that conducting its operations in this manner enables it
not only to readily and efficiently adapt to changes in housing
demand, but also to avoid fixed costs associated with retaining
construction personnel.
Sales, Marketing and Research
The Company makes extensive use of advertising and other
promotional activities, including newspaper and magazine
advertisements, brochures, direct mail and the placement of
strategically located sign boards in the immediate areas of its
communities. The Company's major media advertising is done
regionally. Because the Company usually offers multiple projects
within a single market area, it is able to utilize multiple
community advertising that highlights all Company developments
within that same market area.
The Company normally builds, decorates, furnishes and
landscapes model homes for each project and maintains on-site
sales offices, which typically are open seven days a week. The
Company believes that model homes play a particularly important
role in the Company's marketing efforts. Consequently, the
Company expends a significant effort in creating an attractive
atmosphere at its model homes. Interior decorations vary among
the Company's models and are carefully selected based upon the
lifestyles of targeted buyers. Structural changes in design from
the model homes are not generally permitted, but homebuyers may
select various other optional construction and design amenities,
including floor coverings.
The Company sells most all of its homes through Company
sales representatives, who typically work from the sales offices
located at the model homes used in each subdivision or in on-site
sales trailers. The sales representatives are paid by the Company
on commission. To a lesser extent, the Company also uses
independent cooperative brokers to assist in selling its homes.
Company representatives are available to assist prospective
buyers by providing them with floor plans, price information and
tours of model homes and by assisting them with the selection of
options. Sales representatives attend periodic meetings at which
they are provided information regarding other products in the
area, the variety of financing programs available, construction
schedules and marketing and advertising plans. The Company
believes this effort results in a more motivated sales force and
higher absorption rate.
Customer Financing
The Company offers its customers mortgage financing through
Forecast Mortgage. Forecast Mortgage is owned 50% by Norwest,
Inc. (a nationally recognized mortgage banker; "Norwest") and 50%
by Inland Counties Mortgage, LLC, a California limited liability
company ("Inland Counties Mortgage"). The Forecast Group
"Registered Tradename", L.P., owns a 98% share of Inland Counties
Mortgage. Forecast Corporation (a limited partner of The Forecast
Group "Registered Tradename", L.P.) owns the other 2%. Through
Forecast Mortgage, the Company seeks to assist its homebuyers in
obtaining financing by offering to qualified buyers the variety
of financing options offered by Norwest, and by making and
processing the loans in a timely and professional manner.
Forecast Mortgage is expected to provide mortgage financing for
approximately 80% of the homes sold by the Company.
Customer Service and Relations
Each purchaser of a home from the Company is given an
information booklet describing area amenities and services, such
as schools, health services and emergency services. The Company's
Warranty Service Manual identifies the appliances, fixtures and
heating/cooling and other systems installed in the house, and
provides information on warranties, maintenance and manufacturer
information. The Company believes that these practices reinforce
the homebuyer's sense of moving into a community. After closing,
the Company continues to communicate its image through a variety
of marketing techniques that are designed to enhance the buying
experiences of the homebuyer.
Customer Warranties
The Company provides one year limited warranties on
purchases of its homes in both Arizona and California 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 homebuyer may request
the Company to repair any latent defects in the architectural
design or actual construction. The Company generally maintains
reserves with respect to units previously sold for the purpose of
covering estimated 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. The Company
competes primarily on the basis of quality, price, design,
service and location. The Company believes that its primary
competitive strength has been its consistent ability to offer
quality homes at affordable prices.
The homebuilding industry is cyclical and significantly
affected by consumer confidence levels, interest rates,
employment trends and other prevailing economic conditions. A
variety of other factors affect the homebuilding industry and
demand for new homes, including consumer preferences, demographic
trends, availability of mortgage financing and costs associated
with home ownership such as property taxes, assessments and
homeowner association fees.
Government Regulation and Environmental Matters
The housing industry is subject to increasing environmental,
building, zoning and real estate regulations that are imposed by
various federal, state and local authorities. Such regulations
affect homebuilding by specifying, among other things, the type
and quality of building material that must be used, certain
aspects of land use and building design, as well as the manner in
which homebuilders, such as the Company, may conduct their sales
activities and other dealings with their home buyers. In
developing a community, the Company must obtain the approval of
numerous governmental authorities regarding such matters as
permitted land uses, housing density, the installation of utility
services (such as water, sewer, gas, electricity, telephone and
cable television), and the dedication of acreage for open space,
parks, schools and other community purposes. Furthermore,
changes in prevailing local circumstances or applicable laws, may
require additional approvals, or modifications of approvals
previously obtained.
Environmental laws may cause the Company to incur
substantial compliance, mitigation and other costs, may restrict
or prohibit development in certain areas and may delay completion
of the Company's communities. As a result, the Company engages
outside professional consultants to evaluate any land prior to
its purchase by the Company. Although environmental laws have
not had a material adverse effect on the Company to date, and
management is not currently aware of any environmental compliance
issues that are expected to have a material adverse effect on the
Company, no assurance can be given that such laws will not have a
material adverse effect on the Company's operations in the
future.
Employees
As of October 31, 1998, the Company employed approximately
188 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 9,250, 2,684 and 1,940 square feet of office
space in Sacramento, California, Phoenix, Arizona and Oceanside,
California, 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
holders during the Company's fiscal year ended October 31, 1998.
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The registrant's common equity has not been registered
pursuant to Section 12(b) of the Act and is not traded.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data (except
operating and other data) are derived from the consolidated
financial statements of the Company, which have been audited by
Ernst & Young LLP, independent auditors. The selected
consolidated financial data should be read in conjunction with
the consolidated financial statements, related notes, and other
financial information included herein.
<TABLE>
- ----------------------------------------------------------------
Year Ended October31
------------------------------------------
Note: $ are in
Thousands 1998 1997 1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data:
- ---------------
Homes Delivered:
Number of
Homes Delivered 1,228 901 1,006 915 849
===== === ===== === ===
Ave. Price of Homes
Delivered $161.3 $147.1 $140.8 $139.4 $124.7
Sales Backlog (1):
Number of Homes
in Sales Backlog 233 289 165 200 155
=== === === === ===
Aggregate Value of
Homes in Backlog $38,179 $44,707 $22,659 $25,657 $20,530
Ave. Price of Homes
in Sales Backlog $163.9 $154.7 $137.3 $128.3 $132.5
Statement of
Operations Data:
- -----------------
Homebuilding
Revenues $198,074 $132,518 $141,652 $127,538 $105,849
Cost of Homes Sold 164,335 112,278 117,702 113,792 90,624
Selling &
Marketing Ex. 14,384 13,929 15,215 12,114 9,075
General &
Admin. Ex. 11,397 7,397 7,006 7,508 8,032
Provision for Losses
on Real Estate
Inventory 0 6,635 0 2,937 1,400
Loss on Abandoned
Land Options 202 726 3 139 1,125
- -----------------------------------------------------------------
Operating Income
(Loss) 7,756 (8,447) 1,726 (8,952) (4,407)
- -----------------------------------------------------------------
Interest Income 455 395 274 200 256
Interest Expense 264 0 0 11 346
Other Income 2,500 15 14 472 609
- -----------------------------------------------------------------
Income (Loss) before
Income Taxes and
Extraordinary Gain 10,447 (7,896) 2,014 (8,399) (3,888)
- -----------------------------------------------------------------
Income Tax Expense
(Benefit) (2) 0 0 0 0 0
Extraordinary Gain on
Extinguishment of
Senior Notes 34 1,634 1,876 3,312 0
- -----------------------------------------------------------------
Net Income (Loss) $10,481 ($6,262) $3,890 ($5,087) ($3,888)
=================================================================
Balance Sheet Data:
- -------------------
Real Estate
Inventory $84,152 $71,012 $80,760 $82,572 $93,573
Total Assets 113,908 91,582 102,186 97,241 113,926
Debt 60,059 56,053 60,195 60,925 72,163
Partners' Equity 31,143 20,662 26,924 23,234 27,022
Other Data:
- -----------
Gross Margin % 17.0% 15.3% 16.9% 10.8% 14.4%
EBITDA (3) $19,018 $7,434 $9,453 $317 $327
Interest Incurred(4) $7,123 7,076 $7,884 $8,073 $5,764
Coverage Ratio(5) 2.7 1.1 1.2 0.0 0.1
Debt to Equity
Ratio (6) 1.9 2.7 2.2 2.6 2.7
</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) As a partnership, Forecast "Registered Tradename" 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.
(3) "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.
(4) 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.
(5) "Coverage Ratio" means the ratio of EBITDA to Interest
Incurred as calculated in accordance with the definition of
such term in the Indenture.
(6) "Debt-to-Equity Ratio" means the ratio of all outstanding
Debt to Net Worth (Partners' Equity) as calculated in
accordance with the definition of such term in the
Indenture.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's results of operations for any period are
affected by a number of factors including the number of
communities under construction, the length of the development
cycle of its communities, product mix, weather, availability of
financing, costs of materials and economic conditions in the
areas in which the Company operates. Product mix (both product
line and size of home) has a substantial effect on the average
sales price of homes and gross margin from home sales because
smaller homes generally have lower sales prices and gross margins
than larger homes. The average sales price of homes from period
to period fluctuates based on product line, home size, geographic
mix and changes in the market price of housing.
The Company's results of operations reflect the cyclical
nature of the homebuilding industry and the Company's historical
focus on the Southern California housing market. Following
approximately seven years of a regional economic downturn, those
markets in which the Company operates began to see a recovery in
the fourth quarter of 1997 which has continued throughout fiscal
year 1998.
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
1998, 1997 and 1996.
