TOUSA, INC.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32322
TOUSA, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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76-0460831
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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4000 Hollywood Boulevard, Suite 500 North
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33021
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Hollywood, Florida
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(Zip Code)
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(Address of Principal Executive
Offices)
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Registrants telephone number, including area code:
(954) 364-4000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Title of Each
Class
Common Stock, $.01 par value
9% Senior Notes due 2010 (CUSIP No. 872962 AA3)
9% Senior Notes due 2010 (CUSIP No. 872962 AB1)
103/8% Senior
Subordinated Notes due 2012 (CUSIP No. 872962 AD7)
71/2% Senior
Subordinated Notes due 2011 (CUSIP No. 872962 AC9)
71/2% Senior
Subordinated Notes due 2015 (CUSIP No. 872962 AE5)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 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 o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of common stock held by
non-affiliates of the Registrant was approximately
$82.6 million as of June 30, 2007.
As of August 6, 2008, there were 59,604,169 shares of
the Registrants common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF
CONTENTS
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EX-10.56 |
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EMPLOYMENT AGREEMENT, DATED JANUARY 1, 2008, BY AND BETWEEN
TOUSA, INC. AND GEORGE YEONAS |
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EX-10.57 |
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AMENDMENT TO EMPLOYMENT AGREEMENT, DATED JANUARY 18, 2008, BY
AND BETWEEN TOUSA, INC. AND TOMMY MCADEN |
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EX-21.0 |
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SUBSIDIARIES OF THE REGISTRANT |
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EX-23.1 |
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CONSENT OF ERNST & YOUNG LLP INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM |
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EX-23.2 |
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CONSENT OF ERNST & YOUNG LLP INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS |
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EX-31.1 |
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SECTION 302 CERTIFICATION OF THE CEO |
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EX-31.2 |
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SECTION 302 CERTIFICATION OF THE CFO |
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EX-32.1 |
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SECTION 906 CERTIFICATION OF THE CEO |
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EX-32.2 |
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SECTION 906 CERTIFICATION OF THE CFO |
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EX-99.1 |
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CONSOLIDATED FINANCIAL STATEMENTS OF TE/TOUSA, LLC AND
SUBSIDIARIES FOR THE YEARS ENDED NOVEMBER 30, 2006 AND THE
PERIOD FROM INCEPTION (JULY 1, 2005) TO NOVEMBER 30,
2005 |
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EX-99.2 |
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UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF TE/TOUSA, LLC AND
SUBSIDIARIES FOR THE EIGHT MONTHS ENDED JULY 30, 2007 |
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EX-99.3 |
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FINANCIAL STATEMENTS OF ENGLE/SUNBELT HOLDINGS, LLC |
PART I
ITEM 1. Business
Explanatory
Note
In some instances we have attempted to provide information as of
a date more current than December 31, 2007. The housing
market has continued to deteriorate significantly since
December 31, 2007 and we have not yet completed the
analyses and processes required for the preparation of our
quarterly reports on
Form 10-Q
for the periods ended March 31, 2008 and June 30,
2008. Therefore, the information contained herein does not
include reserves or provisions for any period after the period
ended December 31, 2007. As a result of the continued
homebuilding and overall macroeconomic market deterioration and
the impact of our Chapter 11 filing on our operations, it
is likely that we will have material impairments, losses and
provisions upon completion of the analyses and processes in
connection with the preparation of our quarterly reports on
Form 10-Q
for the periods ended March 31, 2008 and June 30, 2008.
Introduction
TOUSA, Inc. (TOUSA, the Company,
we, us and our) designs,
builds and markets high-quality detached single-family
residences, town homes and condominiums. We conduct homebuilding
operations through our consolidated subsidiaries and
unconsolidated joint ventures in various metropolitan markets in
nine states, located in four major geographic regions, which are
also our reportable segments: Florida, the Mid-Atlantic, Texas
and the West.
Our predecessor company was founded in Houston, Texas in 1983.
Our company was formed in 1994 as a Nevada corporation under the
name Newark Homes Corp. We completed our initial public offering
of common stock in March 1998. In March 2001, we changed the
state of our incorporation from Nevada to Delaware. On
April 15, 2002 we sold the stock of our wholly-owned
subsidiary, Westbrooke Acquisition Corp., to Standard Pacific
Corp. On June 25, 2002, Engle Holdings Corp., a
wholly-owned subsidiary of our majority stockholder, Technical
Olympic, S.A., merged with and into us and we changed our name
to Technical Olympic USA, Inc. On October 4, 2002, we
acquired the net assets of DS Ware Homes, LLC, a homebuilder
operating in Jacksonville, Florida. On November 18, 2002,
we acquired the net assets of Masonry Homes, Inc., a homebuilder
operating in the northwestern suburbs of Baltimore, Maryland and
southern Pennsylvania. On February 6, 2003, we acquired the
net assets of Trophy Homes, Inc., a homebuilder operating in Las
Vegas, Nevada. On February 28, 2003, we acquired the net
assets of The James Construction Company, a homebuilder
operating in the greater Denver, Colorado area. On
September 28, 2004, we acquired substantially all of the
assets of Gilligan Development, Inc., a homebuilder operating in
Delaware, Maryland and Pennsylvania. On August 1, 2005, we
formed a joint venture of which we held a 50% interest to
acquire substantially all of the homebuilding assets of
Transeastern Property, Inc. (Transeastern JV). On
May 8, 2007, we changed our name to TOUSA, Inc.
On January 29, 2008, TOUSA, Inc. and certain of our
subsidiaries (excluding our financial services subsidiaries and
joint ventures) filed voluntary petitions for reorganization
relief under the provisions of Chapter 11 of Title 11
of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of Florida,
Fort Lauderdale Division. The Chapter 11 cases have
been consolidated solely on an administrative basis and are
pending as Case
No. 08-10928-JKO.
On February 5, 2008, pursuant to an interim order from the
Bankruptcy Court dated January 31, 2008, TOUSA, Inc.
entered into the Senior Secured Super-Priority Debtor in
Possession Credit and Security Agreement. The agreement provided
for a first priority and priming secured revolving credit
interim commitment of up to $134.6 million. The agreement
was subsequently amended to extend it to June 19, 2008. No
funds were drawn under the agreement. The agreement was
subsequently terminated and we entered into an agreement with
our secured lenders to use cash collateral on hand (cash
generated by our operations, including the sale of excess
inventory and the proceeds of our federal tax refund of
$207.3 million received in April 2008).
2
See Item 3, Legal Proceedings, of this Annual Report on
Form 10-K
for additional discussion.
As used in this
Form 10-K,
consolidated information refers only to information
relating to our continuing operations, which are consolidated in
our financial statements and exclude the results of our
Dallas/Fort Worth
division, which we have classified as a discontinued operation;
and combined information includes consolidated
information and information relating to our unconsolidated joint
ventures. Unless otherwise noted, the information contained
herein is shown on a consolidated basis. Our consolidated
financial statements are presented on a going concern basis,
which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.
We market our homes to a diverse group of homebuyers, including
first-time homebuyers,
move-up
homebuyers, homebuyers who are relocating to a new city or
state, buyers of second or vacation homes, active-adult
homebuyers and homebuyers with grown children who want a smaller
home (empty-nesters).
As part of our objective to provide homebuyers a seamless home
purchasing experience, we offer an array of financial services,
which we provide to buyers of our homes, as well as to others.
As part of this business, we offer mortgage financing to
qualified buyers, title insurance and settlement services and
property and casualty insurance products. Our mortgage financing
operations revenues consist primarily of origination and
premium fee income, interest income and the gain on the sale of
the mortgages. We sell substantially all of our mortgages and
the related servicing rights to third parties. Our mortgage
financing operation derives most of its revenues from buyers of
our homes, although existing homeowners may also use these
services. In contrast, our title insurance and settlement
services operation, as well as our insurance agency operations,
are used by our homebuyers and a broad range of other clients
purchasing or refinancing residential or commercial real estate.
Since 2006, the homebuilding industry has experienced a
significant and sustained decrease in demand for new homes, an
oversupply of new and existing homes available for sale and a
more restrictive mortgage lending environment. Although we
operate in a number of markets, approximately 53% of our
operations are concentrated in Florida and the West, based on
2007 deliveries, which suffered particularly severe downturns in
home buying activity. The rapid increase in new and existing
home prices in these markets over the past several years reduced
housing affordability and tempered buyer demand. More recently,
investors and speculators have reduced their purchasing activity
and instead stepped up their efforts to sell the residential
property they had earlier acquired. These trends, which were
more pronounced in markets that had experienced the greatest
levels of price appreciation, resulted in overall fewer home
sales, greater cancellations of home purchase agreements by
buyers, higher inventories of unsold and foreclosed homes and
the increased use by homebuilders, speculators, investors and
others of discounts, incentives, price concessions, broker
commissions and advertising to close home sales compared to the
past several years.
Reflecting these trends, we, like many other homebuilders,
experienced severe liquidity challenges in the credit and
mortgage markets, diminished consumer confidence, increased home
inventories and foreclosures, and downward pressure on home
prices. Potential buyers have exhibited both a reduction in
confidence as to the economy in general and a willingness to
delay purchase decisions based on a perception that prices will
continue to decline. Prospective homebuyers continue to be
concerned about interest rates and the inability to sell their
current homes or to obtain appraisals at sufficient amounts to
secure mortgage financing as a result of the recent disruption
in the mortgage markets and the tightening of credit standards.
For the year ended December 31, 2007, our consolidated
continuing operations delivered 6,580 homes, having an average
sales price of $311,000, had 4,836 net sales orders and
generated $2.2 billion in homebuilding revenues. At
December 31, 2007, our continuing operations had 2,379
consolidated homes in backlog with an aggregate sales value of
$736.3 million. At December 31, 2007, we had contracts
for 511 homes, representing $115.6 million in revenue, with
a third-party that marketed homes in the United Kingdom. These
contracts were cancelled in 2008. As of December 31, 2007,
we controlled approximately 32,200 homesites on a consolidated,
continuing operations basis. During 2007, we also delivered
1,666 homes through our unconsolidated joint ventures. See
additional discussion regarding our joint ventures located in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition, Liquidity and Capital Resources.
3
For the six months ended June 30, 2008, our consolidated
continuing operations delivered 2,139 homes, having an average
sales price of $265,000, had 1,340 net sales orders and
generated $567.8 million in home sales revenues. At
June 30, 2008, our continuing operations had 1,580
consolidated homes in backlog with an aggregate sales value of
$479.3 million.
For the year ended December 31, 2007, we had a loss from
continuing operations of $1.3 billion. As a result of
deteriorating market conditions and liquidity constraints, we
did not exercise certain homesite option contracts and reviewed
our inventories, goodwill, investment in joint ventures and
other assets for possible impairment charges. We recognized
charges totaling $1.3 billion in 2007 related to inventory
impairments, abandonment costs, joint venture impairments,
goodwill impairments and the settlement of a loss contingency
related to the Transeastern JV. Joint venture impairments and
losses totaled $209.0 million for the year ended
December 31, 2007 compared to $48.1 million for the
year ended December 31, 2006. Additionally, in some cases
our Chapter 11 filings have constituted an event of default
under the joint venture lender agreements, which have resulted
in the joint ventures debt becoming immediately due and
payable, limiting the joint ventures access to future
capital.
On July 31, 2007, we consummated transactions to settle the
disputes regarding the Transeastern JV with the lenders of the
Transeastern JV, its land bankers and our joint venture partner
in the Transeastern JV. Pursuant to the settlement, among other
things, the Transeastern JV became a wholly-owned subsidiary by
merger into one of our subsidiaries. The acquisition of the
Transeastern JV was accounted for using the purchase method of
accounting. The results of operations of the Transeastern JV
have been included in our consolidated results beginning on
July 31, 2007. Results of operations prior to July 31,
2007 are included in the results for the unconsolidated joint
ventures.
