FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OR 1934
For the transition period from N/A
Commission File Number 33-72106
THE FORECAST GROUP "Registered Tradename", L.P.
FORECAST "Registered Tradename" CAPITAL CORPORATION
(Exact Name of Registrant as specified in its charter)
California 33-0582072
California 33-0582077
(State of Organization) (IRS Employer Identification Number)
10670 Civic Center Drive, Rancho Cucamonga, California 91730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(909)987-7788
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
11 3/8% Senior Notes Due 2000 None
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicated 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 non-affiliates of the
Registrant at August 31, 1998.
At August 31, 1998, Forecast "Registered Tradename" Capital
Corporation had 2,500 shares of Common stock outstanding.
<PAGE>
<TABLE>
THE FORECAST GROUP "REGISTERED TRADENAME", L.P.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's)
July 31, 1998 October 31, 1997
(Unaudited)
------------- ---------------
<S> <C> <C>
Assets:
- -------
Cash and Cash Equivalents $16,700 $13,550
Accounts Receivable 155 575
Accounts and Notes Receivable,
Related Parties 7,380 3,486
Real Estate Inventory 79,927 71,012
Property and Equipment, Net 636 1,036
Other Assets 1,726 1,923
-------- -------
Total Assets $106,524 $91,582
======== =======
Liabilities & Partners' Equity:
- -------------------------------
Accounts Payable $18,901 $12,294
Accrued Expenses 1,694 2,573
Notes Payable:
Senior Notes at 11 3/8% due
December 2000 27,750 29,075
Collateralized by Real Estate
Inventory 31,497 26,978
Other Notes Payable 544 -
------ ------
Total Notes Payable 59,791 56,053
------ ------
Total Liabilities 80,386 70,920
Partners' Equity 26,438 21,426
Less: Capital Notes Receivable
From Partners (300) (764)
------ ------
Net Partners' Equity 26,138 20,662
-------- -------
Total Liabilities & Partners'Equity $106,524 $91,582
======== =======
</TABLE>
[FN] See notes to consolidated financial statements.
<TABLE>
THE FORECAST GROUP "Registered Tradename", L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
FOR THE NINE AND THREE MONTHS ENDED JULY 31, 1998 AND 1997
(Unaudited)
(Amount in 000's)
Nine Months Three Months
Ended Ended
July 31, July 31,
--------------- --------------
1998 1997 1998 1997
----------------- -------------
<S> <C> <C> <C> <C>
Homebuilding Revenues $139,842 $95,481 $57,280 $41,750
Cost of Homes Sold 117,359 81,028 47,207 35,492
-------- ------- ------- ------
Gross Profit 22,483 14,453 10,073 6,258
-------- ------- ------- ------
Operating Expenses:
- -------------------
Selling & Marketing Ex. 10,585 10,267 3,723 3,730
General & Admin. Ex. 7,722 5,588 3,205 1,850
Provision for Impairment
of Real Estate Inventory - 6,635 - -
Loss on Abandoned Land
Options 126 - 34 -
------ ------ ----- -----
Total Operating Expenses 18,433 22,490 6,962 5,580
------ ------ ----- -----
Operating Income (Loss) 4,050 (8,037) 3,111 678
Other Income (Expenses):
- ------------------------
Interest Income 338 279 108 83
Interest Expense (122) - (122) -
Other Income and Ex., net 1,174 128 934 45
----- --- --- ---
Total Other Income (Expense) 1,390 407 920 128
Income (Loss)before
Extraordinary Gain 5,440 (7,630) 4,031 806
Extraordinary Gain on
Extinguishment of Senior Notes 36 1,634 - -
------ ------ ------ ----
Net Income (Loss) $5,476 ($5,996) $4,031 $806
====== ====== ====== ====
Partners' Equity at
Beginning of Period $21,426 $27,688 $22,407 $20,886
Capital Contrib./(Distrib.) (464) - - -
Net Income (Loss) this Period 5,476 (5,996) 4,031 806
------ ------ ------ ------
26,438 21,692 26,438 21,692
Less: Capital Notes
Receivable from Partners (300) (764) (300) (764)
------ ------ ------ ------
Net Partners' Equity at
End of Period $26,138 $20,928 $26,138 $20,928
======= ======= ======= =======
</TABLE>
[FN] See notes to consolidated financial statements.