<TABLE>
For the Year Ended October 31
- ----------------------------------------------------------------
Note: $ are in thousands 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of Homes Delivered:
- --------------------------
Southern California 487 351 432
Northern California 503 329 280
Arizona 186 221 294
San Diego (1) 52 - -
----------------------------------
Total 1,228 901 1,006
==================================
Housing Sales:
- --------------
Southern California 74,875 $51,723 $60,578
Northern California 84,413 51,880 43,484
Arizona 29,228 28,915 37,590
San Diego (1) 9,558 - -
----------------------------------
Total $198,074 $132,518 $141,652
==================================
Gross Profit:
- -------------
Southern California $13,634 $7,585 $10,420
Northern California 12,892 7,589 6,304
Arizona 4,370 5,033 7,226
San Diego (1) 2,843 - -
-----------------------------------
Total $33,739 $20,207 (2) $23,950
Gross Profit Margin:
- --------------------
Southern California 18.2% 14.7% 17.2%
Northern California 15.3% 14.6% 14.5%
Arizona 15.0% 17.4% 19.2%
San Diego (1) 29.7% 0.0% 0.0%
------------------------------------
Total 17.0% 15.2% 16.9%
====================================
</TABLE>
(1) The Company's fourth operating division, San Diego County,
commenced operations on August 1, 1998. Prior thereto,
the communities in the San Diego County Division were
included in the Southern California Division.
(2) Does not include $33,000 of gross profit at the corporate
level.
During the fiscal year ended October 31, 1998, the Company
reported revenues of $198.1 million and a net profit of $10.5
million, on record closings of 1,228 homes. Based on the
continued economic reports of increasing job formation and low
interest rates, management believes that consumer confidence and
homebuying in its market segment will continue to be strong over
the next few years.
Seasonality
The traditional annual operating cycle for the Company
generally starts with fewer customer orders from October through
December, followed by stronger customer orders from January
through June and moderate orders from June through September.
Because home deliveries usually trail customer orders by up to
120 days, the Company's revenues typically are lowest in its
first and second fiscal quarters due to seasonally slow customer
orders in the immediately preceding fiscal quarters.
Historically, the majority of the Company's revenues come in its
third and fourth quarters, as contracts for home sales entered
into in its second and third fiscal quarters are closed.
Backlog
The Company's backlog at October 31, 1998 and 1997,
respectively, were 233 homes with an average sales price of
$163,900 and 289 homes with an average sales price of $154,700.
As a result of the Company's 36% increase in fiscal year 1998
closings, as compared to closings from fiscal year ended 1997,
the number of homes in backlog as of October 31, 1998 decreased
slightly. However, due to the Company's fourth quarter 1998, and
anticipated first quarter 1999, acquisitions the Company expects
its backlog to quickly increase to levels that will exceed those
achieved for similar periods in the prior year.
Results of Operations
A comparative summary of operating results for fiscal years
1998, 1997 and 1996 is presented in the following table:
<TABLE>
For the Year Ended October 31
------------------------------
1998 1997 1996
------------------------------
Amounts as a Percentage of
Revenues:
- ---------
<S> <C> <C> <C> <C> <C> <C>
Homebuilding Revenues 100.0% 100.0% 100.0%
Cost of Homes Sold 83.0% 84.7% 83.1%
------ ------- -------
Gross Profit 17.0% 15.3% 16.9%
------ ------- -------
Operating Expenses:
Selling & Marketing Expenses 7.3% 10.5% 10.7%
General & Admin. Ex. 5.8% 5.6% 4.9%
Provision for Impairment of
Real Estate Inventory 0.0% 5.0% 0.0%
Loss on Abandoned
Land Options 0.1% 0.5% 0.0%
------ ------ ------
Total Operating Expenses 13.1% 21.6% 15.7%
------ ------ ------
Operating Income (Loss) 3.9% (6.4%) 1.2%
====== ======= ======
Ave. per Home Closed ($):
- ------------------------
Homebuilding Revenues $161,298 $147,079 $140,807
Cost of Homes Sold 133,823 124,615 117,000
-------- -------- --------
Gross Profit 27,475 22,464 23,807
-------- -------- --------
Operating Expenses:
Selling & Marketing Exp. 11,713 15,459 15,124
General & Admin. Ex. 9,281 8,210 6,964
------- ------ ------
Total Operating Expenses 20,994 23,669 22,088
------- ------ ------
Operating Income (Loss) $6,480 (1) ($1,205) (1) $1,719 (1)
======== ======== =======
Other Data:
- -----------
Number of Homes Closed 1,228 901 1,006
Number of Homes Sold 1,172 1,025 971
Number of Homes in
Sales Backlog 233 289 165
Aggregate Value of
Sales Backlog ($ millions) $38.2 $44.7 $22.7
</TABLE>
(1) Calculation does not include $164,000, $806,000 and $3,000
for loss on abandoned land options and $0, $7,364,000
and $0 for provision for impairment of real estate inventory
for fiscal years ended October 31, 1998, 1997 and 1996,
respectively.
Fiscal 1998 Compared to Fiscal 1997
Housing revenues for the fiscal year ended October 1998 were
a Company record $198.1 million, representing an increase of
$65.6 million or 49.5% from the fiscal year ended October 1997.
The revenues for fiscal year 1998 represent 1,228 closings, an
increase of 327 closings or 36.3% over fiscal year 1997. The
increase reflects a strengthening California housing market which
resulted in an increased absorption rates and overall sales in
the Company's submarkets. The average sales price of the homes
closed during fiscal 1998 was $161,298 as compared to $147,079
for the same period a year ago, representing an increase of 9.7%.
The increase in average sales price is due primarily to increases
in sales prices in each of the Company's strongest submarkets and
the increase in the percentage of closings in the Northern
California Division as compared to the Company's overall number
of closings.
Gross profit from housing sales was $33.7 million for the
fiscal year ended October 31, 1998, an increase of $13.5 million
or 66.7%, from fiscal year ended October 31, 1997. Gross profit
per home increased to $27,475 from $22,464 representing a 22.3%
increase over the comparable period in 1997. Gross profit margin
for fiscal year ended October 31, 1998 was 17.0% as compared to
15.3% a year ago. The increase in gross margin was due primarily
to year-over-year 32.7% higher gross margins in the community
closings in the Southern California Division, and increased
prices and lower costs in certain of the Company's submarkets
resulting from greater demand.
For the fiscal year ended October 31, 1998, the Company's
interest incurred increased 0.7% as compared to fiscal year ended
October 31, 1997. This increase is a result of increased
construction volume offset by pricing modifications in the
Company's loan terms. The Company's interest amortized to cost of
homes sold (as a percentage of revenue) decreased 36.5% to 4.0%
for the fiscal year ended October 31, 1998, from 6.1% for the
same period a year ago. This decrease is directly attributable to
increased absorption rates, which produced increased rates of
turnover resulting in lower capitalized interest costs.
Selling and marketing expenses increased by $455,000 or 3.3%
during the fiscal year ended October 31, 1998 as compared to the
fiscal year ended October 31, 1997. This increase is directly
attributable to the higher volume of closings during the period.
Selling and marketing, as a percentage of revenue, decreased to
7.3% from 10.5% for the comparable period in 1997. This decrease,
as a percentage of revenue, is attributable to both the higher
closing volume and the reduction in sales incentives necessary to
achieve desirable absorption rates.
General and administrative expenses increased $4.0 million
during the fiscal year ended October 31, 1998, as compared to the
fiscal year ended October 31, 1997. The $4.0 million increase is
attributable to an increase in the number of employees in the
Company which was necessary to facilitate the Company's continued
expansion and active investigation of new land acquisitions
opportunities, as well as an increase in management bonuses that
resulted from the improved profitability of the Company. The
increase in general and administrative expenses, as a percentage
of revenue increased to 5.8% for the fiscal year ended October
31, 1998 from 5.6% for the fiscal year ended October 31, 1997,
due to the increased employee costs during the most recent
comparable period.
Income before extraordinary gain was $10.4 million during
the fiscal year ended October 31, 1998, as compared to a loss
before extraordinary gain of $7.9 million for the fiscal year
ended October 31, 1997, which is representative of the overall
improvement of market conditions in those areas in which the
Company operates. The loss during the fiscal year ended October
31, 1997 was primarily attributable to the Company recording a
$6.6 million provision for impairment of real estate inventory 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.
Extraordinary gain for the fiscal year ended October 31,
1998 was $34,000 related to the Company's repurchase of a portion
of its 11 3/8% Senior Notes having an aggregate outstanding
principal amount of $9.4 million. In 1997, the Company
repurchased $5.4 million of its Senior Notes resulting in an
extraordinary gain of $1.6 million being recorded in the fiscal
year ended October 31, 1997.
Net income for the fiscal year ended October 31, 1998 was
$10.5 million, as compared to a net loss of $6.3 million in the
fiscal year ended October 31, 1997 due primarily to the factors
discussed above.
Fiscal 1997 Compared to Fiscal 1996
Homebuilding revenues for the fiscal year ended October 1997
were $132.5 million, a decrease of $9.1 million or 6.4% from the
year ended October 1996 as the number of homes closed decreased
10.4% to 901 as compared to 1,006 in the prior year. Conversely,
the average sales price of each home closed in the fiscal year
ended October 31, 1997 increased by $6,300 or 4.5% as compared to
the prior year. The decrease in closings was attributable to
soft market conditions in Arizona and Southern California and a
delay in the Company's introduction of new communities that had
been planned for earlier in the year, but were not introduced
until the fourth quarter. As a result of this delay, closings
anticipated in the fourth quarter of fiscal 1997 were realized in
the first quarter of fiscal 1998. The Company's backlog at
fiscal year end 1997 was 289 homes with an aggregate sales value
of $44.7 million, which is an increase of 75% from 165 homes as
of fiscal year end 1996.
Cost of homes sold for the year ended October 1997 was
$112.3 million, a decrease of 4.8%, or $5.4 million, from the
fiscal year ended October 1996. The decrease in cost of homes
sold corresponds with the decrease in closing volume. Gross
profit from housing sales was $20.2 million for fiscal 1997, a
decrease of $3.7 million or 15.5%, from fiscal 1996. Gross
profit per home decreased to $22,465 from $23,807 representing a
5.6% decrease over the comparable period in 1996. Gross profit
margin for fiscal 1997 was 15.3% as compared to 16.9% in fiscal
1996. The decrease in gross margin is attributable to several
factors, including higher carrying costs due to slower absorption
rates than anticipated and higher warranty costs relating to a
community in Arizona which closed out in fiscal 1996.
Selling and marketing expenses decreased to $13.9 million or
10.5% of homebuilding revenues for the fiscal year ended October
31, 1997, from $15.2 million or 10.7% for the fiscal year ended
October 31, 1996. This decrease is primarily attributable to
fewer closings than the prior year, offset by an increase in
promotional advertising expenses.