On January 28, 2008, Preferred Home Mortgage Company, our
wholly-owned residential mortgage lending subsidiary, entered
into an Amended and Restated Agreement of Limited Liability
Company with Wells Fargo Ventures, LLC. The limited liability
company is known as PHMCWF, LLC but does business as
Preferred Home Mortgage Company, an affiliate of Wells
Fargo. Preferred Home Mortgage Company owns 49.9% of the
venture with the balance owned by Wells Fargo. Effective
April 1, 2008, the venture began to carry on the mortgage
business of Preferred Home Mortgage Company. The venture is
managed by a committee composed of six members, three from
Preferred Home Mortgage Company and three from Wells Fargo. The
venture entered into a revolving credit agreement with Wells
Fargo Bank, N.A. providing for advances of up to
$20.0 million. Wells Fargo Home Mortgage provides the
general and administrative support (as well as all loan related
processing, underwriting, closing functions), and is the end
investor for the majority of the loans closed through the joint
venture. Prior to the joint venture, Preferred Home Mortgage
Company had a centralized operations center that provided those
support functions. The majority of these support functions
ceased in June 2008.
For financial information about our homebuilding and financial
services operating segments, please see our consolidated
financial statements on pages F-1 through F-66.
Business
Strategy
We have taken and will continue to take aggressive actions to
maximize cash receipts and minimize cash expenditures with the
understanding that certain of these actions may make us less
able to take advantage of future improvements in the
homebuilding market. We continue to take steps to reduce our
general and administrative expenses by streamlining activities
and increasing efficiencies, which have led and will continue to
lead to major reductions in the workforce. However, much of our
efforts to reduce general and administrative expenses are being
offset by professional and consulting fees associated with our
Chapter 11 cases. In addition, we are working with our
existing suppliers and seeking new suppliers, through
competitive bid processes, to reduce construction material and
labor costs. We have and will continue to analyze each community
based on anticipated sales absorption rates, net cash flows and
financial returns taking into consideration current market
factors in the homebuilding industry such as the oversupply of
homes available for sale in most of our markets, less demand,
decreased consumer confidence, tighter mortgage loan
underwriting criteria, higher foreclosures and the actions of
competitors, including increased incentives and
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price discounting. In order to generate cash and to reduce our
inventory to levels consistent with our business plan, we have
taken and will continue to take the following actions, to the
extent possible given the limitations resulting from our
Chapter 11 cases:
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limiting new arrangements to acquire land (by submitting
proposals to increased review);
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engaging in bulk sales of land and unsold homes;
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reducing the number of unsold homes under construction and
limiting
and/or
curtailing development activities in any development where we do
not expect to deliver homes in the near future;
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re-negotiating terms or abandoning our rights under option
contracts;
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considering other asset dispositions including the possible sale
of underperforming assets, communities, divisions and joint
venture interests (see Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations Recent Developments regarding the
June 2007 sale of our Dallas/Fort Worth division and the
September 2007 bulk sale of homesites in our Mid-Atlantic
region);
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reducing our speculative inventory levels; and
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pursuing other initiatives designed to monetize our assets.
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Homebuilding
Operations
Operations
Although our homebuilding activities were previously operated on
a decentralized basis, in light of current conditions in the
homebuilding and financial markets, we have initiated a process
to migrate toward a more centralized business platform. At
December 31, 2007, we operated in various metropolitan
markets managed as 12 separate homebuilding operating divisions.
Generally, each operating division consists of a division
president; land entitlement, acquisition and development
personnel; a sales manager and sales personnel; a construction
manager and construction superintendents; customer service
personnel; a finance team; a purchasing manager and office
staff. Before 2008, our division presidents reported to one of
four regional executive vice presidents. Our current structure
has eliminated the regional executive vice president structure
and our division presidents now report to the newly created
position of Chief Operating Officer. Our current structure is
intended to reduce selling, general and administrative expenses
necessitated by market conditions while at the same time
recognizing that homebuilding is a market specific industry and
therefore, requires significant involvement from local
management. We believe that the division presidents and their
management teams, who are familiar with local market conditions,
have significant information on which to base decisions
regarding local operations.
Operating
Division Responsibilities
Each operating division is responsible for:
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site selection, which involves
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a feasibility study;
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an intensive evaluation of competition;
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soil and environmental reviews;
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review of existing zoning and other governmental
requirements; and
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review of the need for and extent of offsite work required to
meet local building codes;
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negotiating certain aspects of the homesite option or similar
contracts;
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obtaining necessary land development and home construction
approvals;
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overseeing land development;
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selecting building plans and architectural schemes;
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selecting and managing construction subcontractors and suppliers
within an integrated national supply chain network;
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planning and managing homebuilding schedules; and
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developing and implementing sales and marketing plans.
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Centralized
Controls
We centralize the key risk elements of our homebuilding business
through our corporate offices. Our corporate executives and
corporate departments are responsible for establishing our
operational policies and internal control standards and for
monitoring compliance with established policies and controls
throughout our operations. Our corporate offices also have
primary responsibility for the following centralized functions:
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financing;
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treasury and cash management;
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risk and litigation management;
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allocation of capital;
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issuance and monitoring of inventory investment guidelines;
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review and approval of all land and homesite acquisition
contracts;
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oversight of land and construction inventory levels;
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environmental assessments of land and homesite acquisitions and
dispositions;
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approval and funding of land and homesite acquisitions and
dispositions;
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accounting, financial and management reporting;
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review and approval of division plans and budgets;
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internal audit;
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information technology systems;
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administration of human resource compliance, payroll and
employee benefits;
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negotiation of national purchasing contracts; and
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management of major national or regional supply chain
initiatives.
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In response to market conditions, we have centralized certain
approval processes and have established procedures requiring
corporate approval before the construction of unsold homes may
commence and prior to any purchases of homesites.
Markets
We operate in various metropolitan markets in nine states
located in four major geographic regions: Florida, the
Mid-Atlantic, Texas and the West. For the year ended
December 31, 2007, our top two largest metropolitan
markets, representing approximately 38% of our consolidated home
deliveries, were Central Florida and Houston.
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Florida
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Mid-Atlantic
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Texas
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West
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Central Florida
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Baltimore/Southern Pennsylvania
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Austin
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Colorado
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Jacksonville
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Nashville
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Houston
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Las Vegas
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Southeast Florida
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Northern Virginia
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San Antonio
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Phoenix
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Southwest Florida
Tampa/St. Petersburg
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6
Florida. Our Florida region is comprised of
five metropolitan markets: Central Florida, which is comprised
of Polk, Lake, Orange, Brevard, Volusia and Seminole Counties;
Jacksonville; Southeast Florida, which is comprised of
Miami-Dade, Broward, Palm Beach, Martin, St. Lucie and Indian
River Counties; Southwest Florida, which is comprised of the
Fort Myers/Naples area; and the
Tampa/St.
Petersburg area. For the year ended December 31, 2007, our
consolidated continuing operations delivered 2,471 homes in
Florida, generating revenue of $849.1 million, or 41% of
our consolidated revenues from home sales as compared to 43% and
38% for the years ended December 31, 2006 and 2005,
respectively.
Mid-Atlantic. Our Mid-Atlantic region is
comprised of four metropolitan markets: Baltimore/Southern
Pennsylvania, Nashville and Northern Virginia. For the year
ended December 31, 2007, our consolidated continuing
operations delivered 649 homes in our Mid-Atlantic region
generating revenue of $228.2 million, or 11% of our
consolidated revenues from home sales as compared to 11% and 13%
for the years ended December 31, 2006 and 2005,
respectively.
Texas. Our Texas region is comprised of three
metropolitan markets: Austin, Houston and San Antonio. For
the year ended December 31, 2007, our consolidated
continuing operations delivered 2,421 homes in Texas, generating
revenue of $625.4 million, or 31% of our consolidated
revenues from home sales as compared to 26% and 19% for the
years ended December 31, 2006 and 2005, respectively.
West. Our West region is comprised of three
metropolitan markets: Colorado, which is comprised of Denver,
Boulder and Colorado Springs; Las Vegas, Nevada; and Phoenix,
Arizona. For the year ended December 31, 2007, our
consolidated continuing operations delivered 1,039 homes in our
West region generating revenue of $346.7 million, or 17% of
our consolidated revenues from home sales as compared to 20% and
30% for the years ended December 31, 2006 and 2005,
respectively.
Product
Mix
We select our product mix in a particular geographic market
based on the demographics of the market, demand for a particular
product, margins and the economic strength of the market. We
regularly review our product mix in each of our markets so that
we can quickly respond to market changes and opportunities.
Percentage of deliveries by price range for the years ended
December 31, 2007 and 2006 are as follows:
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Home Delivery Price Ranges
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2007
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2006
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Below $200,000
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28
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%
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23
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%
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$200,000 to $300,000
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26
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27
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$300,001 to $400,000
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23
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26
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Over $400,000
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23
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24
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100
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%
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100
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%
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For the year ended December 31, 2007, 75% of our home
deliveries were generated from single family homes and 25% of
our home deliveries were generated from multi-family homes, as
compared to 77% of our home deliveries from single family homes
and 23% of our home deliveries from multi-family homes for the
year ended December 31, 2006.
Land and
Homesites
We believe acquiring land and homesites in premier locations is
a key factor to a successful homebuilding business. We utilize a
strategy of balancing owned homesites and land with those we can
acquire under option contracts, together with limited
participation in land development joint ventures. The downturn
in the market and our liquidity situation has forced us to
abandon options to acquire land in numerous markets resulting in
the loss of cash deposits and draws on letters of credit posted
as deposits under these option contracts and relinquishment of
our rights under certain joint ventures.
7
Types
of Land and Homesites
In our homebuilding operations, we generally acquire land or
homesites that are entitled. Land is entitled when
all requisite residential zoning has been obtained. We also
generally seek to acquire entitled land and homesites that have
water and sewage systems, streets and other infrastructure in
place (we refer to these properties as developed
homesites) because they are ready to have homes built on
them. When we acquire entitled homesites that are not developed,
we must first put in place the necessary infrastructure before
commencing construction. However, we believe that there are
economic benefits to undertaking the development of some of the
land that we may acquire and, in those cases, we will attempt to
take advantage of those economic benefits by engaging in land
development activities.
In connection with the development of certain of our
communities, community development or improvement districts may
utilize tax-exempt bond financing to fund construction or
acquisition of certain
on-site and
off-site infrastructure improvements. Some bonds are repaid
directly by us while other bonds only require us to pay non-ad
valorem assessments related to lots not yet delivered to
residents. These bonds are typically secured by the property and
are repaid from assessments levied on the property over time. We
also guarantee district shortfalls under certain bond debt
service agreements when the revenues, fees and assessments which
are designed to cover principal and interest and other operating
costs of the bonds are insufficient.
We generally acquire homesites that are located adjacent to or
near our other homesites in a community, which enables us to
build and market our homes more cost efficiently than if the
homesites were scattered throughout the community. Cost
efficiencies arise from economies of scale, such as shared
marketing expenses and project management.
Land
Acquisition Policies
We have adopted strict land acquisition policies and procedures
that cover all homesite acquisitions, including homesites
acquired through option contracts. All proposed land purchases
are reviewed with the goal of minimizing risk and use of
capital, while maximizing our financial returns.
Initially, our management teams in each of our divisions conduct
extensive analysis on the local market to determine if we want
to enter or expand our operations in that market. As part of
this analysis, we consider a variety of factors, including:
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historical and projected population, employment, and income
growth rates for the surrounding area;
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demographic information such as age, education and economic
status of the homebuyers in the area;
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desirability of location, including proximity to metropolitan
area, local traffic corridors and amenities;
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market competition, including the prices and number of
comparable new and resale homes in the areas; and
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the amount of capital currently invested in that market.