<TABLE>
THE FORECAST GROUP "Registered Tradename", L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
(Unaudited)
(Amount in 000's)
1998 1997
----- -----
<S> <C> <C>
Operating Activities:
- --------------------
Net Income (Loss) $5,476 ($5,996)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities
Non-Cash Charge for Impairment of
Real Estate Inventory - 6,635
Loss on Abandoned Land Options 126 -
Extraordinary Gain on
Extinguishment of Senior Notes (36) (1,634)
Depreciation on Property and Equipment 312 222
Gain on Sale of Property and Equipment (11) -
Decrease (Increase) in Accounts Receivable 420 (242)
Decrease (Increase) in Real Estate Inventory (9,041) 5,042
Decrease in Other Assets 297 252
Increase (Decrease) in Accounts Payable
and Accrued Expenses 5,728 (478)
----- -----
Net Cash Provided by Operating Activities 3,271 3,801
----- -----
Investing Activities:
- --------------------
Contribution to Joint Venture (100) -
Additions to Property and Equipment (231) (69)
Proceeds from sale of property and equipment 330 -
--- ---
Net Cash Used for Investing Activities (1) (69)
--- ---
Financing Activities:
- ---------------------
Retirement of Senior Notes at 11 3/8% due
December 2000 (1,289) (3,612)
Decrease (Increase) in Accounts and Notes
Receivable, Related Parties (3,894) 1,108
Proceeds from Notes Payable Collateralized
by Real Estate 88,935 51,077
Proceeds from Notes Payable, Other 1,357 -
Principal Payments on Notes Payable
Collateralized by Real Estate (84,416) (53,230)
Principal Payments on Notes Payable, Other (813) -
------ ------
Net Cash Used for Financing Activities (120) (4,657)
------ ------
Increase (Decrease) in Cash and
Cash Equivalents 3,150 (925)
Cash and Cash Equivalents at
Beginning of Period 13,550 12,350
------ -----
Cash and Cash Equivalents at
End of Period $16,700 $11,425
======= =======
</TABLE>
[FN] See notes to consolidated financial statements.
<PAGE>
THE FORECAST GROUP "Registered Tradename", L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and
related disclosures contained in the Form 10-K for the year ended
October 31, 1997 (File No. 33-72106) as filed with the Securities
and Exchange Commission.
The results of operations for the nine months ended July 31,
1998 do not necessarily indicate the results that can be expected
for the full fiscal year.
The results of operations for the nine months ended July 31,
1998, and this Form 10-Q, also may be interpreted as, or actually
contain, "forward looking" information, as that term is defined
by the Securities and Exchange Commission. To the extent such
forward looking information is contained in this filing, the
Company intends to use these disclosures to take advantage of the
"Safe Harbor" provisions set out in the rules and regulations of
the Securities and Exchange Commission, and thus strongly
recommends that prior to making an investment decision a
prospective investor should carefully consider the factors
mentioned in Form 10-K for the year ended October 31, 1997 in
relation to that "forward looking" information, as well as other
financial and business information that may be available from a
variety of sources regarding the home building industry as a
whole, including, but not limited to:
- - Changes in national economic conditions such as interest
rates, consumer confidence and job loss or formation
statistics
- - Change in economic conditions in the markets in which the
Company operates
- - Fluctuations in mortgage interest rates
- - Cost increases resulting from adverse weather conditions,
shortages of labor and/or construction materials
- - Changes in governmental regulations which may delay new home
development or impose additional costs or fees.
2. Real Estate Held for Development and Sale and Related
Notes Payable
Real estate held for development and sale and related notes
payable consist of the following:
<TABLE>
(Amount's in 000's)
July 31, 1998
----------------------------
Real Estate Notes Payable
Inventory
-----------------------------
<S> <C> <C>
Land Held for Development $12,021 $0
Residential Projects in Process 62,052 29,306
Model Homes 5,854 2,191
------- ------
Total $79,927 $31,497
======= =======
October 31, 1997
---------------------------
Real Estate Notes Payable
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>
3. Interest
The following summarizes the components of interest
incurred, capitalized, expensed and paid:
<TABLE>
(Amount's in 000's)
For the Nine For the Three
Months Ended Months Ended
July, 31, July 31,
------------ -------------
<S> <C> <C> <C> <C>
Interest incurred and capitalized $5,196 $5,393 $1,693 $1,709
Interest incurred and expensed 122 - 122 -
------ ------ ------ ------
Total Interest Incurred $5,318 $5,393 $1,815 $1,709
====== ====== ====== ======
Capitalized interest amortized
To cost of homes sold $6,178 $6,183 $1,988 $2,821
Interest paid $6,143 $6,488 $2,593 $2,575
</TABLE>
4. Transactions With Affiliates
The Board of Directors of Forecast "Registered Tradename"
Homes, Inc., 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 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 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 acquired and the Company
repurchased, $20,350,000 of Senior Notes prior to July 31, 1998.