General and administrative expenses were $7.4 million or
5.6% of revenues in fiscal 1997 up from $7.0 million or 4.9% of
revenues during fiscal 1996. The increase in expenses are
primarily the result of settling two long standing legal cases
during the fiscal year for approximately $1.1 million. The first
case was the result of a settlement with an ex-employee and the
second case was a settlement with the City of Moreno Valley.
Exclusive of these nonrecurring expenses, the Company's general
and administrative expenses actually decreased by $700,000 or
0.5% as a percentage of revenues, due to a reduction in personnel
and lower bonuses for remaining personnel.
Income/loss before extraordinary gain for the fiscal year
ended October 31, 1997 was a loss of $7.9 million, as compared to
an income before extraordinary gain of $2.0 million for the
fiscal year ended October 31, 1996. The loss in fiscal 1997 was
the result of several factors, the most instrumental being a $6.6
million provision for impairment of real estate inventory. Other
factors contributing to the fiscal 1997 loss include soft market
conditions and a delay in the Company's introduction of new
communities that had been planned for earlier in the year, but
were not introduced until the fourth quarter, which produced
closings during the first quarter of fiscal 1998.
During the fiscal year ended October 31, 1997, the Company
repurchased a portion of its 11 3/8% Senior Notes having an
aggregate outstanding principal amount of $5.4 million. These
repurchases resulted in an outstanding balance of $29.1 million
as of October 31, 1997 and an extraordinary gain of $1.6 million
being recorded in fiscal year 1997. In fiscal 1996, the Company
repurchased $5.3 million of its Senior Notes resulting in an
extraordinary gain of $1.9 million.
Net loss for the fiscal year ended October 31, 1997 was $6.3
million, compared to net income for the fiscal year ended October
31, 1996 of $3.9 million due to the factors discussed above.
Liquidity and Capital Resources
The residential real estate development business is
inherently capital intensive. Significant cash expenditures are
typically needed to acquire and develop land, construct homes and
establish marketing programs for periods of time in advance of
revenue realization. The Company generally finances its
operations with secured borrowings from commercial banks,
financial institutions (and, at times, private investors),
unsecured borrowings in the public market, and with available
cashflow from operations.
The Company's financing needs depend primarily upon sales
volume, asset turnover and land acquisition. When liquidating
inventory through home closings, the Company generates cash.
When building inventory, the Company uses substantial amounts of
cash obtained through borrowings, cashflow from operations, and
partners' contributions to capital. The Company has had adequate
liquidity throughout its operating history, despite recessionary
periods. At certain times during the past few years the Company
has repurchased a portion of its 11 3/8% Senior Notes on the open
market at prices below par, subsequently retired such repurchased
notes, and then reported the resultant income as extraordinary
gain in the Company's consolidated financial statements. At
times, these debt repurchases were utilized to cure certain
unsatisfied minimum net worth covenant requirements set out in
the Indenture for the 11 3/8% Senior Notes.
At October 31, 1998, the Company had commitments for $69.0
million under several revolving credit facilities with commercial
banks and financial institutions of which $28.8 million was
outstanding. In addition, at October 31, 1998, the Company had
community specific facilities to provide aggregate funding of
$8.3 million of which $4.7 million was outstanding at that time.
The Company also has a $5.8 million revolving line of credit
which is secured by certain of its model homes of which $2.0
million was outstanding as of October 31, 1998. Borrowings under
the credit facilities are secured by liens on specific real
property owned by the Company, and are recourse to the Company to
varying extents. As a result, on October 31, 1998, the aggregate
outstanding principal balance under the Company's credit
facilities was $35.5 million and the amount of such debt that is
recourse to the Company was $6.1 million.
To date, the Company has been able to obtain acceptable land
acquisition and construction financing. Consistent with an
industry trend, certain lenders require increased amounts of cash
invested in a project by borrowers in connection with both new
loans and the extension of existing loans. The Company currently
intends to continue utilizing conventional bank financing for
land acquisition and construction financing, and under its
present credit facilities is required to use its own cash to fund
a portion of the total project and acquisition costs in order to
obtain that financing. In the past, the Company has failed to
meet the debt-to-equity and debt coverage ratios that are set
forth in the Indenture governing the 11 3/8% Senior Notes,
thereby resulting in the Company being restricted in its ability
to incur recourse indebtedness. To overcome the limitation and
assist the Company in meeting its liquidity needs, Mr. Previti
and/or the Previti Family Trust has guaranteed a portion of the
Company's indebtedness. As of October 31, 1998, the Company met
both its debt-to-equity and debt coverage ratio tests, thereby
permitting it to incur more than $15 million of recourse debt.
Despite this present ability to incur additional recourse debt,
there is no assurance that the Company will continue to meet
these ratio tests, and if not, that Mr. Previti and/or the Trust
will be willing to guarantee such indebtedness. The Company
considers its current relationship with its lenders to be good.
In February 1994, the Company issued $50 million in Senior
Notes through a public debt offering. As of October 31, 1998,
the Company has repurchased and retired a total of $20,925,000 of
the Senior Notes and the remaining $29,075,000 have not been
retired, including $9,375,000 which were repurchased and are
being held in the Company's name. The notes are due in December
2000, with interest at the rate of 11 3/8% per annum payable semi
annually on June 15 and December 15 of each year.
During the fiscal year ended October 1998, the Company
repurchased a portion of its Senior Notes having an aggregate
outstanding principal amount of $9,375,000 in the open market.
Net of allocable issuance costs, the resultant income of $34,000
is reported as an extraordinary gain in the Company's
consolidated financial statements for the fiscal year ended
October 31, 1998.
The Indenture governing the Senior Notes requires the
Company to maintain a minimum net worth of $25 million. On
January 31, 1997, the Company fell below the minimum net worth
requirement, and did not again exceed that threshold until the
quarter ended July 31, 1998. See Note 5 of Notes to Consolidated
Financial Statements for further discussion regarding the net
worth requirement.
There can be no assurance that the impact of market
conditions affecting the demand for homes or the availability of
debt financing will not adversely affect the Company's future
needs for capital. However, the Company expects that available
capital resources will be sufficient to meet its normal operating
requirements over the near term.
Impact of Year 2000
Some of the Company's older computer programs were written
using two digits rather than four to define the applicable year.
As a result, those computer programs have time-sensitive software
that recognize a date using "00" as the year 1900, rather than
the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including
among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
The Company has completed its internal assessment and
testing of its IT and non-IT systems that are designed to
function properly with respect to dates in the year 2000 and
thereafter. The core operating system for the company, JD
Edwards, is in compliance with year 2000 standards. Ancillary
programs for the company will be year 2000 compliant by the end
of the company's first fiscal quarter ending January 31, 1999.
The Company believes that with the modifications to existing
software, the year 2000 will not pose significant operational
problems for its computer system.
The Company recognizes that there may be significant
business disruptions involving year 2000 problems with its
vendors and customers. To counteract this potential disruption
to its business and earnings, the Company has undertaken, but not
yet completed, an assessment of the readiness of such third
parties, where the failure of such third parties to be year 2000
compliant could have a material impact on the Company. For
instance, financial service providers to both the Company and the
Company's customers may incur significant costs and even
temporary shut downs as a result of computer problems. Should
those financial services providers not prove to be ready for
compliance with the systems' needs associated with the year 2000,
the ability of lenders to advance funds both for purchasers of
the Company's homes and for financing that is associated with the
Company's operations may be impacted negatively. Any such delay
could have a material adverse effect on the Company and its
results of operations. In the meantime, the Company is
continuing to collect the written assurances it has delivered to
its major vendors regarding their current and expected future
readiness for the year 2000. In addition, the Company is
developing contingency plans should any of its major vendors fail
to be year 2000 compliant in time. These contingency plans range
from finding alternative sources for these services, to training
and readying the Company's employees and personal property so
they are prepared (if needed) to function at current capacities
and efficiencies until the non-complying vendors do in fact
become year 2000 compliant. Although non-compliance could
materially affect the Company's revenues and earnings, the
Company anticipates that the likelihood of such an effect to be
remote, and that the cost for the implementation of its
contingency plans to be non-material to its revenues and
earnings.
ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company's market risks related to financial instruments
as defined in the Market Risk Disclosure Rules issued by the
Securities and Exchange Commission are considered to be
immaterial.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index to the consolidated financial statements,
Report of Independent Auditors and the Consolidated Financial
Statements, which appear beginning on page F-1 of this report and
are incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Forecast "Registered Tradename" is a limited partnership and
has no officers or directors. The sole general partner of
Forecast "Registered Tradename" is Forecast Homes, Inc. ("FHI").
FHI manages the business and affairs of Forecast "Registered
Tradename". Capital is a wholly-owned subsidiary of Forecast
"Registered Tradename". The directors and executive officers of
FHI and Capital are as follows:
Name Age Position
- ---- ---- --------
James P. Previti* 52 Chairman of the Board and President
Frank Glankler 48 Senior Vice President,
Chief Operating Officer
Larry R. Day 49 Senior Vice President,
Chief Legal Officer and Secretary
Richard B. Munkvold 33 Vice President, Finance,
Principal Accounting Office
Jack Firestone 77 Director
Steven Fowlkes* 44 Director
Peter T. Healy 47 Director
Leo Previti** 45 Director
* Member of the Compensation Committee
** Member of Audit 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
Forecast Real Estate Services, Inc. and Inland Empire Personnel.
("IEP"), each of which are affiliates of the Company.
Frank Glankler has served as a Senior Vice President and
Chief Operating Officer since January 1996, after returning to
the company in July 1995 as Vice President of Operations.
Effective August 1, 1998, Mr. Glankler was elected to the
position of Operating Committee member of Forecast Home Mortgage,
the Company's mortgage affiliate. From July 1992 until October
1993 he served as President of the Company's Arizona Division,
and from October 1993 until July 1995, Mr. Glankler was President
of MFR Holdings. Mr. Glankler has over 17 years in the
homebuilding industry, including previous senior management
positions with U.S. Home Corporation. Mr. Glankler was the
former Chairman of the Arizona division of U.S. Home Corporation,
responsible for operations in Phoenix, Tucson and New Mexico.