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We then evaluate and identify specific homesites that are
consistent with our strategy for the particular market,
including the type of home and anticipated sales price that we
wish to offer in the community. In addition, we review:
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estimated costs of completed homesite development;
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current and anticipated competition in the area, including the
type and anticipated sales prices and absorption of homes
offered by our competitors;
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opportunity to acquire additional homesites in the future, if
desired; and
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results of financial analyses, such as projected profit margins
and return on invested capital.
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In addition, we conduct environmental due diligence, including
on-site
inspection and soil testing, and confirming that the land has
the necessary zoning and other governmental entitlements
required to develop and use the property for residential home
construction.
8
Each land acquisition proposal, including the purchase of lots
under options, is subject to review and approval by our Asset
Committee. The Asset Committee is comprised of representatives
from our land, finance and supply management departments.
Land
Supply and Asset Management Actions
We acquire the land and homesites through a combination of
purchase agreements, option contracts and joint ventures. At
December 31, 2007, we controlled approximately 32,200
consolidated homesites in continuing operations. Of this amount,
we owned approximately 21,400 homesites and had option contracts
on approximately 10,800 homesites. At December 31, 2006, we
controlled approximately 60,600 consolidated homesites in
continuing operations. Of this amount, we owned approximately
21,200 homesites and had option contracts on approximately
39,400 homesites.
As part of our land inventory management strategy, we review the
size, geographic allocation and components of our inventory to
better align these assets with estimated future deliveries.
Based on current market conditions, existing inventory levels
and our historical and projected results, we have excess land
inventory. We are and will continue to take necessary actions to
reduce our inventory. These actions include, to the extent
possible given the limitations resulting from our
Chapter 11 cases: limiting new arrangements to acquire land
by submitting proposals to a rigorous review; engaging in bulk
sales of land and unsold homes; reducing the number of unsold
homes under construction and limiting
and/or
curtailing development activities in any development where we do
not expect to deliver homes in the near future; re-negotiating
terms or abandoning our rights under option contracts;
considering other asset dispositions including the possible sale
of underperforming assets, communities, divisions and joint
venture interests; reducing our speculative inventory levels and
pursuing other initiatives designed to monetize our assets.
Revenues from land sales for the year ended December 31,
2007 were $109.4 million, as compared to
$131.9 million for the year ended December 31, 2006.
However, due to challenging housing market conditions, we may
not be able to continue to sell land profitably or at all.
Option
Contracts
We have utilized option contracts to acquire land whenever
feasible. Under the option contracts, we typically have the
right, but not the obligation, to buy homesites at predetermined
prices on a predetermined takedown schedule anticipated to be
commensurate with home starts. Option contracts generally
require the payment of a cash deposit or the posting of a letter
of credit, which is typically less than 20% of the underlying
purchase price, and may require monthly maintenance payments.
These option contracts are either with land sellers or financial
investors who have acquired the land to enter into the option
contract with us. In some cases, these contracts give the other
party the right to require us to purchase homesites or guarantee
minimum returns. (see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Financial Condition, Liquidity and
Capital Resources Off-Balance Sheet
Arrangements)
In certain instances, we have entered into development
agreements under these option contracts which require us to
complete the development of the land even if we choose not to
exercise our option and forfeit our deposit. Although we are
typically compensated for this work, in most cases we are
responsible for any cost overruns.
At December 31, 2007, we had option contracts on
approximately 10,800 homesites and had approximately
$56.9 million in non-refundable cash deposits and
$44.9 million in letters of credit under those option
contracts. At December 31, 2006, we had option contracts on
approximately 39,400 homesites and had approximately
$216.6 million in cash deposits and $257.8 million in
letters of credit under those option contracts. As a result of
worsening market conditions and liquidity constraints, during
the year ended December 31, 2007, we abandoned our rights
under certain option agreements. In connection with the
abandonment of our rights under these option contracts, we
forfeited $82.5 million in cash deposits and had letters of
credit totaling $98.5 million drawn at December 31,
2007, which increased our outstanding borrowings. Through
June 30, 2008 an additional $72.8 million of letters
of credit have been drawn related to the abandonment of option
contracts.
9
Joint
Ventures
We have used strategic joint ventures to acquire and develop
land and/or
to acquire, develop, build and market homes to mitigate and
share the risks associated with land ownership and development,
increase our return on equity and extend our capital resources.
Our partners in these joint ventures (generally) are unrelated
homebuilders, land sellers, financial investors, or other real
estate entities. In joint ventures where the acquisition,
development
and/or
construction of the property are being financed with debt, the
borrowings are non-recourse to us, except that we have agreed to
complete certain property development in the event the joint
ventures default and to indemnify the lenders for losses
resulting from fraud, misappropriation and similar acts. In some
cases, we have agreed to make capital contributions to the joint
venture sufficient to comply with a specified debt to value
ratio. Our obligations become full recourse upon certain
bankruptcy events at the joint venture.
In some cases our Chapter 11 filings have constituted an
event of default under the joint venture lender agreements which
have resulted in the debt becoming immediately due and payable,
limiting the joint ventures access to future capital. As a
result of our Chapter 11 cases and our reduced investments
in joint ventures, we anticipate only limited use of joint
ventures in the future.
At December 31, 2007 our unconsolidated joint ventures
controlled approximately 3,600 homesites, which included 1,100
homesites under option contracts compared to approximately 5,000
controlled homesites, which included 2,100 homesites under
option contracts at December 31, 2006. At December 31,
2007 and 2006, we had investments in and receivables from
unconsolidated joint ventures of $9.3 million and
$156.2 million, respectively. The decrease in 2007 compared
to 2006 is primarily due to joint venture impairments recognized
during the year ended December 31, 2007 totaling
$194.1 million as a result of our evaluation of the
recoverability of our investments in the joint ventures under
Accounting Principles Board Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock
(APB 18). During the year ended
December 31, 2007 our unconsolidated joint ventures had a
total of 815 net sales orders and 1,666 homes
delivered compared to 456 net sales orders and 3,951 homes
delivered for the year ended December 31, 2006. At
December 31, 2007, our unconsolidated joint ventures had 94
homes in backlog with a sales value of $24.7 million
compared to 1,199 homes in backlog with a sales value of
$365.6 million at December 31, 2006.
See additional discussion regarding joint ventures located in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations
Off-Balance Sheet Arrangements.
Transeastern
JV
We acquired our 50% interest in the Transeastern JV on
August 1, 2005, when the Transeastern JV acquired
substantially all of the homebuilding assets and operations of
Transeastern Properties, Inc. including work in process,
finished lots and certain land option rights. The Transeastern
JV paid approximately $826.2 million for these assets and
operations (which included the assumption of $127.1 million
of liabilities and certain transaction costs, net of
$30.1 million of cash). The other member of the joint
venture was an entity controlled by the former majority owners
of Transeastern Properties, Inc. We functioned as the managing
member of the Transeastern JV through a wholly-owned subsidiary.
As a result of, among other factors, lower than expected
deliveries resulting from lower than expected gross sales and
higher cancellations, we evaluated the recoverability of our
investment in the joint venture under APB 18 and determined that
our investment was fully impaired. As of September 30, 2006
we wrote off $143.6 million related to our investment in
the Transeastern JV, which included $35.0 million of our
member loans receivable and $16.2 million of receivables
for management fees, advances and interest due to us from the
joint venture.
On October 31, 2006 and November 1, 2006, we received
demand letters from the administrative agent for the lenders to
the Transeastern JV demanding payment under certain guarantees.
The demand letters alleged that potential defaults and events of
default had occurred under the credit agreements and that such
potential defaults or events of default had triggered our
obligations under the guarantees. The lenders claimed that our
guarantee obligations equaled or exceeded all of the outstanding
obligations under each of the credit agreements and that we were
liable for default interest, costs and expenses.
10
On July 31, 2007, we consummated transactions to settle the
disputes regarding the Transeastern JV with the lenders to the
Transeastern JV, its land bankers and our joint venture partner
in the Transeastern JV. Pursuant to the settlement, among other
things,
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the Transeastern JV became a wholly-owned subsidiary of ours by
merger into one of our subsidiaries, which became a guarantor on
our credit facilities and note indentures (the acquisition was
accounted for using the purchase method of accounting and
results of operations have been included in our consolidated
results beginning on July 31, 2007);
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the senior secured lenders of the Transeastern JV were repaid in
full, including accrued interest (approximately
$400.0 million in cash);
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the senior mezzanine lenders to the Transeastern JV received
$20.0 million in aggregate principal amount of
14.75% Senior Subordinated PIK Election Notes due 2015 and
$117.5 million in initial aggregate liquidation preference
of 8% Series A Convertible Preferred PIK Preferred Stock;
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the junior mezzanine lenders to the Transeastern JV received
warrants to purchase shares of our common stock which had an
estimated fair value of $8.2 million at issuance (based on
the Black-Scholes option pricing model and before issuance
costs);
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we entered into settlement and mutual release agreements with
the senior mezzanine lenders and the junior mezzanine lenders to
the Transeastern JV which released us from our potential
obligations to them; and
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we entered into a settlement and mutual release agreement with
Falcone/Ritchie LLC and certain of its affiliates (the
Falcone Entities) concerning the Transeastern JV,
one of which owned 50% of the equity interests in the
Transeastern JV and, among other things, released the Falcone
Entities from claims under the 2005 asset purchase agreement
pursuant to which we acquired our interest in the Transeastern
JV. Pursuant to the settlement agreement, we remain obligated on
certain indemnification obligations, including, without
limitation, related to certain land bank arrangements.
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To effect the settlement of the Transeastern JV dispute, on
July 31, 2007, we also entered into:
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an amendment to our $800.0 million revolving loan facility,
dated January 30, 2007;
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a new $200.0 million aggregate principal amount first lien
term loan facility; and
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a new $300.0 million aggregate principal amount second lien
term loan facility.
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The proceeds from the first lien and second lien term loans were
used to satisfy claims of the senior secured lenders against the
Transeastern JV, and to pay related expenses. Our existing
$800.0 million revolving loan facility was amended and
restated to reduce the revolving commitments thereunder by
$100.0 million and permit the incurrence of the first and
second lien term loan facilities (and make other conforming
changes relating to the facilities). Net proceeds from these
financings at closing were $470.6 million which is net of a
1% discount and transaction costs.
In connection with the Transeastern JV settlement, we recognized
a loss of $426.6 million, of which $151.6 million was
recognized during the year ended December 31, 2007, and
$275.0 million was recognized during the year ended
December 31, 2006.
We also paid:
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$50.2 million in cash to purchase land under existing land
bank arrangements with the former Transeastern JV
partner; and
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$33.5 million in interest and expenses.
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Supply
Management
We use our purchasing power and a team-oriented sourcing
methodology to achieve volume discounts and/or rebates and the
best possible service from our suppliers, thereby reducing
costs, ensuring timely
11
deliveries and reducing the risk of supply shortages due to
allocations of materials. Our team-oriented sourcing methodology
involves the use of corporate and divisional teams of supply
management personnel who are responsible for identifying which
commodities should be purchased and used on a national,
regional, or divisional level to optimize our purchasing power.
We have negotiated price arrangements, which we believe are
favorable, to purchase lumber, sheetrock, appliances, heating
and air conditioning, bathroom fixtures, roofing and insulation
products, concrete, bricks, floor coverings and other housing
equipment and materials. Our purchase contracts are with high
quality national, regional, and local suppliers.