(See Note 5 to Consolidated Financial Statements).
The Company believes that the transactions discussed above
were on terms at least as favorable to the Company as a
comparable transaction made on an arms length basis between
unaffiliated parties.
During the nine months ended July 31, 1998, Accounts
Receivables from Related Parties increased by $3.9 million. The
increase primarily relates to the addition of a $2.5 million
receivable, from an affiliated entity in which Mr. Previti is a
100% owner, 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
from the proceeds of the sale of Community Facilities District
bonds which is presently anticipated to occur in the fourth
quarter of fiscal 1998. On an ongoing basis the Company also
receives a monthly management fee of $12,000 for the construction
oversight and project management of this project.
A portion of the increase also relates to Mr. Previti's
purchase from the Company of 17 finished lots in Moreno Valley,
at book value ($1.7 million), in consideration for a note secured
by other real property having a fair market value in excess of
the $1.7 million note. No gain or loss was realized as a result
of this transaction, and as of July 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.
The remainder of the increase relates to various management
fees due to the Company, including a $500,000 fee earned by the
Company from an affiliated entity in which Mr. Previti owns a 50%
interest, for development related rights and services associated
with certain real property in Southern California. On an ongoing
basis the Company also receives a monthly management fee of
$20,000 for the construction oversight and project management of
this project.
During the nine months ended July 31, 1998, the Company also
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 the above referenced Southern California affiliate, 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.
Also during the nine months ended July 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.
Additionally, during the nine months ended July 31, 1998,
Mr. Joe Carman (a prior 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 financial
impact to the Company's net equity.
As of 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 Mortgage, Inc. (a nationally
recognized mortgage banker, "Norwest") under the name of Forecast
Homes Mortgage, LLC ("Forecast Mortgage"). This new entity will
continue to provide the Company with the ability to control the
mortgage processing and funding of the loans its homebuyers
obtain 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 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.
Lastly, in 1993, Mr. Previti contributed two undeveloped
parcels 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 to 204. The remaining parcel of undeveloped
property is currently carried on the Company's books at $1.6
million. Mr. Previti now intends to sell 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
carrying value for its undeveloped property.
5. 11 3/8% Senior Notes Due December 2000
In February 1994, the Company issued $50,000,000 in 11 3/8%
Senior Notes through a public debt offering. The notes are joint
and several obligations of the Company and Forecast Capital
Corporation, with interest only payments due semi-annually on
June 15 and December 15 of each year. The notes are unsecured
obligations of the Company and rank pari passu in right of
payment with all senior indebtedness of the Company. As of July
31, 1998, the Company had repurchased and retired a total of
$20,925,000 of the Senior Notes and the remaining $29,075,000
have not been retired, including $1,325,000 which were
repurchased and are held by the Company. (See Note 7 of Notes to
Consolidated Financial Statements).
The Indenture governing the Senior Notes permits the Company
to incur up to $15 million in recourse debt in addition to the
$50 million of Senior Notes, and to incur additional recourse
debt beyond this $15 million limitation if the Company maintains
certain debt-to-equity ratios and debt coverage ratios. As of
July 31, 1998, the Company met the interest coverage and debt-to
equity ratios, thereby permitting the Company to incur additional
recourse debt above the $15 million limit. Notwithstanding the
ability to incur recourse debt in excess of $15 million at July
31, 1998, the Company only had outstanding approximately $2.3
million of recourse debt, thus permitting it to incur more that
$12.7 million in additional recourse debt. In addition, the
Company is not precluded from incurring additional debt on a non
recourse debt basis, and believes the financing currently in
place is sufficient to meet the Company's business objectives for
the foreseeable future.