Positions held by Mr. Glankler at U.S. Home include President of
the Louisiana, North Houston, East Houston and South Houston
divisions, respectively. He is former board member of the
Southern Arizona Homebuilders Association and holds a Class B
Arizona Contractors License and an Arizona Real Estate License.
Larry R. Day joined the Company's predecessor as Vice
President and General Counsel in December 1992 and now holds the
position of Chief Legal Officer and Senior Vice President. He
was elected to FHI's and Capital's boards of directors in
November 1993 and served in that capacity until January 1996.
Since March 1993, Mr. Day has also supervised the Company's human
resources, payroll and risk management departments. From 1989 to
1992, Mr. Day was in private practice specializing in real estate
finance and transactional matters. From 1988 to 1989, Mr. Day was
a Director, Vice President and General Counsel of Guardian
Savings and Loan. From 1985 to 1988, Mr. Day was Director of Real
Estate Legal Services for Taco Bell Corporation. Prior to that,
Mr. Day served 6 years as Vice President of Corporate and Special
Real Estate with First Interstate Bank. Mr. Day is admitted to
practice law in the States of California and Vermont, and is a
licensed California real estate broker.
Richard B. Munkvold joined the Company in 1995 as a Division
Controller of both the Southern California and Arizona
Divisions. In 1997, Mr. Munkvold became Vice President, Finance
and Principal Accounting Officer. Prior to joining the Company,
Mr. Munkvold held several financial positions with the Ryland
Group from 1989 through 1995 and last served as Ryland Group's
West Region Financial Analyst.
Jack Firestone, a private investor, became a Director of the
Company in January 1996.
Steven K. Fowlkes became a Director of the Company in
January 1996. Mr. Fowlkes is President and Chief Operating
Officer of R.W. Selby & Company, Inc., a real estate investment
and management firm in Los Angeles, California.
Peter T. Healy became a Director of the Company in January
1996. Mr. Healy is a Senior Partner with the law firm of
O'Melveny & Myers LLP in their San Francisco, California office.
Leo Previti became a Director of the Company in January
1996. Mr. Previti has been an attorney with the firm of Brown,
Michael & Carroll in Atlantic City, New Jersey since 1996 and
prior thereto was Associate Counsel of International Game
Technology. Leo Previti is also a Certified Public Accountant
and is the brother of James P. Previti.
The Board of Directors of FHI is elected annually by
Mr. Previti, the sole shareholder of FHI. Officers are elected
annually by the Board of Directors and serve at the discretion of
the Board of Directors. The Board of Directors of Capital is
elected annually by FHI on behalf of Forecastr as the sole
shareholder of Capital. Officers are elected annually by the
Board of Directors and serve at the discretion of the Board of
Directors.
The Boards of Directors of FHI and Capital meet three or
four times per year on a quarterly basis. The Boards of
Directors of FHI and Capital each have an Audit Committee of
which Mr. Leo Previti is a member. The Board of Directors of FHI
has a Compensation Committee of which Mr. Steven Fowlkes is a
member.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain information with
respect to the compensation earned by the Chief Executive Officer
and each of the other most highly paid executive officers of FHI
and Capital (pursuant to Regulation S-K, Item 402, of the
Securities Act of 1933, Secuirites Exchange Act of 1934 and
Energy Policy and Conservation Act of 1975) whose total
compensation for services rendered during fiscal 1998 exceeded
$100,000 (collectively, the "Named Executive Officers"):
<TABLE>
Summary Compensation Table
- ----------------------------------------------------------------
Annual Compensation
-------------------------
Name Principal Position Salary Bonus All Other
Compensation
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
James P. President/
Chief Executive Officer $150,000 $566,425 $0
Frank Glankler Chief Operating Officer/
Sr Vice President 141,000 178,895 7,200
Larry Day Sr. Vice President/
Chief Legal Officer/
Secretary 129,000 115,000 7,200
James Rex Southern Division -
President 120,000 200,741 7,200
Larry Young Northern Division -
President 120,000 196,208 7,200
</TABLE>
Forecast "Registered Tradename" and Mr. Previti are parties
to an employment agreement whereby Mr. Previti's annual
compensation is $150,000 plus a quarterly bonus of five 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, 1999.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of November 1, 1998, the
beneficial ownership of the partnership interests in Forecast
"Registered Tradename" by (a) each of the directors of GP and
Capital, (b) the directors and officers of FHI and Capital as a
group, and (c) each person known to the Company to own
beneficially more than 5% of Forecast "Registered Tradename"'s
limited partnership interests or general partnership interests.
<TABLE>
% of
Profits/
Type of Losses/ % of
Name of Beneficial Owner [1] Interest Capital Class
- ----------------------------------------------------------
<S> <C> <C> <C>
James P. Previti [2] GeneralPartner 100.00% 100.00%
James P. Previti [3] Limited Partner 100.00% 100.00%
All directors and officers
as a group (9 persons) [2][4] General Partner 100.00% 100.00%
All directors and officers
as a group (9 persons) [3][4} Limited Partner 100.00% 100.00%
Forecast Homes, Inc. General Partner 1.00% 100.00%
Forecast Corporation Limited Partner 56.28% 56.85%
Forecast Mortgage Corporation Limited Partner 1.04% 1.05%
Forecast Development, L.P. Limited Partner 25.01% 25.26%
Inland Empire Personnel, Inc. Limited Partner 16.67% 16.84%
</TABLE>
{1] The address of each beneficial owner is: 10670 Civic Center
Drive, Rancho Cucamonga, California 91730.
[2] Reflects beneficial ownership resulting from status
as sole trustor and trustee of the Trust, which owns
all of the outstanding interests in each of the current
limited partners of Forecast "Registered Tradename".
[3] Reflects beneficial ownership resulting from status
as sole trustor and trustee of the Trust, which owns
all of the outstanding equity interests in each of the
current limited partners of Forecast "Registered
Tradename".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationships Among Mr. Previti, the Trust and the Company
The Company was formed in 1993 in connection with a
reorganization of the homebuilding businesses owned by the James
Previti Family Trust (the "Trust"). Forecast "Registered
Tradename" is the successor to substantially all the assets and
known liabilities of the residential real estate development
business of the Trust's affiliates. The Trust is a living,
revocable trust with James Previti as the sole trustor and
trustee.
Transactions With Affiliates
The Board of Directors of FHI resolved that it would be in
the Company's best long-term interests to seek the assistance of
Mr. James Previti, the Company's President and Chief Executive
Officer, in acquiring the Company's 11 3/8% Senior Notes on the
open market, if he could acquire them at a favorable discount
from their stated face value. At the same time, the Board of
Directors of FHI agreed that the Company would repurchase the
notes from Mr. Previti at his cost basis, plus interest, at such
time as the Company had sufficient financial resources. Acting
upon this authorization, Mr. Previti did acquire $20.4 million of
the 11 3/8% Senior Notes all of which were repurchased and
retired prior to October 31, 1998. The Company believes that
these transactions were on terms at least as favorable to the
Company as a comparable transaction made on an arm's length basis
between unaffiliated parties.
From time to time, the Trust and/or Mr. Previti have
guaranteed indebtedness of the Company in order to enable the
Company to obtain financing on more favorable terms than would
otherwise be available. There can be no assurances that the Trust
and/or Mr. Previti will continue to provide such guarantees in
the future.
During the fiscal year ended October 31, 1998, Mr. Joe
Carman (a former executive with the Company) tendered his
interest in the Company by effecting a cancellation of his
capital contribution which had been reflected by a note
receivable in the amount of $464,000. This transaction both
reduced the Company's gross equity and its related capital notes
receivable from partners, thereby resulting in no impact to the
Company's net equity.
During the fiscal year ended October 31, 1998, the Company
sold three non-residential real estate assets to an affiliate of
Mr. Previti at the Company's book value. No profit or loss was
recorded on these transactions.
In 1993, Mr. Previti contributed two undeveloped parcels of
real property in Bullhead City, Arizona zoned for multi-family
use, to the Company. In May 1995, the Company sold one of these
parcels to Previti Realty Fund in exchange for a note for
$641,000 secured by the parcel. Previti Realty Fund developed the
parcel as part of an adjacent existing multi-family operating
property bringing the total units in that operating property to
204. The remaining parcel of undeveloped property held by the
Company has a current book value of $1.6 million. Previti Realty
Fund and the Company intend to sell both the operating property
owned by Previti Realty Fund together with the undeveloped parcel
owned by the Company.
Land Acquisitions and Sales From Affiliates
In the fiscal year ended October 31, 1998, the Company
purchased 169 lots in Folsom, California for $2.2 million (or
$13,018 per lot) from Previti Realty Fund. The lots were
purchased at their book value. In addition, the Company was
granted the right to purchase another 147 lots within the same
community at Previti Realty Fund's book value of $1.7 million.
The Company will also purchase, from Previti Realty Fund (at
Previti Realty Fund's current book value of $5.8 million), 387
lots in Tracy, California. These lots have a tentative map and
the Company expects it will have a final map prior to January 31,
1999. The Company has already deposited with Previti Realty Fund
approximately $440,000 towards the purchase price.
The Folsom lots are located near Sacramento, and the Tracy
lots are within the commuter market of the San Francisco East Bay
Area. Both properties, Tracy and Folsom, will be further
developed and homes constructed thereon by the Company's Northern
California Division.
During the fiscal year ended October 31, 1998, the Company
acquired 142 lots in Corona, California from a limited liability
company, in which Previti Realty Fund is a 50% member, at their
book value of $5.7 million. In addition, the Company was granted
the right to purchase another 227 lots in the same Corona
development at the book value of the affiliated limited liability
company.
Receivables From Affiliates
During the fiscal year ended October 31, 1998, Accounts
Receivables from Related Parties increased by $6.9 million. The
increase primarily relates to the addition of a $4.8 million
receivable, from an affiliated entity in which Mr. Previti is a
100% owner that is related to costs incurred by the Company, on
behalf of the affiliate, for certain development activities on
real property in Northern California. The Company will be
reimbursed all amounts then outstanding from the proceeds of the
sale of Community Facilities District bonds which is presently
anticipated to occur in the first quarter of fiscal 1999. The
Company anticipates that it may incur up to an additional $1.5
million on behalf of this affiliate in connection with such
development activity prior to repayment.