Our supply management team uses our quality control procedures
to monitor and assess the effectiveness of our suppliers and
subcontractors within our overall building processes. In
addition, our design process includes input from our supply
management team to develop product designs that take into
account standard material sizes and quantities with the goal of
creating product designs that eliminate unnecessary material and
labor costs.
Design
To appeal to the tastes and preferences of local communities, we
expend considerable effort in developing an appropriate design
and marketing concept for each community, including determining
the size, style and price range of the homes and, in certain
projects, the layout of streets, individual homesites and
overall community design. In addition, in certain markets,
outside architects who are familiar with the local communities
in which we build, assist us in preparing home designs and floor
plans. The product line that we offer in a particular community
depends upon many factors, including the housing generally
available in the area, the needs of the particular market and
our costs of homesites in the community. To improve the
efficiency of our design process and make full use of our
resources and expertise, we maintain a company-wide database, or
product library, of detailed information relating to the design
and construction of our homes, including architectural plans
previously or currently used in our communities. Periodically,
we review the product library to determine which plans have high
and low sales paces, as well as the high and low margins. We
then attempt to remove the lesser performing plans from our
product library. This enables us to lower the cost of
maintaining a large number of plans and lower construction costs
by increasing the efficiency of the building process by building
better performing plans more frequently.
Design
Centers
We maintain design centers in most of our markets as part of our
marketing process and to assist our homebuyers in selecting
options and upgrades, which can result in additional revenues.
The design centers heighten interest in our homes by allowing
homebuyers to participate in the design process and introducing
homebuyers to the various finishes and colors including
flooring, lighting, fixtures and hardware options available to
them. While the size and content of our design centers vary
between markets, the focus of all of our design centers is on
making the homebuyers selection process less complicated
and an enjoyable experience, while increasing our profitability.
Construction
Subcontractors perform substantially all of our construction
work. Our construction superintendents monitor the construction
of each home, coordinate the activities of subcontractors and
suppliers, subject the work of subcontractors to quality and
cost controls and monitor compliance with zoning and building
codes. We typically retain subcontractors pursuant to a contract
that obligates the subcontractor to complete construction at a
fixed price in a good and workmanlike manner at or
above industry standards. In addition, under these contracts the
subcontractor generally provides us with standard
indemnifications and warranties. Typically, we work with the
same subcontractors within each market, which provides us with a
stable and reliable trade base and better control over the costs
and quality of the work performed. Although we compete with
other homebuilders for qualified subcontractors, we have
established long-standing relationships with many of our
subcontractors and have not experienced any material
difficulties in obtaining the services of desired subcontractors.
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We typically complete the construction of a home within four to
ten months after the receipt of relevant permits. Construction
time, however, depends on weather, availability of labor,
materials and supplies and other factors. We do not maintain
significant inventories of construction materials, except for
materials related to work in progress for homes under
construction. While the availability and cost of construction
materials may be negatively impacted from time to time due to
various factors, including weather conditions, generally, the
construction materials used in our operations are readily
available from numerous sources. We have established price
arrangements or contracts, which we believe are favorable, with
suppliers of certain of our building materials, but we are not
under specific purchasing requirements.
We have, and will continue to establish and maintain,
information systems and other practices and procedures that
allow us to effectively manage our subcontractors and the
construction process. For example, we have implemented
information systems that monitor homebuilding production,
scheduling and budgeting. We believe that this program has and
will continue to improve our efficiency and decrease our
construction time.
Marketing
and Sales
We currently market our homes primarily under the Engle Homes
brand name in Florida, most of the Mid-Atlantic and the West and
under the Newmark Homes and Fedrick Harris Estate Homes brand
names in Texas and in Nashville, Tennessee. We also market our
homes targeted to first-time homebuyers under the
Trophy Homes brand name, primarily in Texas. We believe our
brands are widely recognized in the markets in which we operate
for providing quality homes in desirable locations.
We build and market different types of homes to meet the needs
of different homebuyers and the needs of different markets. We
employ a variety of marketing techniques to attract potential
homebuyers through numerous avenues, including Internet web
sites for our various homebuilding brands, advertising and other
marketing programs. We advertise on radio, in newspapers and
other publications, through our own brochures and newsletters,
on billboards, on the web, where permitted, and in brochures and
newsletters produced and distributed by real estate and mortgage
brokers.
We typically conduct home sales activities from sales offices
located in furnished model homes in each community. We use
commissioned sales personnel who assist prospective buyers by
providing them with floor plans, price information, tours of
model homes and information on the available options and other
custom features. We provide our sales personnel with extensive
training, and we keep them updated as to the availability of
financing, construction schedules and marketing and advertising
plans to facilitate their marketing and sales activities. We
supplement our in-house training program with training by
outside marketing and sales consultants.
We market and sell homes through our own sales personnel and in
cooperation with independent real estate brokers. Because a
portion of our sales originate from independent real estate
brokers, we sponsor a variety of programs and events to provide
the brokers with a level of familiarity with our communities,
homes and financing options necessary to successfully market our
homes.
Sales of our homes generally are made pursuant to a standard
sales contract that is tailored to the requirements of each
jurisdiction. Generally, our sales contracts require a deposit
of a fixed amount or percentage, typically averaging about five
percent of the purchase price, plus additional deposits for
options and upgrades selected by homebuyers. The contract may
include contingencies, such as financing or the prior sale of a
buyers existing home. We estimate that the average period
between the execution of a sales contract for a pre-sold home
and closing ranges from four months to over a year, depending on
the market and size and complexity of home being built.
Customer
Service and Quality Control
Our operating divisions are responsible for both pre-delivery
quality control inspections and responding to customers
post-delivery needs. We believe that the prompt, courteous
response to homebuyers needs reduces post-delivery repair
costs, enhances our reputation for quality and service and
ultimately leads to significant
13
repeat and referral business. We conduct home orientations and
pre-delivery inspections with homebuyers immediately before
closing.
An integral part of our customer service program includes
post-delivery surveys. We contract with independent third
parties to conduct periodic post-delivery evaluations of the
customers satisfaction with their home, as well as the
customers experience with our sales personnel,
construction department and title and mortgage services. We use
a national customer satisfaction survey company to mail customer
satisfaction surveys to homeowners within 60 days of their
home closing. These surveys provide us with a direct link to the
customers perception of the entire buying experience as
well as valuable feedback on the quality of the homes we deliver
and the services we provide.
Warranty
Program
For all homes we sell, we provide our homebuyers with a limited
warranty that provides a one-year or two-year limited warranty
on workmanship and materials, and a five to ten-year limited
warranty covering major structural defects. The extent of these
warranties may differ in some or all of the states in which we
operate. We currently have liability insurance coverage in place
which covers repair costs associated with warranty claims for
structure and design defects related to homes sold by us during
the policy period, subject to a significant self-insured
retention per occurrence. We have a warranty administration
program, including mandatory alternative dispute resolution
procedures that we believe will allow us to more effectively
manage and resolve our warranty claims. We subcontract
homebuilding work to subcontractors who generally are required
to indemnify us and provide evidence of required insurance
coverage before receiving payments for their work. Therefore,
claims relating to workmanship and materials are the primary
responsibility of our subcontractors; however, we may be unable
to enforce these contractual indemnities.
After we deliver a home, we process all warranty requests
through our customer service departments located in each of our
markets. If a warranty repair is necessary, we manage and
supervise the repair to ensure that the appropriate
subcontractor takes prompt and appropriate corrective action.
Additionally, we have developed a proactive response and
remediation protocol to address any warranty claim that may
result in mold damage. We generally have not had any material
litigation or claims regarding warranties or latent defects with
respect to construction of homes. Current claims and litigation
are expected to be substantially covered by our reserves or
insurance.
To support our warranty program, we implemented an automated
warranty application in 2007 in approximately half of our
divisions. It allows management, customers and associates the
ability to track and manage warranty requests from reporting
through resolution to improve communication and customer
satisfaction. This application also helps us to objectively
select and manage vendors that deliver quality work on time.
To address homebuyer concerns regarding our fulfillment of
warranty obligations at the inception of our Chapter 11
cases, we entered into an agreement with an affiliate of Zurich
Financial Services Group, which guarantees our warranty
obligations for the first ten years and assumes all liability
for structural claims in years three through ten. The agreement
covered all homes in backlog on January 21, 2008 and homes
sold or delivered between January 21, 2008 and
June 30, 2008.
Financial
Services
As part of our objective to provide homebuyers with a seamless
home purchasing experience, we offer an array of financial
services, which we provide to buyers of our homes, as well as to
others. As part of this business, we provide mortgage financing,
title insurance and settlement services, and property and
casualty insurance products. Our mortgage financing operation
derives most of its revenues from buyers of our homes, although
existing homeowners may also use these services. In contrast,
our title and settlement services and our insurance agency
operations are used by our homebuyers and a broad range of other
clients purchasing or refinancing residential or commercial real
estate.
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Our mortgage business provides a full selection of conventional,
FHA-insured and VA-guaranteed mortgage products to our
homebuyers. We are an approved Fannie Mae
seller / servicer. All of our loans are originated and
underwritten in accordance with the guidelines of Fannie Mae,
Freddie Mac, FHA, VA or other institutional third parties. We
sell substantially all of our loans and the related servicing
rights to third party investors. We conduct this business
through our subsidiary, Preferred Home Mortgage Company, which
has its headquarters in Tampa, Florida and has offices in each
of our markets. For the year ended December 31, 2007,
approximately 10% of our homebuyers paid in cash and 70% of our
non-cash homebuyers utilized the services of our mortgage
business. During 2007, we closed 5,192 loans totaling
$1.3 billion in principal amount.
On January 28, 2008, Preferred Home Mortgage Company, our
wholly-owned residential mortgage lending subsidiary, entered
into an Amended and Restated Agreement of Limited Liability
Company with Wells Fargo Ventures, LLC. The limited liability
company is known as PHMCWF, LLC but does business as
Preferred Home Mortgage Company, an affiliate of Wells
Fargo. Preferred Home Mortgage Company owns 49.9% of the
venture with the balance owned by Wells Fargo. Effective
April 1, 2008, the venture began to carry on the mortgage
business of Preferred Home Mortgage Company. The venture is
managed by a committee composed of six members, three from
Preferred Home Mortgage Company and three from Wells Fargo. The
venture entered into a revolving credit agreement with Wells
Fargo Bank, N.A. providing for advances of up to
$20.0 million. Wells Fargo Home Mortgage provides the
general and administrative support (as well as all loan related
processing, underwriting and closing functions), and is the end
investor for the majority of the loans closed through the joint
venture. Prior to the joint venture, Preferred Home Mortgage
Company had a centralized operations center that provided those
support functions. The majority of these support functions
ceased in June 2008.
Through our title services business, we, as agent, obtain
competitively-priced title insurance for, and provide settlement
services to our homebuyers as well as third party homebuyers. We
conduct this business through our subsidiary, Universal Land
Title, Inc. and its subsidiaries and affiliates.
Our Universal Land Title subsidiary works with national
underwriters and lenders to facilitate client service and
coordinates closings at its offices. It is equipped to handle
e-commerce
applications,
e-mail
closing packages and digital document delivery. The principal
sources of revenues generated by our title insurance business
are fees paid to Universal Land Title for title insurance
obtained for our homebuyers and other third party residential
purchasers. Universal Land Title operates as a title agency with
its headquarters in West Palm Beach, Florida and has 21
additional offices.
For the year ended December 31, 2007, approximately 97% of
our homebuyers used Universal Land Title or its affiliates for
their title insurance and settlement services. Third party
homebuyers (or non-company customers) accounted for 41% of our
title services business revenue for the year ended
December 31, 2007.
Alliance Insurance and Information Services, LLC, owned by
Universal Land Title, is a full service insurance agency serving
all of our markets. Alliance markets homeowners, flood and
auto insurance directly to homebuyers and others in all of our
markets and also markets life insurance in Florida. Interested
homebuyers obtain free quotes and have the necessary paperwork
delivered directly to the closing table for added convenience.