The Indenture governing the Senior Notes requires the
Company to maintain a minimum net worth of $25 million. If the
Company's net worth at the end of any two consecutive fiscal
quarters (the last day of such second consecutive fiscal quarter
being referred to as the "Trigger Date") is less than $25
million, then the Company is required to make an offer to all
Senior Note holders to acquire, on a pro rata basis, Senior Notes
in the aggregate principal amount of $5 million (the "Net Worth
Offer") at a purchase price equal to 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.
As of October 31, 1995 and January 31, 1996, the Company was
not in compliance with the minimum net worth requirement.
However, the Company had purchased or redeemed a sufficient
amount of Senior Notes to meet its repurchase obligations at that
time.
As of April 30, 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
as of October 31, 1997 prevented the need to make a Net Worth
Offer at that time.
As of January 31 and April 30, 1998 the Company was again
not in compliance with the minimum 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 again
above the $25 million threshold, thereby bringing the Company's
net worth into compliance with the net worth provisions of the
Indenture.
6. Real Estate Held for Development and Sale
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 assets to be held and used might
exist, the expected future undiscounted cash flows from the
affected asset or group of assets must be estimated and compared
to the carrying value of the asset or group of assets. If the
sum of the estimated future undiscounted cash flows, excluding
interest charges, is less than the carrying value of the assets,
an impairment loss must be recorded. The impairment loss is
measured by comparing the estimated fair value of the assets with
their carrying amount. Statement 121 also requires that long
lived assets that are held for disposal be reported at the lower
of the assets' carrying amount or fair value less costs of
disposal.
On an ongoing basis, management analyzes future undiscounted
cash flows for all real estate projects where impairment
indicators are present. Based upon such analysis, no provision
for impairment loss was recorded for the nine months ended July
31, 1998. Using the same analysis for the first nine months of
fiscal 1997, the Company concluded that certain real estate
projects were impaired, and recorded an impairment loss of
$6,635,000.
7. Extraordinary Item
In November 1997, the Company repurchased on margin and in
the open market, a portion of its Senior Notes having an
aggregate outstanding principal balance of $1,325,000. As of
July 31, 1998, $544,000 was due on the margin account for the
purchase of these Senior Notes and such amount has been
classified as Other Notes Payable on the Company's balance sheet.
Net of allocable issuance costs, the resultant income of $36,000
was reported as an extraordinary gain in the Company's financial
statements for the nine month period ending July 31, 1998.
<PAGE>
FORECAST "Registered Tradename" CAPITAL CORPORATION
BALANCE SHEETS
<TABLE>
July 31, 1998 October 31, 1997
(Unaudited)
------------- ---------------
<S> <C> <C>
Assets:
- -------
Cash $100 $100
---- ----
Total Assets $100 $100
==== ====
Liabilities & Shareholders' Deficit:
- ------------------------------------
Accounts Payable $300 $300
Accounts Payable, Related Parties 4,200 3,400
----- -----
Total Liabilities 4,500 3,700
----- -----
Common Stock, $1.00 par value:
Authorized 10,000 shares
Issued and Outstanding
2,500 shares 2,500 2,500
Accumulated Deficit (6,900) (6,100)
------ -----
Total Shareholders' Deficit (4,400) (3,600)
------ -----
Total Liabilities &
Shareholders' Deficit $100 $100
===== ====
</TABLE>
[FN] See notes to financial statements.
FORECAST "Registered Tradename" CAPITAL CORPORATION
STATEMENTS OF OPERATIONS AND SHAREHOLDERS' EQUITY
FOR THE NINE AND THREE MONTHS ENDED JULY 31, 1998 AND 1997
(Unaudited)
<TABLE>
Nine Months Three Months
Ended Ended
July 31, July 31,
----------- -----------
1998 1997 1998 1997
----------- ------------
<S> <C> <C> <C> <C>
General & Administrative Expenses $0 $0 $0 $0
Income Tax Expense 800 800 0 0
----- ----- -- --
Net Income (Loss) ($800) ($800) $0 $0
===== ===== == ==
Shareholders' Equity at
Beginning of Period ($3,600) ($2,400) ($4,400) 3,200
Net Income (Loss) this Period (800) (800) 0 0
------ ------ ------ -----
Shareholders' Equity at
End of Period ($4,400) ($3,200) ($4,400) $3,200
======= ======= ======= ======
</TABLE>
[FN] See notes to financial statements.