A portion of the increase also relates to Mr. Previti's
purchase from the Company of 17 finished lots in Moreno Valley,
at the Company's book value of $1.7 million, in consideration for
a note secured by other real property having a fair market value
which the Company believes is in excess of the $1.7 million note.
No gain or loss was realized as a result of this transaction, and
as of October 31, 1998, the outstanding balance of this note
receivable from Mr. Previti had been paid down to $589,000,
without a reduction in collateral held by the Company. During
the first quarter of fiscal 1999, Mr. Previti paid off this note.
The remainder of the increase relates to various management
fees due to the Company, including a $1,500,000 fee earned by the
Company from Corona Country Club Estates, LLC, an affiliated
entity in which Mr. Previti owns a 50% interest. The fee was
associated with development related rights, licenses and services
performed by the Company on behalf of Corona Country Club
Estates, LLC. On an ongoing basis the Company also receives a
monthly management fee of $20,000 for the construction oversight
and project management of Corona Country Club, and a monthly
management fee of $12,000 for the construction oversight and
project management of a similar project in Northern California,
in which Mr. Previti owns a 100% interest.
The Company 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 service agreements with
several affiliates as a part of the above described
reorganization in 1993. The agreements obligate the Company to
provide certain executive management, legal, tax, accounting,
human resources, payroll, environmental, risk management,
treasury and management information services to these affiliates,
in exchange for a fixed management fee specified in the
agreement. The Company charged $1,781,000 in management fees to
affiliates under these agreements during fiscal 1998, the
majority of which are associated with the $1.5 million fee
referenced above.
Transactions with Mortgage Banking Company - Forecast Home
Mortgage LLC
Mortgage Banking Services. In 1988, Rancho Mortgage
"Registered Tradename" Corporation, a corporation in which Mr.
Previti was the sole stockholder, commenced operations as a
mortgage broker assisting customers of the Company in obtaining
financing. In 1989, Rancho Mortgage "Registered Tradename" began
originating mortgages as a mortgage banker. Although Rancho
Mortgage "Registered Tradename" was formed to provide financing
for customers of the Company, during the year ended October 31,
1997, the Company's customers accounted for only approximately
50% of Rancho Mortgage "Registered Tradename"'s loan
originations. During fiscal 1997, Rancho Mortgage "Registered
Tradename" provided mortgage financing for approximately 55% of
the homes sold by the Company.
Subsequent to October 31, 1997, the Company entered into
negotiations with Norwest for the purpose of forming a broader
based mortgage services entity that would be better able to
attract and fulfill the mortgage needs of the Company's
homebuyers, increase the Company's cashflow from its mortgage
business and take advantage of the standardization in the
mortgage industry. As of January 16, 1998, the Company severed
its relationship with Rancho Mortgage "Registered Tradename" and
began to send its homebuyers to Norwest for all of its mortgage
needs. At the same time, Norwest and the Company applied to
conduct business as "Forecast Home Mortgage LLC' ("Forecast
Mortgage"), a joint venture owned in equal shares by Norwest and
Inland Counties Mortgage. The Forecast Group "Registered
Tradename", L. P., owns a 98% share of Inland Counties Mortgage.
Forecast Corporation owns the other 2%. Forecast Mortgage was
thereafter approved to begin operations on August 1, 1998.
This new entity will continue to provide the Company with
the ability to control the mortgage processing and funding of the
loans its homebuyers obtained in their dealings with the Company,
and has provided the Company (through the consolidation of Inland
Counties with the Company) with income for fiscal year 1998 in
the amount of $588,000 generated through the origination of those
mortgage loans to its homebuyers.
Insurance Brokerage Services
IEI, an affiliate of the Company that is owned by the Trust,
is a licensed insurance broker that does business as Inland
Southern Insurance Services, Inc. ("ISIS"). The Company
purchases various insurance policies through ISIS. Such purchases
are made on terms at least as favorable to the Company as could
be obtained through an unaffiliated insurance broker. In
addition, ISIS markets various forms of insurance to the
Company's homebuyers. The vast majority of the business of ISIS
consists of homebuyers referred by the Company. The Company
receives no referral fee from ISIS for such referrals or
providing its customer lists.
The Company purchases other insurance through independent
insurance brokers under an arrangement whereby ISIS receives a
commission as a co-broker on the insurance sold. ISIS performs
no services for the Company in obtaining the insurance and no
portion of such commission is rebated to the Company as a
referral fee. The Company believes that the aggregate cost of
the insurance coverage purchased pursuant to this arrangement is
no greater than the cost that would have been charged in an arms-
length transaction with an unaffiliated party.
Office Leases
The Company leases from Previti Realty Fund, approximately
15,500 square feet of office space in Rancho Cucamonga for its
corporate and Southern California headquarters and approximately
9,250 in Sacramento. The Company presently pays $15,000 triple
net per month to lease its corporate headquarters, $8,000 full
service per month for its Sacramento office. "Triple Net"
provisions require the Company to pay insurance, taxes and
operating expenses on the building while "full service"
provisions include such expenses in the monthly rent. The terms
and conditions of such leases, including rent payments by the
Company thereunder, are believed by the Company to be equivalent
to such as would be available on an arm's length, fair market
value basis.
Aircraft Charter
From time to time the Company charters aircraft from JP Air
Charter, Inc., an affiliate of the Company. In fiscal 1998 and
1997 the Company paid such affiliate $47,858 and $17,490,
respectively. All such charter services are provided on terms
equivalent to those offered to unaffiliated third parties.
Loan Payable
From time to time, Mr. Firestone, a director of the Company,
has made non-recourse loans to the Company to partially fund the
acquisition of specific communities. The loans bear interest
with a range of 11% to 12% and are repaid at maturity. As of
October 31, 1998 the Company was obligated to Mr. Firestone for
$900,000 by way of such loans. The loans were made on terms
commensurate with those generally available for similar loans.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8 - K
(a) (1) and (a) (2) Financial Statements and Financial Statement
Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page F-1. All other
schedules are not applicable or not required and accordingly have
been omitted.
(a) (3) Exhibits
Exhibit Description
------- -----------
No.
1.1 Limited Partnership Agreement of The Forecast
Group "Registered Tradename", L.P. effective as of
September 30, 1993 by and among Forecast "Registered
Tradename" Homes, Inc., Forecast 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 "Registered Tradename" Capital
Corporation.
2.1 Form of Indenture by and among The Forecast
Group "Registered Tradename", L.P., Forecast "Registered
Tradename" Capital Corporation and United States Trust
Company of New York, as Trustee.
2.2 Specimen of Note.
3.1 Employment Agreement by and between The Forecast Group
"Registered Tradename", L.P. and James P. Previti
dated as of November 1, 1993.
4.1 Subsidiaries of the Registrant.
_________
Each of the foregoing exhibits was filed as part of the Company's
Form S1 and Amendments thereto dated November 24, 1993, January
18, 1994, February 7, 1994 and February 11, 1994 and are
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the
most recent period covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
THE FORECAST GROUP
"Registered Tradename", L.P. By: FORECAST "Registered
Tradename" CAPITAL
CORPORATION.
By: FORECAST "Registered
Tradename"HOMES, INC. By: /s/ James P. Previti
A California corporation --------------------
its General Partner President
By: /s/ James P. Previti
--------------------
President
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FORECAST GROUP "Registered Tradename", L.P., by FORECAST
"Registered Tradename" HOMES, INC., General Partner:
Name Title Date
- ----- ----- ----
/s/ James P. Previti
- --------------------
James P. Previti Chairman of the December 15, 1998
Board, President,
Principal Executive
Officer
/s/ Richard B. Munkvold
- -----------------------
Richard Munkvold Vice President, December 15, 1998
Finance,
Principal Accounting
Officer
FORECAST "Registered Tradename" CAPITAL CORPORATION:
Name Title Date
- ---- ----- -----
/s/ James P. Previti
- --------------------
James P. Previti Chairman of the December 15, 1998
Board, President,
Principal Executive
Officer
/s/ Richard B. Munkvold
- -----------------------
Richard Munkvold Vice President, December 15, 1998
Finance,
Principal Accounting
Officer
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Forecast Group "Registered Tradename", L.P.
We have audited the accompanying consolidated balance sheets
of The Forecast Group "Registered Tradename", L.P. and
subsidiaries (the "Company") as of October 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997,
and the consolidated results of their operations and their
cashflows for each of the three years in the period ended October
31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Newport Beach, California
December 2, 1998
<PAGE>
<TABLE>
The Forecast Group "Registered Tradename", L.P.
Consolidated Balance Sheets
(Amounts in 000's)
October 31
-------------------
1998 1997
-------------------
<S> <C> <C>
Assets:
- -------
Cash and Cash Equivalents $16,193 $13,550
Accounts Receivable 1,409 575
Accounts and Notes Rec.Related Parties 10,427 3,486
Real Estate Inventory 84,152 71,012
Property and Equipment, Net 634 1,036
Other Assets 1,093 1,923
-------- -------
Total Assets $113,908 $91,582
======== =======
Liabilities & Partners' Equity:
- -------------------------------
Accounts Payable $20,781 $12,294
Accrued Expenses 1,925 2,573
Notes Payable:
Senior Notes at 11 3/8%
due December 2000 19,700 29,075
Collateralized by Real Estate
Inventory 35,536 26,978
Other Notes Payable 4,823 -
-------- -------
Total Notes Payable 60,059 56,053
-------- -------
Total Liabilities 82,765 70,920
Commitments and Contingencies (Note 9)
Partners' Equity 31,443 21,426
Less: Capital Notes Receivable from
Partners (300) (764)
Net Partners' Equity 31,143 20,662
--------- -------
Total Liabilities & Partners' Equity $113,908 $91,582
========= =======
</TABLE>
[FN] See notes to consolidated financial statements.
<TABLE>
The Forecast Group "Registered Tradename", L.P.