For the year ended December 31, 2007, 2% of our new
homebuyers used Alliance for their insurance needs.
Governmental
Regulation
We must comply with federal, state and local laws and
regulations relating to, among other things, zoning, treatment
of waste, land development, required construction materials,
density requirements, building design and elevation of homes in
connection with the construction of our homes. These include
laws requiring use of construction materials that reduce the
need for energy-consuming heating and cooling systems. In
addition, we and our subcontractors are subject to laws and
regulations relating to employee health and safety. These laws
and regulations are subject to frequent change and often
increase construction costs. In some cases, there are laws
requiring that commitments to provide roads and other
infrastructure be in place prior to the commencement of new
construction. These laws and regulations are usually
administered by individual counties and municipalities and may
result in fees and assessments or building moratoriums. In
addition,
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certain new development projects are subject to assessments for
schools, parks, streets and highways and other public
improvements, the costs of which can be substantial.
The residential homebuilding industry also is subject to a
variety of local, state and federal statutes, ordinances, rules
and regulations concerning the protection of health and the
environment. The requirements, interpretation
and/or
enforcement of these environmental laws and regulations are
subject to change. Environmental laws and conditions may result
in delays, may cause us to incur substantial compliance and
other costs and can prohibit or severely restrict homebuilding
activity in environmentally sensitive regions or areas. In
recent years, several cities and counties in which we have
developments have submitted to voters
and/or
approved slow growth or no growth
initiatives and other ballot measures, which could impact the
affordability and availability of homes and land within those
localities.
Our title insurance agency subsidiaries must comply with
applicable state and federal insurance laws and regulations. Our
mortgage financing subsidiary must comply with applicable real
estate lending laws and regulations. In addition, to make it
possible for purchasers of some of our homes to obtain
FHA-insured or VA-guaranteed mortgages, we must construct those
homes in compliance with regulations promulgated by those
agencies.
The mortgage financing and title insurance subsidiaries are
licensed in the states in which they do business and must comply
with laws and regulations in those states regarding mortgage
financing, homeowners insurance and title insurance
agencies. These laws and regulations include provisions
regarding capitalization, operating procedures, investments,
forms of policies and premiums.
Competition
and Market Forces
The development and sale of residential properties is a highly
competitive business. We compete in each of our markets with
numerous national, regional and local builders on the basis of a
number of interrelated factors including location, price,
reputation, amenities, design, quality and financing. Builders
of new homes compete for homebuyers and for desirable
properties, raw materials and reliable, skilled subcontractors.
We also compete with resales of existing homes, available rental
housing and, to a lesser extent, resales of condominiums. We
believe we generally compare favorably to other builders in the
markets in which we operate, due primarily to:
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our experience within our geographic markets;
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the ability of our local managers to identify and quickly
respond to local market conditions;
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our reputation for service and quality; and
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our ability to retain key employees.
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The housing industry is cyclical and is affected by consumer
confidence levels and prevailing economic conditions, including
interest rate levels. A variety of other factors affect the
housing industry and demand for new homes, including the
availability of labor and materials and increases in the costs
thereof, changes in costs associated with home ownership such as
increases in property taxes, energy costs, changes in consumer
preferences, demographic trends and the availability of and
changes in mortgage financing programs.
Our mortgage operation competes with other mortgage lenders,
including national, regional and local mortgage bankers,
mortgage brokers, banks and other financial institutions, in the
origination, sale and servicing of mortgage loans. Principal
competitive factors include interest rates and other features of
mortgage loan products available to the consumer. Our title and
insurance operations compete with other insurance agencies,
including national, regional and local insurance agencies and
attorneys in the sale of title insurance, homeowner insurance
and related insurance services. Principal competitive factors
include the level of service available, technology, cost and
other features of insurance products available to the consumer.
We are required under certain contracts to provide performance
bonds. The market for performance bonds was severely impacted by
certain corporate failures in recent years and continues to be
impacted by general economic conditions. Consequently, less
overall bonding capacity is available in the market than in the
past,
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and surety bonds have become more expensive and restrictive.
Additionally, in certain cases where we have stopped activities
in a community, we may have failed to complete the
infrastructure for which the performance bond was posted. In
such cases, sureties for our performance bonds are required to
fulfill our obligations and in the future, may be unwilling to
issue performance bonds or may require additional collateral to
issue or renew performance bonds.
The past year has seen intense competition in the homebuilding
industry for a decreased group of homebuyers. See Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations Financial
Condition, Liquidity and Capital Resources, for discussion
of 2007 developments.
Seasonality
The homebuilding industry tends to be seasonal, as generally
there are more homes sold in the spring and summer months when
the weather is milder, although the number of sales contracts
for new homes is highly dependent on the number of active
communities and the timing of new community openings. Because
new home deliveries trail new home contracts by a number of
months, we typically have the greatest percentage of home
deliveries in the fall and winter, and slow sales in the spring
and summer months could negatively affect our full year results.
We operate primarily in the Southwest and Southeast, where
weather conditions are more suitable to a year-round
construction process than in other parts of the country. Our
operations in Florida and Texas are at risk of repeated and
potentially prolonged disruptions during the Atlantic hurricane
season, which lasts from June 1 until November 30.
Backlog
At December 31, 2007, our consolidated continuing
operations had 2,379 homes in backlog representing
$736.3 million in revenue, as compared to 3,869 homes in
backlog representing $1.4 billion in revenue as of
December 31, 2006. At December 31, 2007, we had
contracts for 511 homes, representing $115.6 million in
revenue, with a third-party that marketed homes in the United
Kingdom. These contracts were cancelled in 2008. At
June 30, 2008, our consolidated continuing operations had
1,580 homes in backlog representing $479.3 million in
revenue. Backlog represents home purchase contracts that have
been executed and for which earnest money deposits have been
received, but for which the sale has not yet closed. We do not
record home sales as revenues until the closings occur. Our
consolidated sales order cancellation rate for the year ended
December 31, 2007 was approximately 38%, as compared to 32%
for the year ended December 31, 2006. The increase in the
sales order cancellation rate is a result of the continued
deterioration of conditions in most of our markets during 2007
characterized by record levels of new and existing homes
available for sale, speculative investors canceling existing
contracts, reduced affordability, increased competition among
builders, diminished buyer confidence and tightening of
available mortgage financing. All of our markets are
experiencing patterns of lower traffic, increased cancellations,
higher incentives, lower margins and reduced absorption.
Employees
At December 31, 2007, we employed 1,461 people in our
consolidated operations and 9 people in our unconsolidated
Engle/Sunbelt joint venture as compared to 2,007 people in
our consolidated operations and 297 people in our
unconsolidated joint ventures at December 31, 2006. At
June 30, 2008, we employed 1,039 people in our
consolidated operations. The decrease in staffing levels in 2008
and 2007 compared to 2006 is in response to the decline in
business levels. Our ability to attract, motivate and retain key
and essential personnel is impacted by the Bankruptcy Code which
limits our ability to implement a retention program or take
other measures intended to motivate employees to remain with us.
As part of our business strategy initiatives and as a result of
uncertainties involving our Chapter 11 cases, we expect to
experience further reductions in workforce. None of our
employees are covered by collective bargaining agreements.
In 2007, our division presidents received performance bonuses
based upon achieving targeted financial and operational measures
in their operating divisions. We are currently evaluating our
compensation structure for our division presidents in light of
our Chapter 11 cases.
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Availability
of Reports and Other Information
Our corporate website is www.TOUSA.com. We make available, free
of charge, access to our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
Proxy Statements on Schedule 14A and amendments to those
materials filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 on our website
under Investor Information SEC Filings,
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the United States
Securities and Exchange Commission. We also make available on
our website under Investor Information
Corporate Governance copies of materials regarding our
corporate governance policies and practices, including our
Corporate Governance Guidelines, our Code of Business Ethics and
the charters relating to the committees of our Board of
Directors. This information is available in print free of charge
to any stockholder who submits a written request for such
document to TOUSA, Inc., Attn: Investor Relations, 4000
Hollywood Blvd., Suite 500 N, Hollywood, Florida 33021.
Information on our website is not part of this document.
Additional information regarding our Chapter 11 cases,
including access to court documents and other general
information about the Chapter 11 cases, is available at
www.kccllc.net/tousa. Financial information on the website is
prepared according to requirements of federal bankruptcy law.
While such financial information reflects information required
under federal bankruptcy law, such information may be
unconsolidated, unaudited and prepared in a format different
than that used in our consolidated financial statements
incorporated herein prepared in accordance with generally
accepted accounting principles in the United States and filed
under the securities laws. Moreover, the materials filed with
the Bankruptcy Court are not prepared for the purpose of
providing a basis for investment decisions relating to our stock
or debt or for comparison with other financial information filed
with the Securities and Exchange Commission.
Risks
Relating to the Chapter 11 Cases
We are
subject to the risks and uncertainties associated with our
Chapter 11 cases.
We are operating our businesses as debtors and
debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code and orders
of the Bankruptcy Court. As a result, we are subject to the
risks and uncertainties associated with our Chapter 11
cases which include, among other things:
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our ability to obtain and maintain normal terms with existing
and potential homebuyers, vendors and service providers and
maintain contracts and leases that are critical to our
operations;
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limitations on our ability to implement and execute our business
plans and strategy;
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limitations on our ability to obtain Bankruptcy Court approval
with respect to motions in the Chapter 11 cases that we may
seek from time to time or potentially adverse decisions by the
Bankruptcy Court with respect to such motions, including as a
result of the actions of our creditors and other third parties,
who may oppose our plans or who may seek to require us to take
actions that we oppose;
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limitations on our ability to reject contracts or leases that
are burdensome or uneconomical;
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limitations on our ability to raise capital, including through
sales of assets;
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our ability to attract, motivate and retain key and essential
personnel is impacted by the Bankruptcy Code which limits our
ability to implement a retention program or take other measures
intended to motivate employees to remain with us; and
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our ability to obtain needed approval from the Bankruptcy Court
for transactions outside of the ordinary course of business,
which may limit our ability to respond on a timely basis to
certain events or take advantage of certain opportunities.
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These risks and uncertainties could negatively affect our
business and operations in various ways. For example, events or
publicity associated with our Chapter 11 cases could
adversely affect our relationships with
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existing and potential homebuyers, vendors and employees, which
in turn could adversely affect our operations and financial
condition, particularly if such cases are protracted.
As a result of our Chapter 11 cases and the other matters
described herein, including the uncertainties related to the
fact that we have not yet had time to complete and obtain
confirmation of a plan of reorganization, there is substantial
doubt about our ability to continue as a going concern. Our
ability to continue as a going concern, including our ability to
meet our ongoing operational obligations, is dependent upon,
among other things:
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our ability to generate and maintain adequate cash;
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the cost, duration and outcome of the restructuring process;
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our ability to comply with the terms of our cash collateral
order and, if necessary, seek further extensions of our ability
to use cash collateral;
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our ability to achieve profitability following a restructuring
given housing market challenges; and
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our ability to retain key employees.
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These challenges are in addition to those operational and
competitive challenges that we face in connection with our
business. In conjunction with our advisors, we are implementing
strategies to aid our liquidity and our ability to continue as a
going concern. However, such efforts may not be successful.
In light of the foregoing, trading in our securities during the
pendency of our Chapter 11 cases is highly speculative and
poses substantial risks. These risks include extremely volatile
trading prices. In addition, during the pendency of the
Chapter 11 cases, the Bankruptcy Court has entered an order
that places certain limitations on trading in our common stock
and certain securities, including options convertible into our
common stock, and has also provided the potentially retroactive
application of notice and sell-down procedures for trading in
claims against the debtors estates (in the event that such
procedures are approved in the future). Holders of our
securities, especially holders of our common stock, may not be
able to resell such securities and, in connection with our
reorganization, may have their securities cancelled and in
return receive no payment or other consideration, or a payment
or other consideration that is less than the par value or the
purchase price of such securities.