<PAGE>
FORECAST "Registered Tradename" CAPITAL CORPORATION NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Forecast "Registered Tradename" Capital Corporation was
incorporated in California on September 20, 1993. 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. Forecast "Registered Tradename" Capital Corporation
is financially dependent on The Forecast Group "Registered
Tradename", L.P. to fund its continuing operations.
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and
related disclosures contained in the Form 10K for the year ended
October 31, 1997 (File No. 33-72106) as filed with the Securities
and Exchange Commission.
The results of operations for the nine months ended July 31,
1998 do not necessarily indicate the results that can be expected
for the full fiscal year.
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".
Part I. Item 2.
Results of Operations
- ---------------------
The following table sets forth, for the period indicated,
certain income statement items as percentages of total home
building sales and certain other data:
<TABLE>
Percent of Percent of
Housing Sales Housing Sales
For the Nine For the Nine
Months Ended Months Ended
July 31, July 31,
------------- -------------
1998 1997 1998 1997
------------- --------------
<S> <C> <C> <C> <C>
Homebuilding Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Homes Sold 83.9% 84.9% 82.4% 85.0%
----- ----- ----- ----
Gross Profit 16.1% 15.1% 17.6% 15.0%
Operating Expenses:
- -------------------
Selling & Marketing Ex. 7.6% 10.8% 6.5% 8.9%
General & Admin Ex. 5.5% 5.9% 5.6% 4.4%
Non-Cash Charge for
Impairment of Real Estate
Inventory 0.0% 6.9% 0.0% 0.0%
Loss on Abandoned Land Options 0.1% 0.0% 0.1% 0.0%
---- ---- ---- ----
Total Operating Ex. 13.2% 23.6% 12.2% 13.4%
Operating Income (Loss) 2.9% (8.4%) 5.4% 1.6%
==== ===== ==== ====
Number of homes closed 872 657 345 288
Number of homes sold 875 719 357 300
Number of homes in backlog 292 227
Aggregate value of backlog
(in Millions) $46,620 $34,186
======= =======
</TABLE>
<PAGE>
Results of Operations for the Nine Months ended July 31, 1998
and July 31, 1997
Housing revenues for the nine months ended July 31, 1998 were
$139.8 million, representing an increase of $44.3 million or
46.5% from the nine months ended July 31, 1997. The revenues for
the first nine months of fiscal 1998 represent 872 closings, an
increase of 215 closings or 32.7% over the nine months ended July
31, 1997. The increase reflects a strengthening California
housing market which resulted in an increased absorption rate in
the Company's submarkets and the ability of the Company to sell
more homes. Certain land acquisitions and home sales were also
delayed (due to causes beyond the control of the Company) in the
fiscal fourth quarter of 1997 which resulted in an increase in
homes closed in the first quarter of 1998. The average sales
prices in each of the Company's divisions' strongest submarkets
for homes closed during the nine months ended July 31, 1998 was
$160,369 as compared to $145,328 for the same period a year ago,
representing an increase of 10.3%. The increase in average sales
price is due primarily to increases in sales prices in each of
the Company's divisions' strongest submarkets. Another factor is
the increase in the average sales price in the Northern
California Division as a whole.
Gross profit from housing sales was $22.5 million for the
nine months ended July 31, 1998, an increase of $8.0 million or
55.5%, from the nine months ended July 31, 1997. Gross profit
per home increased to $25,783 from $21,998 representing a 17.2%
increase over the comparable period in 1997. Gross profit margin
for the nine months ended July 31, 1998 was 16.1% as compared to
15.1% a year ago. The increase in gross margin was due primarily
to higher gross margins in the Southern California Division of
18.7% and increased prices and lower costs in certain of the
Company's submarkets resulting from greater demand.
For the nine months ended July 31, 1998, the Company's
interest incurred decreased 1.4% as compared to the nine months
ended July 31, 1997. This decrease is a result of modifications
in the loan terms which resulted in reduced financing rates. The
Company's interest amortized to cost of homes sold (as a
percentage of revenue) decreased 32% to 4.4% for the nine months
ended July 31, 1998, from 6.5% 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 $317,000 or 3.1%
during the nine months ended July 31, 1998, as compared to the
nine months ended July 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
7.6% from 10.8% 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 $2.1 million
during the nine months ended July 31, 1998, as compared to the
nine months ended July 31, 1997. Despite the increase in general
and administrative expenses, these costs, as a percentage of
revenue decreased to 5.5% for the nine months ended July 31, 1998
from 5.9% for the nine months ended July 31, 1997, due to the
increased number of home closings during comparable periods. The
$2.1 million increase is primarily attributable to an increase in
management bonuses that resulted from the improved profitability
of the Company, as well as an increase in the number of employees
in the Company which was necessary to facilitate the Company's
expansion and active investigation of new land acquisition
opportunities.