Consolidated Statements of Operations and Partner's Equity
(Amounts in 000's)
For the Year Ended October 31
-----------------------------
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Homebuilding Revenues $198,074 $132,518 $141,652
Cost of Homes Sold 164,335 112,278 117,702
-------- -------- --------
Gross Profit 33,739 20,240 23,950
Operating Expenses:
- -------------------
Selling & Marketing Expenses 14,384 13,929 15,215
General & Admin. Expenses 11,397 7,397 7,006
Provision for Impairment of
Real Estate Inventory - 6,635 -
Loss on Abandoned Land Options 202 726 3
------ ------- ------
Total Operating Expenses 25,983 28,687 22,224
------ ------- ------
Operating Income (Loss) 7,756 (8,447) 1,726
Other Income (Expenses):
- -------------------------
Interest Income 455 395 274
Interest Expense (264) - -
Other Income and Expenses 2,500 156 14
------ ---- ----
Total Other Income (Expenses) 2,691 551 288
------ ---- ----
Income (Loss) before
Extraordinary Gain 10,447 (7,896) 2,014
Extraordinary Gain on
Extinguishment of Senior Notes 34 1,634 1,876
-------- ----- ------
Net Income (Loss) $10,481 ($6,262) $3,890
======== ========= ======
Partners' Equity at
Beginning of Year $27,688 $23,998 1,426
Capital Distributions, net (464) - (200)
Net Income (Loss) this Year 10,481 (6,262) 3,890
------- ------- -------
Subtotal 31,443 21,426 27,688
Less: Capital Notes Receivable
from Partners (300) (764) (764)
------- ----- -----
Net Partners' Equity at
End of Year $31,143 $20,662 $26,924
======= ======= =======
</TABLE>
[FN] See notes to consolidated financial statements.
<TABLE>
The Forecast Group "Registered Tradename", L.P.
Consolidated Statements of Cash Flow
(Amounts in 000's)
For the Year Ended October 31
-----------------------------
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Operating Activities:
- ---------------------
Net Income (Loss) $10,481 ($6,262) $3,890
Adjustments to Reconcile Net Income
(Loss) to
Net Cash Provided by Operating
Activities
Extraordinary Gain on
Extinguishment of Senior Notes (34) (1,634) (1,876)
Depreciation on Property and Equip. 442 316 281
Loss (Gain) on Sale of
Property and Equipment (11) - 5
Loss on Abandoned Land Options 202 726 3
Provision for Impairment of
Real Estate Inventory - 6,635 -
Equity Income of
unconsolidated joint venture (588) - -
(Increase) Decrease in
Accounts Receivable (834) (109) 199
Decrease (Increase) in Real
Estate Inventory (13,342) 2,387 1,809
Decrease (Increase) in Other Assets 1,176 123 (203)
Increase (Decrease) in Accounts Payable
and Accrued Expenses 7,839 (200) 1,985
------ ----- ------
Net Cash Generated
from Operating Activities 5,331 1,982 6,093
------ ----- -----
Investing Activities:
- ---------------------
Contribution to Joint Venture (100) - -
Distribution from Joint Venture 180 - -
Additions to Property and Equipment (359) (181) (226)
Proceeds from Sale of Property and
Equipment 330 - 3
------ ----- -----
Net Cash Provided by (Used for)
Investing Activities 51 (181) (223)
------- ----- ------
Financing Activities:
- ---------------------
Retirement of Senior Notes at
11 3/8% due December 2000 (9,179) (3,612) (3,251)
Increase) Decrease in Accounts and
Notes Receivable, Related Parties (6,941) 1,753 (2,944)
Proceeds from Notes Payable,
Collateralized by Real Estate 125,691 75,013 72,614
Proceeds from Notes Payable, Other 5,636 - -
Proceeds from Notes Payable,
Related Parties - - 2,221
Principal Payments on Notes Payable,
Collateralized by Real Estate (117,133) (73,755)(68,029)
Principal Payments on Notes Payable,
Other (813) - -
Principal Payments on Notes Payable,
Related Parties - - (2,221)
-------- ------ ------
Net Cash Used for
Financing Activities (2,739) (601) (1,610)
-------- ------ ------
Increase in Cash and Cash Equivalents 2,643 1,200 4,260
Cash and Cash Equivalents at
Beginning of Year 13,550 12,350 8,090
------- ------ -----
Cash and Cash Equivalents at
End of Year $16,193 $13,550 $12,350
======= ====== =======
</TABLE>
[FN] See notes to consolidated financial statements.
<PAGE>
THE FORECAST GROUP "Registered Tradename", L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
1. Basis of Presentation
The Forecast Group "Registered Tradename", L.P. is a
California limited partnership (the "Company") which was formed
in October 1993 to be the successor to substantially all the
assets and liabilities of the single-family residential real
estate development business of the James Previti Family Trust
(the "Trust") and its affiliates. The Trust is a living,
revocable trust with James Previti as Trustor. The Company's
sole general partner is Forecast 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 majority-owned entities engaged in single-
family residential real estate development and related
businesses. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that effect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates significantly in the
near term.
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted deposit
accounts at financial institutions, unrestricted certificates of
deposit with a maturity of less than 90 days and certain funds
not yet remitted and held in trust by escrow companies on homes
which have closed escrow. These escrow funds are generally
received within one to three days after the close of escrow.
Real Estate Inventory and Recognition of Revenue
Real estate inventory consists of single-family residential
projects and land held for future development of single-family
communities and property zoned for multi-family and commercial
use. Interest and property taxes are capitalized to inventories
during periods of development and construction.
In accordance with FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (Statement 121), when events or circumstances
indicate that an impairment to an asset to be held and used might
exist, the expected future undiscounted cashflows from the
affected asset or group of assets must be estimated and compared
to the carrying value of the asset or group of assets. If the
sum of the estimated future undiscounted cash flows, excluding
interest charges, is less than the carrying value of the assets,
an impairment loss must be recorded. The impairment loss is
measured by comparing the estimated fair value of the assets with
their carrying amount. Statement 121 also requires that long
lived assets that are held for disposal be reported at the lower
of the assets' carrying amount or fair value less costs of
disposal.
On an ongoing basis, management analyzes future undiscounted
cashflows for all real estate projects where impairment
indicators are present. Based upon such analysis, the Company
concluded that certain real estate projects were impaired, due
primarily to continuing deterioration of net selling prices and
the rate of sales during the first quarter of fiscal 1997. The
Company then estimated the fair value of those projects and
recorded a resulting impairment loss of $6,635,000 for the year
ended October 31, 1997. For the fiscal year ended October 31,
1998 and October 31, 1996 no provision for impairment loss was
recorded.
Estimated fair value represents the estimated amount at
which an asset could be bought or sold by willing parties in a
current transaction. The estimation process involved in the
determination of fair value requires estimates as to future
events and conditions. Such future events and conditions include
economic, political and market conditions, the costs to complete
development, as well as the availability of suitable financing to
fund development and construction activities, and the repayment
or refinancing of existing indebtedness. As the amount and
timing of the realization of cash flows from the Company's real
estate projects is dependent upon such future uncertain events
and conditions, the ultimate realization may be materially
different from amounts presently estimated in determining fair
value.
Sales of single-family residences and other real estate are
generally recognized when title is conveyed to the buyer at close
of escrow and other conditions for profit recognition have been
met.
Selling expenses include escrow charges, commissions, sales
incentives, advertising, promotions, and the cost of model home
center operation and maintenance. These expenses are generally
charged to operations as incurred. Cost of homes sold include
direct and allocated costs for land and construction including an
estimate for future warranty costs. The Company allocates the
cost of land, common area development, production overhead,
capitalized sales center costs, interest, and property taxes to
homes within a particular community on a pro-rata basis which
approximates relative value of the property.
Property and Equipment
Property and equipment, consisting primarily of vehicles and
office furniture and equipment, is stated at cost. Depreciation
is provided using the straight-line method over the estimated
useful lives of three to seven years.
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, 1998 and 1997 are
costs associated with the issuance of Senior Notes in the amount
of $310,000 and $669,000 (which are reflected net of accumulated
amortization of $1,286,000 and $1,089,000, respectively). The
Company is amortizing these costs over seven years and classifies
the amortization as additional interest incurred.
Income Taxes
The Company, as a partnership, is not subject to federal and
state income taxes since the results of its operations will be
allocated to the partners for inclusion in their respective
income tax returns.
3. Accounts and Notes Receivable, Related Parties
Accounts and notes receivable, related parties, consist of
the following:
<TABLE>
(Amounts in 000's)
October 31
---------------------
1998 1997
---------------------
<S> <C> <C>
Receivable from Previti Realty Fund $4,780 $52
Receivables from other affiliates, net 1,518 464
Management Fees from Affiliates 1,159 589
Note receivable from Mr. Previti,
collateralized by a partnership interest
in River Road Ventures 1,083 1,083
Note receivable from Newport Murrieta Land
Co., secured by real property in
Flagstaff, Arizona 657 657
Note receivable from Previti Realty Fund
secured by real property in
Mohave County, Arizona 641 641
Note receivable from Mr. Previti, secured
by an interest in real property in
Flagstaff, Arizona 589 -
------- ------
Total $10,427 $3,486
======= ======
</TABLE>
As of October 31, 1998, amounts receivable from related
parties, includes a receivable from an entity in which Mr Previti
is a 100% owner in the amount of $4,780,000 relating to costs
incurred by the Company, on behalf of the affiliate, for certain
development activities on real property in Northern California.
The receivables from other affiliates is primarily advances
which totaled $1,518,000 as of October 31, 1998. See further
discussion regarding this project, as well as management fees
from affiliates in Note 6 of Notes to Consolidated Financial
Statements.
As of October 31, 1998 and 1997, amounts receivable from
related parties include a promissory note from Mr. Previti in the
amount of $1,083,000. The note, which is secured by Forecast
"Registered Tradename" Mortgage Corporation's partnership
interest in River Road Ventures (a California general
partnership), is due June 15, 1999 and bears interest at 10 1/2% per
annum.
As of October 31, 1998, amounts receivable from related
parties also includes $657,000 due on a note with an original
face amount of $844,000 that is due March 1999, and is secured by
real property in Flagstaff, Arizona.