A long
period of operating under Chapter 11 may harm our
business.
A long period of operating under Chapter 11 could adversely
affect our businesses and operations. So long as the
Chapter 11 cases continue, our senior management will be
required to spend a significant amount of time and effort
dealing with the Chapter 11 reorganization instead of
focusing exclusively on business operations. A prolonged period
of operating under Chapter 11 will also make it more
difficult to attract and retain management and other key
personnel necessary to the success and growth of our businesses.
In addition, the longer the Chapter 11 cases continue, the
more likely it is that our customers and suppliers will lose
confidence in our ability to successfully reorganize our
businesses and seek to establish alternative commercial
relationships.
Furthermore, so long as the Chapter 11 cases continue, we
will be required to incur substantial costs for professional
fees and other expenses associated with the cases. A prolonged
continuation of the Chapter 11 cases may also require us to
seek additional financing and obtain relief from certain terms
contained in the cash collateral order. It may not be possible
for us to obtain additional financing during the term of the
Chapter 11 cases on commercially favorable terms or at all.
If we require additional financing during the Chapter 11
cases and we are unable to obtain the financing on favorable
terms or at all, our chances of successfully reorganizing our
businesses may be seriously jeopardized.
Operating
under the Bankruptcy Code may restrict our ability to pursue our
business strategies.
Among other things, the Bankruptcy Code limits our ability to:
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incur additional indebtedness;
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pay dividends, repurchase our capital stock or make certain
other restricted payments or investments;
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make investments;
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sell assets;
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consolidate, merge, sell or otherwise dispose of all or
substantially all of our assets;
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grant liens;
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plan for or react to market conditions or meet capital needs or
otherwise restrict our activities or business plans; and
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finance our operations, strategic acquisitions, investments or
joint ventures or other capital needs or to engage in other
business activities that would be in our interest.
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These restrictions may place us at a competitive disadvantage
compared to our competitors who are not subject to similar
restrictions, which may adversely affect our results of
operations.
Our
cash collateral order includes operating budgets and financial
covenants that limit our operating flexibility.
The cash collateral order requires us to maintain certain
financial budgets and covenants that, among other things,
restrict our ability to take specific actions, even if we
believe such actions are in our best interest. These include,
among other things, restrictions on our ability to:
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incur indebtedness;
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incur liens and enter sale/leaseback transactions except for
model homes subject to certain limitations;
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make or own investments;
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enter into transactions with affiliates;
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engage in new lines of business;
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consolidate, merge, sell all or substantially all of our assets;
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issue guarantees of debt;
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agree to amendment or modification to our organizational
documents;
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incur or create claims; and
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make additional payments on prepetition indebtedness.
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Limitations
in the cash collateral order on making capital expenditures and
incurring additional debt may prevent us from pursing new
business initiatives, which may place us at a competitive
disadvantage.
The cash collateral order limits the amount of money that we may
spend on capital expenditures. Accordingly, we could be unable
to make capital expenditures to pursue new business initiatives.
Our inability to pursue new business initiatives may put us at a
competitive disadvantage to our competitors who are not subject
to these restrictions. If our competitors successfully pursue
new business initiatives, these restrictions may limit our
ability to react effectively, and our results of operations or
financial condition could be adversely affected.
We
require a significant amount of cash, which may not be available
to us.
Our ability to make payments on, repay or refinance our debt, to
fund planned capital expenditures and to generate sufficient
working capital to operate our business will depend largely upon
our future operating performance. Our future performance is
subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. In
addition, our ability to borrow funds depends on the
satisfaction of the covenants of our debt agreements that we
will have upon our exit from Chapter 11.
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Additionally, our working capital needs may increase to the
extent that our suppliers are unwilling to extend credit to us
on satisfactory terms. Our business may not generate sufficient
cash flow from operations and future borrowings may not be
available to us in an amount sufficient to enable us to pay our
debt, fund capital expenditures or fund our working capital or
other liquidity needs.
We may
not be able to confirm or consummate a plan of
reorganization.
In order to successfully emerge from our Chapter 11 cases
as a viable company, we must develop, obtain requisite creditor
and Bankruptcy Court approval of, and consummate a
Chapter 11 plan of reorganization. This process requires us
to meet certain statutory requirements under the Bankruptcy Code
with respect to adequacy of disclosure regarding a plan of
reorganization, soliciting and obtaining creditor acceptances of
a plan, and fulfilling other statutory conditions for
confirmation. We may not receive the requisite acceptances to
confirm a plan of reorganization. Even if the requisite
acceptances to a plan of reorganization are received, the
Bankruptcy Court may not confirm the plan. In addition, even if
a plan of reorganization is confirmed, we may not be able to
consummate such plan.
If a plan of reorganization is not confirmed by the Bankruptcy
Court, or if we are unable to successfully consummate a plan
after confirmation, we may not be able to reorganize our
businesses. If an alternative reorganization could not be agreed
upon, we may have to liquidate our assets.
We have the exclusive right to file a Chapter 11 plan or
plans prior to October 25, 2008 and the exclusive right to
solicit acceptance thereof until December 24, 2008.
Pursuant to Section 1121 of the Bankruptcy Code, the
exclusivity periods may be expanded or reduced by the Bankruptcy
Court, but in no event can the exclusivity periods to file and
solicit acceptance of a plan or plans of reorganization be
extended beyond 18 months and 20 months, respectively.
Transfers
of our equity, or issuances of equity in connection with our
restructuring, may impair our ability to utilize our federal
income tax net operating loss carryforwards in the
future.
Under federal income tax law, a corporation is generally
permitted to deduct from taxable income in any year net
operating losses carried forward from prior years. We have net
operating loss carryforwards and built in losses (which are
treated similarly to net operating losses) of approximately
$83.5 million and $1.2 billion, respectively, as of
December 31, 2007. In addition, we have alternative minimum
tax credit carryforwards of $12.5 million. Our ability to
deduct net operating loss carryforwards and recognize the
benefits of the built in losses and the alternative minimum tax
credit carryforwards could be subject to a significant
limitation if we were to undergo an ownership change
for purposes of Section 382 of the Internal Revenue Code of
1986, as amended, during or as a result of our Chapter 11
cases. During the pendency of the Chapter 11 cases, the
Bankruptcy Court has entered an order that places certain
limitations on trading in our common stock or certain
securities, including options, convertible into our common
stock. The Bankruptcy Court has also provided the potentially
retroactive application of notice and sell-down procedures for
trading in claims against the debtors estates (in the
event that such procedures are approved in the future). These
limitations, however, may not prevent an ownership
change and our ability to utilize our net operating loss
carryforwards and recognize the benefits of the built in losses
and the alternative minimum tax credit carryforwards may be
significantly limited as a result of our reorganization.
The
Bankruptcy Code may limit our secured creditors ability to
realize value from their collateral.
Upon the commencement of a case under Chapter 11 of the
Bankruptcy Code, a secured creditor is prohibited from
repossessing its security from a debtor in a Chapter 11
case, or from disposing of security repossessed from such
debtor, without Bankruptcy Court approval. Moreover, the
Bankruptcy Code generally permits the debtor to continue to
retain and use collateral even though the debtor is in default
under the applicable debt instruments, provided that the secured
creditor is given adequate protection. The meaning
of the term adequate protection may vary according
to circumstances, but it is intended to protect the value of the
secured creditors interest in the collateral and may
include cash payments or the granting of additional security if
and at such times as the Bankruptcy Court in its discretion
determines that the value of the secured
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creditors interest in the collateral is declining during
the pendency of a Chapter 11 case. A Bankruptcy Court may
determine that a secured creditor may not require compensation
for a diminution in the value of its collateral if the value of
the collateral exceeds the debt it secures.
In view of the lack of a precise definition of the term
adequate protection and the broad discretionary
power of a Bankruptcy Court, it is impossible to predict:
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how long payments under our secured debt could be delayed as a
result of our Chapter 11 cases;
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whether or when secured creditors (or their applicable agents)
could repossess or dispose of collateral; or
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the value of the collateral.
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In addition, the instruments governing certain of our
indebtedness provide that the secured creditors (or their
applicable agents) may not object to a number of important
matters following the filing of a bankruptcy petition.
Accordingly, it is possible that the value of the collateral
securing our indebtedness could materially deteriorate and
secured creditors would be unable to raise an objection.
Furthermore, if the Bankruptcy Court determines that the value
of the collateral is not sufficient to repay all amounts due on
applicable secured indebtedness, the holders of such
indebtedness would hold a secured claim only to the extent of
the value of their collateral and would otherwise hold unsecured
claims with respect to any shortfall. The Bankruptcy Code
generally permits the payment and accrual of post-petition
interest, costs and attorneys fees to a secured creditor
during a debtors Chapter 11 case, but only to the
extent the value of its collateral is determined by a Bankruptcy
Court to exceed the aggregate outstanding principal amount of
the obligations secured by the collateral.
Our
successful reorganization will depend on our ability to retain
and motivate key employees.
Our success and the successful implementation of a business plan
is largely dependent on the skills, experience and efforts of
our people, particularly senior management. Our ability to
attract, motivate and retain key and essential personnel is
impacted by the Bankruptcy Code which limits our ability to
implement a retention program or take other measures intended to
motivate employees to remain with us. In addition, we must
obtain U.S. Bankruptcy Court approval of employment
contracts and other employee compensation programs. The process
of obtaining such approvals, including negotiating with creditor
committees (which may raise objections to or otherwise limit our
ability to implement such contracts or programs), has resulted
in delays and reduced potential compensation for many employees.
Certain employees, including certain key members of senior
management, have resigned following the filing of our
Chapter 11 cases. The continued loss of such individuals or
other key personnel could have a material adverse effect upon
the implementation of a business plan and on our ability to
reorganize successfully and emerge from bankruptcy.
Our
financial results may be volatile and may not reflect historical
trends.
While in Chapter 11, we expect our financial results to
continue to be volatile as asset impairments, asset
dispositions, restructuring activities, contract terminations
and rejections and claims assessments may significantly impact
our consolidated financial statements. As a result, our
historical financial performance is likely not indicative of our
financial performance during bankruptcy or post-bankruptcy. Upon
emergence from Chapter 11, the amounts reported in our
subsequent consolidated financial statements may materially
change relative to our historical consolidated financial
statements, including as a result of revisions to our operating
plans pursuant to our plan of reorganization. In addition, as
part of our successful emergence from Chapter 11, we expect
that we will be required to adopt fresh start accounting. If
fresh start accounting is applicable, our assets and liabilities
will be recorded at fair value as of the fresh start reporting
date. The fair value of our assets and liabilities may differ
materially from the recorded values of assets and liabilities on
our consolidated statements of financial condition. In addition,
our financial results after the application of fresh start
accounting may be different from historical trends.
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Risks
Related to Capital Resources; Liquidity
We
have substantial liquidity needs and face liquidity
pressure.