Income before extraordinary gain was $5.4 million during the
nine months ended July 31, 1998, as compared to a loss before
extraordinary gain of $7.6 million for the nine months ended July
31, 1997. The income for the nine months ended July 31, 1998, is
representative of the overall improvement of market conditions.
The loss during the first nine months of fiscal year 1997 is
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 nine months ended July 31, 1998
was $36,000 related to the Company's repurchase of a portion of
its 11 3/8% Senior Notes having an aggregate outstanding
principal amount of $1.3 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 nine
months ended July 31, 1997.
Net income for the nine months ended July 31, 1998 was $5.5
million, as compared to a net loss of $6.0 million in the nine
months ended July 31, 1997 due primarily to the factors discussed
above.
Results of Operations for the Three Months ended July 31,
1998 and July 31, 1997
Housing revenues for the three months ended July 31, 1998
were $57.3 million, representing an increase of $15.5 million or
37.2% from the three months ended July 31, 1997. The revenues
for the three months ended July 31, 1998 represent 345 closings,
an increase of 57 closings or 19.8% over the three months ended
July 31, 1997. The average sales price for the three months
ended July 31, 1998, was $166,029 as compared to $144,965 for the
same period a year ago, representing an increase of 14.5%, that
is primarily due to increases in sales prices in the Company's
divisions' strongest markets and an overall average sales price
in the Northern California Division of $174,000.
Gross profit from housing sales was $10.1 million for the
three months ended July 31, 1998, an increase of $3.8 million or
60.9%, from the three months ended July 31, 1997. Gross profit
per home increased to $29,197 from $21,727 representing a 34.3%
increase for the comparable periods in 1998 and 1997,
respectively. Gross profit margin for the three months ended
July 31, 1998 was 17.6% as compared to 15.0% a year ago. This
increase is primarily attributable to the increased absorption
rates in Northern and Southern California in conjunction with
higher sales prices and decreased incentive levels as a result of
an overall strengthening in the California marketplace.
Selling and marketing, as a percentage of revenue, decreased
in the three month period ended July 31, 1998, to 6.5% from 8.9%
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 in order
to achieve absorption levels that are acceptable to the Company.
General and administrative expenses increased $1.4 million
during the three months ended July 31, 1998, as compared to the
three months ended July 31, 1997. These costs, as a percentage
of revenue increased to 5.6% from 4.4%, for the three months
ended July 31, 1998 and 1997, respectively. The increase is
attributable to an increase in management bonuses that resulted
from improved profitability of the Company, as well as an
increase in the number of employees in the Company, which were
necessary to facilitate the Company's expansion and active
investigation of new land acquisition opportunities. The general
and administrative costs are considered by management to be at an
appropriate level for the Company.
Net income for the three months ended July 31, 1998 was $4.0
million as compared to a net income of $806,000 for the three
months ended July 31, 1997. Net income, as a percentage of
revenue, increased to 7.0% for the three months ended July
31,1998, as compared to 1.9% for the same period a year ago. The
increase in net profits is attributable to an increase in
closings and the strengthening of the California market, which
created an opportunity for price increases and lower customer
incentives as 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 lengthy periods of time in
advance of revenue realization. The Company generally finances
its operations with secured borrowings from commercial banks,
financial institutions and private investors, unsecured
borrowings in the public market, and with available cash flow
from operations.
The Company's financing needs depend primarily upon sales
volume, asset turnover and land acquisition. When liquidating
inventory through home closings, the Company generates cash. When
building inventory, the Company uses substantial amounts of cash
obtained through borrowings and cash flow from operations. The
Company has had adequate liquidity throughout its operating
history, despite recessionary periods, and historically the
Company's liquidity needs have been met through a combination of
cash provided by operations and financing activities. At certain
times during the past few years the Company has repurchased a
portion of its outstanding 11 3/8% Senior Notes due on the open
market at prices below par, and subsequently retired such
repurchased 11 3/8% Senior Notes, and the resultant income was
reported as an 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 of the 11 3/8% Senior Notes.