In 1993, Mr. Previti contributed two undeveloped parcels of
real property in Bullhead City, Arizona zoned for multi-family
use to the Company. In May 1995, the Company sold one of these
parcels to an affiliated entity in which Mr. Previti owns a 100%
interest, and took back a note receivable of $641,000 secured by
the parcel. The affiliated entity developed the parcel as part
of an adjacent existing multi-family operating property bringing
the total units in that operating property to 204. The remaining
parcel of undeveloped property is currently carried on the
Company's books at an amount of $1.6 million. Mr. Previti now
intends to sell both the operating property owned by the
affiliated entity together with the undeveloped parcel owned by
the Company. In conjunction with this anticipated sale Mr.
Previti has executed a pledge of his shareholder interest in the
net proceeds from the intended sale of the combined properties to
ensure the Company will receive the current book value for its
undeveloped property.
Also included in receivables from related parties as of
October 31, 1998 is a note in the principal amount of $589,000
that is due October 30, 1998, secured by land in Flagstaff,
Arizona. Payment was received in full on this note subsequent to
the Company's fiscal year end.
For further discussion regarding these and other
transactions with affiliates See Note 6.
The Company had 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
represented an obligation of Joseph M. Carman, a prior executive
officer of the general partner in the form of a $464,000 non
recourse note payable to the Company dated February 1994. The
note was secured by Mr. Carman's 1.5% interest in the Company and
bore interest at the prime rate with all interest and principal
due in October 1999. Both of these capital notes were reported
as a reduction of Partners' Equity in the consolidated balance
sheets for the fiscal year ended October 31, 1997. During the
fiscal year ended October 31, 1998, Mr. Carman tendered his
interest in the Company by effecting a cancellation of his
capital contribution that was reflected by the note in the amount
of $464,000. This transaction reduced both the Company's gross
equity and the related capital note receivable from partners,
thereby resulting in no financial impact to the Company's net
equity.
4. Real Estate Inventory and Related Notes Payable
Real estate inventory and related notes payable consist of
the following:
<TABLE>
(Amount in 000's)
October 31, 1998
------------------------
Real Notes Payable
Estate
Inventory
-------------------------
<S> <C> <C>
Land Held for Development $13,263 $0
Residential Projects in Process 65,623 33,525
Model Homes 5,266 2,011
------- -------
Total $84,152 $35,536
======= =======
October 31, 1997
-----------------------
Real Notes Payable
Estate
Inventory
------------------------
Land Held for Development $15,223 $0
Residential Projects in Process 49,638 23,610
Model Homes 6,151 3,368
------- -------
Total $71,012 $26,978
======= =======
</TABLE>
Notes payable secured by real estate inventory bear interest
at rates ranging from the three month LIBOR rate (5.0% at October
31, 1998) plus 2.25% to prime rate (8.0% at October 31, 1998)
plus 1.0%. The interest rate on $12.3 million of the loans
outstanding at October 31, 1998 which bear interest at the thirty
day LIBOR rate plus 2.25% will increase to the prime rate plus
.5% if the Company fails to maintain average deposits with the
lender of $3 million. At October 31, 1998, the Company's cash
balance with this LIBOR lender was in excess of $13.0 million.
Principal payments on notes payable collateralized by real estate
held for development and sale are generally due within eighteen
months. Notes payable collateralized by residential developments
that are in process are generally repaid as units in the related
communities are sold.
The Company is currently considering an exchange of lands
transaction, which if consummated would result in a transactional
loss to the Company in the first quarter of fiscal year 1999.
However, during that same period, the Company has contracted with
unaffiliated third parties to sell to them various excess lot
land parcels which, if consummated, would substantially offset the
projected transactional loss.
At October 31, 1998 and 1997, undisbursed amounts under
construction loans were approximately $38,369,000 and
$41,016,000, respectively. Draws of undisbursed amounts under
construction loans are subject to varying requirements of the
lenders including progress of construction. Approximately
$23,780,000 and $14,997,000 of the notes payable outstanding as
of October 31, 1998 and 1997, 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>
(Amount's in 000's)
For the Year Ended October 31
-----------------------------
1998 1997 1996
----------------------------
<S> <C> <C> <C>
Interest Incurred and Capitalized $6,859 $7,076 $7,884
Interest Incurred and Expensed 264 - -
------ ------- -------
Total Interest Incurred $7,123 $7,076 $7,884
====== ======= =======
Capitalized Interest Amortized
to Cost of Homes Sold $7,865 $8,379 $7,158
Interest Paid $7,529 $7,371 $8,111
</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. At October 31, 1998
Senior Notes with a face value of $19,700,000 are held in names
of investors other than the Company. The notes are joint and
several senior obligations of the Company and Forecast Capital
"Registered Tradename" Corporation ("Capital"), with interest
only payments due semiannually on June 15 and December 15 of each
year. The notes are senior unsecured obligations of the Company
and rank pari passu in right of payment with all senior
indebtedness of the Company. The fair value of the Company's
Senior Notes is approximately $19,109,000 based on the market
price as of October 31, 1998.
The Indenture governing the Senior Notes permits the Company
to incur up to $15 million in recourse debt in addition to the
$50 million of Senior Notes, and to incur additional recourse
debt beyond this $15 million limitation if the Company maintains
certain debt-to-equity and debt coverage ratios. As of October
31, 1998, the Company met the interest coverage and debt-toequity
ratios, thereby permitting the Company to incur additional
recourse debt above the $15 million limit. Notwithstanding the
ability to incur recourse debt in excess of $15 million at
October 31, 1998, the Company only had outstanding approximately
$6.1 million of recourse debt, thus permitting it to incur more
than $8.9 million in additional recourse debt. In addition, the
Company is not precluded from incurring additional debt on a non
recourse debt basis, without regard to any interest or debt
coverage ratios.
The Indenture also requires that the Company maintain a
minimum net worth of $25 million. If the Company's net worth at
the end of each of any two consecutive fiscal quarters (Trigger
Dates) is less than $25 million, the Company is then required to
make an offer ("Net Worth Offer") to all Senior Note holders to
acquire, on a pro rata basis, Senior Notes in the aggregate
principal amount of $5 million at a purchase price of 100% of the
principal amount plus accrued interest ("Net Worth Offer"). The
Company may credit against any such Net Worth Offer, the
principal amount of Senior Notes previously acquired by the
Company.
For the fiscal quarter ended 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 its repurchase
obligations at that time.
For the fiscal quarters ended July 31, and October 31, 1996,
the Company's net worth was again above the $25 million
threshold, thereby preventing the occurrence of a second Trigger
Date. As a result of the non-cash charge for the impairment of
real estate inventory at the end of the first quarter of 1997,
for the fiscal quarters ended January 31, April 30, July 31, and
October 31, 1997, the Company was again not in compliance with
the minimum net worth requirement, which resulted in Trigger
Dates occurring on April 30, 1997 and October 31, 1997. The
Company's acquisition and retirement of over $20.9 million in
Senior Notes prevented the need to make a Net Worth Offer.
As of January 31 and April 30, 1998, the Company was again
not in compliance with the minim net worth requirement which
resulted in a Trigger Date on April 30, 1998. The Company's
prior acquisition and retirement of Senior Notes remained
sufficient to prevent the need to make a Net Worth Offer at April
30, 1998.
As of July 31, 1998, the Company's net worth was above
the $25 million, threshold, thereby bringing the Company into
compliance with the provisions of the Indenture.
During the year ended October 31, 1998 the Company
repurchased on a margin account, and in the open market, a
portion of its Senior Notes having an aggregate outstanding face
value of $9,375,000, which brought the total Senior Notes
repurchased to $30,300,000, of which all but the $9,375,000 had
been retired. As of October 31, 1998 approximately $4,823,000
was outstanding on the margin account and has been classified as
Other Notes Payable on the balance sheet.
6. Related Party Transactions
The Company leases its corporate offices and certain of its
operating division offices from Mr. Previti or partnerships in
which Mr. Previti maintains at least a 50% ownership. These
leases are generally noncancelable and have expiration dates
ranging through 2004. Payments under these leases were $346,000,
$343,000 and $332,000 for the fiscal years ended October 31,
1998, 1997 and 1996, respectively. See Note 9 of Notes to
Consolidated Financial Statements for aggregate operating lease
commitments of the Company.
Through January 15, 1998 mortgages for certain of the
Company's customers were provided by Rancho Mortgage "Registered
Tradename" Corporation ("Rancho Mortgage "Registered Tradename"),
a corporation in which Mr. Previti is the sole stockholder.
During the normal course of business, the Company had entered
into certain transactions with Rancho Mortgage "Registered
Tradename" for loan commitments under various governmental
programs to facilitate its customers ability to obtain financing.
Commitment fees paid to Rancho Mortgage "Registered Tradename"
were approximately $502,000, $758,000 and $1,432,000 for the
fiscal years ended October 31, 1998, 1997 and 1996, respectively.
As of January 16, 1998 the Company ceased doing business
with Rancho Mortgage "Registered Tradename" and started a
business relationship with Norwest, Inc. (a nationally recognized
mortgage banker, "Norwest"). On August 1, 1998 the Company
(through its limited partnership interest in Inland Counties
Mortgage, LLC ["Inland Counties"], an affiliated entity of the
Company) entered into a joint venture with Norwest under the name
Forecast "Registered Tradename" Homes Mortgage, LLC ("Forecast
Mortgage"). This new entity will continue to provide the Company
with the ability to influence the mortgage processing and funding
of the loans its homebuyers obtained in their dealings with the
Company, and has provided the Company (through the consolidation
of Inland Counties with the Company) with previously unavailable
income generated through the origination of those mortgage loans
to its homebuyers. The Company expects that Forecast Mortgage
"Registered Tradename" will be able to capture a greater percentage
of its homebuyers than had its prior mortgage provider due to the
vastly larger mortgage products a company like Norwest is able
to offer.
In fiscal 1997 and 1996, Rancho Mortgage "Registered
Tradename" incurred management, administration, servicing rights
and credit enhancement fees to the Company in the amount of
approximately $40,000 and $40,000, respectively. No such fees
were incurred subsequent to fiscal 1997.