On February 5, 2008, pursuant to an interim order from the
Bankruptcy Court dated January 31, 2008, we entered into
the Senior Secured Super-Priority Debtor in Possession Credit
and Security Agreement. The agreement provided for a first
priority and priming secured revolving credit interim commitment
of up to $134.6 million. The agreement was subsequently
amended to extend it to June 19, 2008. No funds were drawn
under the agreement. The agreement was subsequently terminated
and we entered into an agreement with our secured lenders to use
cash collateral on hand (cash generated by our operations,
including the sale of excess inventory and the proceeds of our
federal tax refund of $207.3 million received in April
2008). Under the Bankruptcy Court order dated June 20,
2008, we are authorized to use cash collateral of our first lien
and second lien lenders (approximately $358.0 million at
the time of the order) for a period of six months in a manner
consistent with a budget negotiated by the parties. The order
further provides for the paydown of $175.0 million to our
first lien term loan facility secured lenders, subject to
disgorgement provisions in the event that certain claims against
the lenders are successful and repayment is required. The order
also reserves our sole right to paydown an additional
$15.0 million to our fist lien term loan facility secured
lenders. We are permitted under the order to incur liens and
enter into sale/leaseback transactions for model homes subject
to certain limitations. As part of the order, we have granted
the prepetition agents and the lenders various forms of
protection, including liens and claims to protect against any
diminution of the collateral value, payment of accrued, but
unpaid interest on the first priority indebtedness at the
non-default rate and the payment of reasonable fees and expenses
of the agents under our secured facilities.
We continue to have substantial liquidity needs in the operation
of our business and face liquidity challenges. Our business
depends upon our ability to obtain financing for the acquisition
of land, operating costs, development of our residential
communities and to provide bonds to ensure the completion of our
projects. Our ability to make payments on our indebtedness will
depend on our ability to generate cash. This, to a large extent,
is dependent upon industry conditions, as well as general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. The success of our
Chapter 11 cases and implementation of our business plan
will depend on our ability to achieve our budgeted operating
results and access sufficient resources.
Our
substantial indebtedness could adversely impact our financial
health and limit our operations.
Our high level of indebtedness has important consequences,
including:
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limiting our ability to borrow additional amounts for working
capital, capital expenditures, debt service requirements,
execution of our strategy or other purposes;
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limiting our ability to use operating cash flow in other areas
of our business because we must dedicate a substantial portion
of these funds to service the debt;
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increasing our vulnerability to general adverse economic and
industry conditions;
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limiting our ability to capitalize on business opportunities and
to react to competitive pressures and adverse changes in
government regulation; and
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limiting our ability or increasing the costs to refinance
indebtedness.
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We may
be unable to obtain additional financing in the
future.
Our ability to arrange financing (including any extension or
refinancing) and the cost of the financing are dependent upon
numerous factors, including:
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general economic and capital market conditions;
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credit availability from banks or other lenders for us and our
industry peers, as well as the economy in general;
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investor confidence in the industry and in us; and
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provisions of tax and securities laws that are conducive to
raising capital.
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Our
cash collateral order imposes significant operating and
financial restrictions on us; any failure to comply with these
restrictions could have a material adverse effect on our
liquidity and our operations.
These restrictions could adversely affect us by limiting our
ability to plan for or react to market conditions or to meet our
capital needs. These restrictions limit or prohibit our ability,
subject to certain exceptions to, among other things:
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incur additional indebtedness and issue stock;
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make additional prepayments on or purchase indebtedness in whole
or in part;
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pay dividends and other distributions with respect to our
capital stock or repurchase our capital stock or make other
restricted payments;
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make certain investments;
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incur liens and enter sale/leaseback transactions except for
model homes subject to certain limitations;
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consolidate or merge with another entity, or allow one of our
subsidiaries to do so;
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lease, transfer or sell assets and use proceeds of permitted
asset leases, transfers or sales;
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incur dividend or other payment restrictions affecting certain
subsidiaries;
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engage in certain business activities; and
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acquire other businesses.
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Our ability to comply with these covenants depends in part on
our ability to implement our restructuring program during the
Chapter 11 cases. If we are unable to achieve the goals
associated with our restructuring program and the other elements
of our business plan, we may not be able to comply with these
covenants.
We may
incur significant damages and expenses due to the purported
class action complaints filed against us and certain of our
officers.
TOUSA, Inc. is a defendant in a class action lawsuit pending in
the United States District Court for the Southern District of
Florida. The name and case number of the class action suit is
Durgin, et al., v. TOUSA, Inc., et al.,
No. 06-61844-CIV.
Beginning in December 2006, various stockholder plaintiffs
brought lawsuits seeking class action status in the
U.S. District Court for the Southern District of Florida.
At a hearing held March 29, 2007, the Court consolidated
the actions and heard arguments on the appointment of lead
plaintiff and counsel. On September 7, 2007, the Court
appointed Diamondback Capital Management, LLC as the lead
plaintiff and approved Diamondbacks selection of counsel.
Pursuant to a scheduling order, the lead plaintiff filed a
Consolidated Complaint on November 2, 2007.
The Consolidated Complaint names TOUSA, all of TOUSAs
directors, David Keller, Randy Kotler, Beatriz Koltis, Lonnie
Fedrick, Technical Olympic, S.A., UBS Securities, LLC, Citigroup
Global Markets, Inc., Deutsche Bank Securities, Inc. and JMP
Securities, LLC as defendants. The alleged class period is
August 1, 2005 to March 19, 2007. The Consolidated
Complaint alleges that TOUSAs public filings and other
public statements that described the financing for the
Transeastern Joint Venture as non-recourse to TOUSA were false
and misleading. The Consolidated Complaint also alleges that
certain public filings and statements were misleading or
suffered from material omissions in failing to disclose fully or
describe the Completion and Carve-Out Guaranties that TOUSA
executed in support of the Transeastern Joint Venture financing.
The Consolidated Complaint asserts claims under Section 11
of the Securities Act against all defendants other than
Ms. Koltis for strict liability and negligence regarding
the registration statements and prospectus associated with the
September 2005 offering of 4 million shares of stock.
Plaintiffs contend that the registration
24
statements and prospectus contained material misrepresentations
and suffered from material omissions in the description of the
Transeastern Joint Venture financing and TOUSAs related
obligations. The Consolidated Complaint asserts related claims
against Technical Olympic, S.A. and Messrs. Konstantinos
Stengos, Antonio B. Mon, David Keller and Tommy L. McAden as
controlling persons responsible for the statements in the
registration statements and prospectus. The Consolidated
Complaint also alleges claims under Section 10(b) of the
Exchange Act for fraud with respect to various public statements
about the non-recourse nature of the Transeastern debt and
alleged omissions in disclosing or describing the Guaranties.
These claims are alleged against TOUSA, Messrs. Mon,
McAden, Keller and Kotler and Ms. Koltis. Finally, the
Consolidated Complaint asserts related claims against
Messrs. Mon, Keller, Kotler and McAden as controlling
persons responsible for the various alleged false disclosures.
Plaintiffs seek compensatory damages, plus fees and costs, on
behalf of themselves and the putative class of purchasers of
TOUSA common stock and purchasers and sellers of options on
TOUSA common stock.
On January 30, 2008, TOUSA filed a Motion to Dismiss
Plaintiffs Consolidated Complaint. TOUSA moved to dismiss
plaintiffs claims on the grounds that plaintiffs:
a) could not establish materially false or misleading
statements or omissions; b) could not establish loss
causation; c) failed to plead with particularity facts
giving rise to a strong inference of scienter; and
d) lacked standing to pursue a Section 11 claim. Many
of the other defendants also filed motions to dismiss
and/or
signed on to TOUSAs Motion to Dismiss.
On February 4, 2008, TOUSA filed a Notice of Suggestion of
Bankruptcy notifying the Court that TOUSA filed for bankruptcy
on January 29, 2008. On February 5, 2008, the Court
entered an order staying the action as to TOUSA pursuant to
Section 362 of the United States Bankruptcy Code. The
action continues with respect to defendants other than TOUSA.
On April 30, 2008, lead plaintiff Diamondback Capital
Management moved to withdraw as lead plaintiff. On May 22,
2008, the Court entered an order: granting Diamondback Capital
Managements motion to withdraw as lead plaintiff;
establishing a procedure pursuant to which a new lead plaintiff
would be appointed; extending the time for plaintiffs to respond
to the motions to dismiss until a new lead plaintiff is
selected; and acknowledging that the Court may need to set a
time for the filing of an amended complaint, if requested by the
new lead plaintiff.
On June 6, 2008, two prospective lead plaintiffs filed
motions to be appointed the new lead plaintiff. On July 15,
2008, the Court entered an Order appointing the
Bricklayers & Trowel Trades International Pension Fund
as the new lead plaintiff. The Court further ordered that,
within 15 days of the entry of the Order, the new plaintiff
must either respond to the previously filed Motions to Dismiss,
or file a notice of intent to file an amended complaint. On
July 30, 2008, the new plaintiff filed a notice of intent
to file an amended complaint. On July 31, 2008, following
the notice of intent to file an amended complaint, the Court
denied as moot, without prejudice, the defendants
previously filed motion to dismiss the consolidated complaint.
Under the current schedule set by the Court, the plaintiff must
file its amended complaint by August 29, 2008.
You
may find it difficult to sell our common stock and debt
securities.
Effective November 19, 2007, NYSE Regulation, Inc.
suspended our common stock and debt securities from trading on
the NYSE. We appealed the suspension. Following our suspension
from the NYSE, we began trading on the Pink Sheet Electronic
Quotation Service. On February 15, 2008, the NYSE denied
our appeal and affirmed the decision to suspend trading in our
common stock and debt securities on the NYSE and commenced
delisting procedures. On March 3, 2008, the NYSE filed
Forms 25, Notification of Removal of Listing
and/or
Registration under Section 12(b) of the Securities Exchange
Act of 1934, with the SEC with respect to our listed securities.
Our securities will be delisted 90 days thereafter.
The trading of our common stock over the counter negatively
impacts the trading price of our common stock and the levels of
liquidity available to our stockholders. In addition, the
trading of our common stock over the counter materially
adversely affects our access to the capital markets and our
ability to raise capital through alternative financing sources
on terms acceptable to us or at all. Securities that trade on
the Pink Sheets are not eligible for margin loans and make our
common stock subject to the provisions of
Rule 15g-9
of the Securities Exchange Act of 1934, commonly referred to as
the penny stock rule. The Securities and
25
Exchange Commission generally defines penny stock to
be any equity security that has a market price less than $5.00
per share, subject to certain exceptions. If our common stock is
deemed to be a penny stock, trading in the shares will be
subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited
investors are persons with assets in excess of
$1.0 million, or annual income exceeding $200,000, or
$300,000 together with their spouse. For transactions covered by
these rules, broker-dealers must make a special suitability
determination for the purchase of such security and must have
the purchasers written consent to the transaction prior to
the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require the delivery,
prior to the first transaction, of a risk disclosure document,
prepared by the SEC, relating to the penny stock market. A
broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered representative, and current
quotations for the securities. Finally, monthly statements must
be sent disclosing recent price information for the penny stocks
held in an account and information on the limited market in
penny stocks. Consequently, these rules may restrict the ability
of broker-dealers to trade
and/or
maintain a market in our common stock and may affect the ability
of our shareholders to sell their shares. There are also other
negative implications, including the potential loss of
confidence by suppliers, existing and potential homebuyers and
employees and the loss of institutional investor interest in our
company.
Risks
Related to Our Business
The
homebuilding industry is experiencing a severe downturn that may
continue for an indefinite period which may further adversely
affect our business and results of operations compared to prior
periods.
Since 2006, the homebuilding industry as a whole has experienced
a significant and sustained decrease in demand for new homes, an
oversupply of new and existing homes available for sale and a
more restrictive mortgage lending environment. Although we
operate in a number of markets, approximately 53% of our
operations are concentrated in Florida and the West, based on
2007 deliveries, which suffered a particularly severe downturn
in home buying activity. The rapid increase in new and existing
home prices in these markets over the past several years reduced
housing affordability and tempered buyer demand. In particular,
investors and speculators reduced their purchasing activity and
instead stepped up their efforts to sell the residential
property they had earlier acquired. These trends, which were
more pronounced in markets that had experienced the greatest
levels of price appreciation, resulted in overall fewer home
sales, greater cancellations of home purchase agreements by
buyers, higher inventories of unsold homes and the increased use
by homebuilders, speculators, investors and others of discounts,
incentives, price concessions, broker commissions and
advertising to close home sales compared to the past several
years.