At July 31, 1998, the Company had commitments for $70.6
million under several revolving credit facilities with
commercial banks and financial institutions, of which $24.6
million was outstanding. In addition, at July 31, 1998, the
Company had community specific facilities capable of providing
aggregate fundings of $8.3 million, of which $4.7 million was
outstanding. The Company also benefits from a line of credit
which is secured by certain of its model homes for an amount not
to exceed $5.8 million of which $2.2 million was outstanding as
of July 31, 1998. Borrowings under the credit facilities are
secured by liens on specific real property owned by the Company,
and carry varying levels of recourse against the Company. On
July 31, 1998, the aggregate outstanding principal balance under
the Company's credit facilities was $31.5 million and the
recourse to the Company from those borrowings was $2.3 million.
The Indenture governing the Senior Notes limits total
outstanding recourse debt to $15 million unless, at the time the
recourse debt is incurred and after giving effect to the proceeds
therefrom, certain threshold tests are met for interest coverage
and debt to equity ratios, as defined in the Indenture. As of
July 31, 1998, the Company met the threshold tests for interest
coverage and debt-to-equity ratios, thereby permitting the
Company to incur additional recourse debt above the $15 million
limit. Notwithstanding the ability to incur recourse debt in
excess of $15 million at July 31, 1998 the Company only had
outstanding approximately $2.3 million of recourse debt, thus
permitting it to incur more than $12.7 million in additional
recourse debt. In addition, the Company is not precluded from
incurring additional debt on a non-recourse basis, and believes
the financing currently in place is sufficient to meet the
Company's business objectives for the foreseeable future.
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 costs and acquisition costs in
order to obtain construction or land acquisition financing. The
Company has in the past 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. As a result, the Company has
been restricted in its ability to incur recourse indebtedness.
As a result, to assist the Company in meeting its liquidity
needs, Mr. Previti has personally guaranteed a portion of the
Company's debt. The Indenture for the Notes also contains a
similar debt-to-equity covenant. There is no assurance that Mr.
Previti will be willing to guarantee such indebtedness in the
future if the Company fails to meet any interest coverage and
covenants in the future.
The Company believes that its current borrowing capacity,
and anticipated cash flows from its operations, are sufficient to
meet liquidity needs for the foreseeable future. There can be no
assurance, however, that amounts available in the future from the
Company's sources of liquidity will be sufficient to meet the
Company's future capital needs. The amount and types of
indebtedness that the Company may incur may be limited by the
terms of the Notes and/or the Company's credit facilities. 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.
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 has
upgraded its software so that its computer system will 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 anticipates that there may be significant
business disruptions involving year 2000 problems with its
vendors and customers. The Company has not 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. The ability of lenders to advance
funds both for purchasers of the Company's homes and for
financing the Company's operation may be impacted negatively.
Any such delay may have a material adverse effect on the Company
and its results of operations. The Company will continue to
address the readiness of such third parties and, to the extent
appropriate, develop contingency plans.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) None
Item 2. Changes in Securities
---------------------
(a) None
Item 3. Defaults upon Senior Securities
-------------------------------
(a) Refer to Note 5 of Notes to Consolidated Financial
-------------------------------
Statements.
- ------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) None
Item 5. Other Information
-----------------
(a) None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) There are no exhibits attached to this report.
(b) The Company did not file any reports on Form 8-K during the
period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE FORECAST GROUP "Registered Tradename", L.P.
-----------------------------------------------
By: FORECAST "Registered Tradename" HOMES, INC.
-----------------------------------------------
A California Corporation
its General Partner
August 31, 1998 By: /s/ James P. Previti
- --------------- -------------------------
Date James P. Previti
President
By: /s/ Richard B. Munkvold
----------------------------
Richard B. Munkvold
Vice President
Corporate Controller
Principal Accounting Officer
By: FORECAST "Registered Tradename" CAPITAL CORPORATION
-------------------------------------------------------
August 31, 1998 By: /s/ James P. Previti
- --------------- -------------------------
Date James P. Previti
President
By: /s/ Richard B. Munkvold
-----------------------------
Richard B. Munkvold
Vice President
Corporate Controller
Principal Accounting Officer
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<PERIOD-END> JUL-31-1998
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<RECEIVABLES> 7535000
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