The Company has entered into management services agreements
with several affiliates, whereby the Company provides certain
executive management, real estate development, legal, tax,
accounting, human resources, environmental, risk management,
treasury and management information services to these affiliates,
in exchange for a fixed management fee. The company charged
$1,781,000, $142,000 and $142,000 in management fees to
affiliates under these agreements for the fiscal years ended
October 31, 1998, 1997 and 1996, respectively. Included in the
management fees earned in the fiscal year ended October 31, 1998
is a $1,500,000 fee earned by the Company from an affiliated
entity in which Mr. Previti owns a 50% interest, for development
related rights, licensing and services associated with certain
real property in Southern California. The Company has management
fee receivables from affiliates of $1,159,000 as of October 31,
1998.
During the fiscal year ended October 31, 1998, the Company
incurred $4.8 million in site development costs on real property
in Northern California, on behalf of an affiliated entity in
which Mr. Previti is a 100% owner. The Company will be
reimbursed from the sale of Community Facilities District bonds
which is presently anticipated to occur in the first quarter of
fiscal 1999.
During fiscal 1998, the Company acquired 169 lots in the
above referenced Northern California community at the affiliate's
book value of $2.2 million, along with the right to purchase
another 147 lots within that same community at the affiliate's
book value of $1.7 million. In addition, during that same
period, the Company acquired 142 lots, from an affiliate in which
Mr. Previti owns a 50% interest, at the affiliate's book value of
$5.7 million, along with the right to acquire another 227 lots at
book value. This 227 lot transaction is further subject to a
profit participation agreement in which the non-Previti owned
portion of the affiliated entity will be entitled to 50% of the
net profits from the sale of each home on those 227 lots, after
the deduction of a 3% management fee to the Company. The
remaining 50% of the net profits will be retained by the Company.
During the fiscal year ended October 31, 1998, the Company
sold three non-residential real estate assets to Mr. Previti's
above referenced 100% ownership entity, all at the Company's book
value. The total book value for all three parcels was $2.2
million. No profit or loss was recorded on these transactions.
In May 1995, the Company sold, to an affiliate, a parcel of
land located in Bullhead City, Arizona that was approved for the
construction of 68 apartment units. The sales price of $641,000
represented 105% of the book value of the parcel as of the sale
date. As consideration for the sale, the Company accepted a note
receivable of $641,000 from Previti Realty Fund, which remains
outstanding as of October 31, 1998, and is secured by the
property. See Note 3 of Notes to Consolidated Financial
Statements.
In March 1996, the Company sold a 8.1 acre parcel of land
located in Murietta, California, at its book value, to a
corporation controlled by Mr. Previti for total consideration of
approximately $2.5 million consisting of a note payable to the
Company for $844,000 and the assumption by the buyer of
$1,679,000 of indebtedness related to the parcel sold. No gain
or loss was recognized on the sale. As of October 31, 1998, the
principal balance of that note was $657,000. See Note 3 of Notes
to Consolidated Financial Statements.
During the year ended October 31, 1998, Mr. Previti
purchased from the Company a parcel of land in Moreno Valley,
which the Company elected not to develop. The purchase price was
$1.7 million, the land's current book value, and was transferred
in consideration for a note secured by land in the amount of $1.7
million. No gain or loss will be realized as a result of the
consummation of this transaction. As of October 31, 1998, the
principal balance of that note was $589,000. Subsequent to year
end this note was paid in full.
For further discussion of these and other transactions
with affiliates see Note 3 of Notes to Consolidated Financial
Statements.
7. Extraordinary Item
During the years ended October 31, 1998, 1997 and 1996, the
Company repurchased a portion of its Senior Notes having an
aggregate face value of $9,375,000, $5,400,000 and $5,315,000,
respectively. The Senior Notes were purchased from Mr. Previti
and in the open market and $20,925,000 of such Senior Notes have
been retired. Net of allocable issuance costs, the resultant
income of $34,000, $1,634,000 and $1,876,000 is reported as an
extraordinary gain in the Company's financial statements for the
years ended October 31, 1998 1997 and 1996, respectively. FHI's
Board of Directors has authorized management to repurchase
additional Senior Notes through affiliates, at their 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, 1998, affiliates of the Company did not control any
additional Senior Notes.
8. Profit Sharing and Pension Plans
In fiscal 1995, the Company adopted a non-contributory
401(k) plan covering substantially all employees. There were no
contributions made by the Company to the Plan in fiscal 1996 and
1995. In fiscal 1997, the Company adopted a qualified matching
program relating to employees' contribution to their 401(k)
plans. The program creates an obligation for the Company to
contribute 25% of any employee's contribution to the 401(k) plan,
up to the first 6% of any one employees' contribution.
Participating employees vest in the Company's matching over a
five (5) year period, at 20% per year expired. After (5) years,
the employee becomes fully vested in all Company matched funds.
During 1998, the Company paid $30,000 to employees' accounts as a
result of this program.
9. Commitments and Contingencies
COMMITMENTS
The Company leases office facilities under noncancelable
operating leases expiring in 1998 and 2004. Aggregate rental
costs incurred under such leases were $496,000, $356,000 and
$413,000 for the years ended October 31, 1998, 1997 and 1996,
respectively. Future minimum annual rental payments of $186,000
for its Corporate Office are due during 1999. Future minimum
annual rental payments of $98,000, $99,000, $101,000, $103,000,
$105,000 and $71,000 for its Sacramento office are due during
1999, 2000, 2001, 2002, 2003 and thereafter, respectively. Future
minimum annual rental payments of $27,000, $28,000 and $19,000
for its Arizona office are due during 1999, 2000 and 2001,
respectively. Future minimum annual rental payments of $31,428
and $28,809 for its San Diego office are due during 1999 and
2000, respectively. See Note 6 of Notes to Consolidated
Financial Statements for further discussion regarding leases with
affiliates.
CONTINGENCIES
The Company is subject to routine litigation incidental to
its business. In the opinion of management, the resolution of
such claims will not have a material adverse effect on the
operating results or financial position of the Company.
In addition to the routine litigation, the Company's
contingent liabilities include warranty obligations and other
disputes arising from construction and sales of single-family
homes in the ordinary course of business. In the opinion of
management, adequate reserves have been provided for warranty
obligations and ultimate outcome of any disputes on these other
matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or
liquidity.
<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, 1998 and 1997 and the related statements of
operations and accumulated deficit, and cash flows for each of
the three years in the period ended October 31, 1998. 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 Capital Corporation at October 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the
three years in the period ended October 31, 1998, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
December 2, 1998
Forecast "Registered Tradename" Capital Corporation
Balance Sheets
<TABLE>
October 31
-------------
1998 1997
-------------
<S> <C> <C>
-------------
Assets:
Cash $100 $100
---- ----
Total Assets $100 $100
==== =====
Liabilities & Shareholders' Deficit:
Accounts Payable 300 $300
Accounts Payable, Related Parties 4,400 3,400
----- -----
Total Liabilities $4,700 $3,700
Common Stock, $1.00 par value:
Authorized 10,000 shares
Issued and Outstanding
2,500 shares 2,500 2,500
Accumulated Deficit (7,100) (6,100)
------ -------
Total Shareholders' Deficit (4,600) (3,600)
------- -------
Total Liabilities &
Sahreholders Deficit $100 $100
======= =======
</TABLE>
[FN] See notes to financial statements.
<TABLE>
Forecast "Registered Tradename" Capital Corporation
Statements of Operations and Shareholders' Equity (Deficit)
For the Year Ended October 31
-----------------------------
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
General & Admin. Expenses $200 $400 $1,000
Income Tax Expense 800 800 800
---=---- ------- --------
Net Loss ($1,000) ($1,200) ($1,800)
======== ======== ========
Shareholders' Equity(Deficit)
At Beginning of Period ($3,600) ($2,400) ($600)
Net Loss this Period ($1,000) ($1,200) ($1,800)
------ ------- -------
Shareholders' Equity (Deficit)
at End of Period ($4,600) ($3,600) ($2,400)
======== ======= ========
</TABLE>
[FN] See notes to financial statements.
<TABLE>
Forecast "Registered Tradename" Capital Corporation
Statements of Cashflows
For the Year Ended October 31
-----------------------------
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Net Loss ($1,000) ($1,200) ($1,800)
Increase (Decrease) in
Accounts Payable and Accrued Ex. - (100) 2,000
Increase in Accounts Payable,
Related Parties 1,000 1,100 -
----- ----- ------
Increase (Decrease) in Cash
and Cash Equivalents $0 ($200) $200
Cash and Cash Equivalents at
Beginning of Year 100 300 100
----- ----- ------
Cash and Cash Equivalents at
End of Year $100 $100 $300
===== ==== =====
</TABLE>
[FN] See notes to financial statements.
<PAGE>
FORECAST "Registered Tradename" CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
1. Organization and Operations
Forecast "Registered Tradename" Capital Corporation (the
"Company") was incorporated in California on September 20, 1993,
and was formed solely for the purpose of serving as an Issuer
of the Senior Notes for The Forecast Group "Registered Tradename",
L.P. The authorized capital stock of the Company consists of
10,000 shares of common stock with a par value of $1.00 per share.
The Company is a wholly-owned subsidiary of The Forecast Group
"Registered Tradename", L.P., a California limited partnership
that is engaged in the residential real estate development
business. The Company is financially dependent on
The Forecast Group "Registered Tradename", L.P. to fund its
continuing operations.
2. Income Taxes
The Company is a C Corporation for federal and state income
tax reporting purposes, and accounts for income taxes in
accordance with Financial Accounting Standards Board Statement
No. 109 "Accounting for Income Taxes."
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 16193000
<SECURITIES> 0
<RECEIVABLES> 11836000
<ALLOWANCES> 0
<INVENTORY> 84152000
<CURRENT-ASSETS> 113908000
<PP&E> 634000
<DEPRECIATION> 442000
<TOTAL-ASSETS> 113908000
<CURRENT-LIABILITIES> 82765000
<BONDS> 19700000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 113908000
<SALES> 198074000
<TOTAL-REVENUES> 198074000
<CGS> 164335000
<TOTAL-COSTS> 190318000
<OTHER-EXPENSES> (2955000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264000
<INCOME-PRETAX> 10447000
<INCOME-TAX> 10447000
<INCOME-CONTINUING> 10447000
<DISCONTINUED> 0
<EXTRAORDINARY> 34000
<CHANGES> 0
<NET-INCOME> 10481000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