Reflecting these trends, we, like many other homebuilders,
experienced the impact of severe liquidity challenges in the
credit and mortgage markets, diminished consumer confidence,
increased home inventories and foreclosures and downward
pressure on home prices. Potential buyers have exhibited both a
reduction in confidence as to the economy in general and a
willingness to delay purchase decisions based on a perception
that prices will continue to decline. Prospective homebuyers
continue to be concerned about interest rates and the inability
to sell their current homes or to obtain appraisals at
sufficient amounts to secure mortgage financing as a result of
the recent disruption in the mortgage markets and the tightening
of credit standards. The homebuilding market may not improve in
the near future, and is forecast to weaken further. Continued
weakness in the homebuilding market would have an adverse effect
on our business and our results of operations as compared to
those of earlier periods.
Our
strategies in responding to the adverse conditions in the
homebuilding industry have had limited success and the continued
implementation of these and other strategies may not be
successful.
In 2007 we have experienced significantly reduced gross profit
levels and have incurred significant asset impairment charges.
These contributed to the net loss we recognized in 2007. Also,
in 2007, notwithstanding our sales strategies, we continued to
experience an elevated rate of sales contract cancellations. We
believe that the elevated cancellation rate largely reflects a
decrease in homebuyer confidence, with continued price declines
and increases in the level of sales incentives for both new and
existing homes prompting homebuyers to forgo or delay home
purchases. A more restrictive mortgage lending environment and
the inability of some
26
buyers to sell their existing homes have also led to
cancellations. Many of the factors that affect new orders and
cancellation rates are beyond our control. These factors include
the level of employment, consumer confidence, consumer income,
the availability of financing and interest rate levels.
Continued reduced sales levels and the increased level of
cancellations would continue to have an adverse effect on our
business and our results of operations as compared to those of
earlier periods.
Continued
high cancellation rates may negatively impact our
business.
Our backlog reflects the number and value of sold but
undelivered homes. Generally we have the right to compel the
customer to complete the purchase, however our only effective
remedy may be the retention of the deposit. In some cases a
customer may cancel the contract and receive a complete or
partial refund of the deposit. If the current industry downturn
continues, or if mortgage financing becomes less available, more
homebuyers may cancel their contracts with us. Significant
cancellations have had, and could have in the future, a material
adverse effect on our business and results of operations.
Contracts with a third-party that marketed homes in the United
Kingdom included in backlog at December 31, 2007 were
cancelled in 2008. These contracts were for 511 homes,
representing $115.6 million in revenue.
Our
revenues and profitability may be adversely affected by natural
disasters or weather conditions.
Homebuilders are particularly subject to natural disasters and
severe weather conditions as they can delay our ability to
timely complete or deliver homes, damage partially complete or
other unsold homes that are in our inventory, negatively impact
the demand for homes,
and/or
negatively affect the price and availability of qualified labor
and materials. Our operations are located in many areas that are
especially subject to natural disasters; for example, we have
significant operations in Florida and Texas which is especially
at risk of hurricanes. To the extent that hurricanes, severe
storms, floods, tornadoes or other natural disasters or similar
weather events occur, our business may be adversely affected. To
the extent our insurance is not adequate to cover business
interruption or losses resulting from these events, our revenues
and profitability may be adversely affected.
We are
subject to substantial risks with respect to the land and home
inventories we maintain, and fluctuations in market conditions
may affect our ability to sell our land and home inventories at
expected prices, if at all, which would reduce our profit
margins.
As a homebuilder, we must constantly locate and acquire new
tracts of land for development and developed homesites to
support our homebuilding operations. There is a lag between the
time we acquire land for development or developed homesites and
the time that we can bring the communities to market and sell
homes. Lag time varies on a
project-by-project
basis; however, historically, we have experienced a lag time of
up to three years. As a result, we face the risk that demand for
housing may decline or costs of labor or materials may increase
during this period and that we will not be able to dispose of
developed properties or undeveloped land or homesites acquired
for development at expected prices or profit margins or within
anticipated time frames or at all. The market value of home
inventories, undeveloped land and developed homesites can
fluctuate significantly because of changing market conditions.
In addition, inventory carrying costs (including interest on
funds used to acquire land or build homes) can be significant
and can adversely affect our performance. The downturn in the
housing market has caused the fair market value of certain of
our inventory to fall, in some cases well below the purchase
price. As a result, we were required to take substantial
write-downs of the carrying value of our land inventory and we
elected not to exercise options, even though that required us to
forfeit deposits, write-off pre-acquisition land development
costs and incur additional liabilities related to these
contracts. Additionally, as a result of these market conditions,
we recorded significant valuation adjustments relating to our
investments in unconsolidated entities. If the current downturn
in the housing market continues, we may need to take additional
charges against our earnings for abandonments or inventory
impairments, or both. Although impairments are non-cash charges,
abandonments give the owner of the land the right to draw on
letters of credit or cash deposits that may have an adverse
impact on our liquidity. Additionally, any non-cash charges
would have an adverse effect on our financial condition and
results of operations.
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Reduced
home sales may impair our ability to recoup development costs or
force us to absorb additional costs.
We incur many costs even before we begin to build homes in a
community. Depending on the stage of development, these include
costs of developing land and installing roads, sewage and other
utilities, as well as taxes and other costs related to ownership
of the land on which we plan to build homes. Reducing the rate
at which we build homes extends the length of time it takes us
to recover these costs. Also, we frequently acquire options to
purchase land and make deposits that will be forfeited if we do
not exercise the options within specified periods. Because of
current market conditions, we have had to terminate some of
these options, resulting in the forfeiture of deposits and
unrecoverable development costs. Any such charges would have an
adverse effect on our financial condition and results of
operations, including our liquidity as a result of a lower
borrowing base which reduces availability under our cash
collateral order.
Market
conditions in the mortgage lending and mortgage finance
industries deteriorated significantly in 2007, adversely
impacting us by increasing the supply of inventory housing,
negatively impacting pricing conditions, as well as decreasing
the demand for our homes, which adversely affected our revenues
and profitability. Recent changes in mortgage lending
requirements or further reduced mortgage liquidity could
adversely affect the availability of credit for some purchasers
of our homes and thereby reduce our sales.
Approximately 90% of our customers finance their purchases
through mortgage financing obtained from us or other sources.
Increases in interest rates or decreases in the availability of
mortgage funds provided or sponsored by Fannie Mae, Freddie Mac,
the Federal Housing Administration, or the Veterans
Administration could cause a decline in the market for new homes
as potential homebuyers may not be able to obtain affordable
financing. In particular, because the availability of mortgage
financing is an important factor in marketing many of our homes,
any limitations or restrictions on the availability of those
types of financing could reduce our home sales and the lending
volume at our mortgage subsidiary.
In 2007, approximately 3% to 5% of the homebuyers that utilized
our mortgage subsidiary obtained sub-prime loans. We define a
sub-prime loan as one where the buyers FICO score is below
620 and is not an FHA or VA loan. At December 31, 2007,
approximately 4% to 6% of our backlog that utilized our mortgage
subsidiary included homebuyers seeking sub-prime financing.
During 2007, the mortgage lending and mortgage finance
industries experienced significant instability due to, among
other things, defaults on subprime loans and a resulting decline
in the market value of such loans. In light of these
developments, lenders, investors, regulators and other third
parties questioned the adequacy of lending standards and other
credit requirements for several loan programs made available to
borrowers in recent years. This has led to reduced investor
demand for mortgage loans and mortgage-backed securities,
tightened credit requirements, reduced liquidity, increased
credit risk premiums and regulatory actions. Deterioration in
credit quality among subprime and other nonconforming loans has
caused most lenders to eliminate subprime mortgages and most
other loan products that do not conform to Fannie Mae, Freddie
Mac, the Federal Housing Administration, or the Veterans
Administration standards. In general, these developments have
resulted in a reduction in demand for the homes we sell and have
delayed any general improvement in the housing market.
Furthermore, they have resulted in a reduction in demand for the
mortgage loans that we originate.
The Housing and Economic Recovery Act of 2008 was enacted into
law on July 30, 2008. One provision of the Act eliminates
down payment assistance programs for FHA loans approved after
September 30, 2008. Down payment assistance programs were
utilized for approximately 15% of our closings over the past
year, but for over 50% of our Trophy Homes division closings.
We are
dependent on the continued availability and satisfactory
performance of our subcontractors, which, if unavailable, could
have a material adverse effect on our business.
Subcontractors perform substantially all of our construction
work. As a consequence, we depend on the continued availability
of and satisfactory performance by these subcontractors for the
construction of our
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homes. There may not be sufficient availability of and
satisfactory performance by these unaffiliated third-party
subcontractors, which could have a material adverse effect on
our business.
Supply
risks and shortages relating to labor and materials can harm our
business by delaying construction and increasing
costs.
The homebuilding industry from time to time has experienced
significant difficulties with respect to:
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shortages of qualified trades people and other labor;
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inadequately capitalized local subcontractors;
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shortages of materials; and
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volatile increases in the cost of certain materials, including
lumber, framing, roofing and cement, which are significant
components of home construction costs, associated with the rapid
rise in the cost of oil, energy, and other factors.
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These difficulties can, and often do, cause unexpected
short-term increases in construction costs and cause
construction delays. In addition, to the extent our
subcontractors incur increased costs associated with increases
in insurance premiums and compliance with state and local
regulations, these costs are passed on to us as homebuilders. We
are generally unable to pass on any unexpected increases in
construction costs to those customers who have already entered
into sales contracts, as those contracts generally fix the price
of the house at the time the contract is signed, which may be up
to two years in advance of the delivery of the home. We have
historically been able to offset sustained increases in the
costs of materials with increases in the prices of our homes and
through operating efficiencies. However, in the future, pricing
competition, oversupply of new and existing homes and tightening
mortgage qualifications, among other factors may restrict our
ability to pass on any additional costs, and negatively impact
our profit margins.
The
competitive conditions in the homebuilding industry could
increase our costs, reduce our revenues and otherwise adversely
affect our results of operations.
The homebuilding industry is highly competitive and fragmented.
We compete in each of our markets with numerous national,
regional and local builders. Some of these builders have greater
financial resources, more experience, more established market
positions and better opportunities for land and homesite
acquisitions than we do and have lower costs of capital, labor
and material than us. Builders of new homes compete for
homebuyers, as well as for desirable properties, raw materials
and skilled subcontractors. The competitive conditions in the
homebuilding industry could, among other things:
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increase our costs, including selling and marketing expenses,
and reduce our revenues
and/or
profit margins;
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make it difficult for us to acquire suitable land or homesites
at acceptable prices;
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require us to increase selling commissions and other incentives;
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result in delays in construction if we experience a delay in
procuring materials or hiring laborers; and
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result in lower sales volumes.
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We also compete with resales of existing homes, available rental
housing and, to a lesser extent, condominium resales. An
oversupply of attractively priced resale or rental homes in the
markets in which we operate could adversely affect our
absorption rates and profitability. Foreclosures in the various
markets as well as within our own communities creating enormous
downward pressure on prices and consumer confidence.
Our financial services operations are also subject to
competition from third party providers, many of which are
substantially larger, may have a lower cost structure and may
focus exclusively on providing such services.
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Future
limitations on our ability to obtain bonds may adversely affect
our homebuilding operations.
We are required under certain contracts to provide performance
bonds. The market for performance bonds was severely impacted by
certain corporate failures in recent years and continues to be
impacted by general economic conditions. Consequently, less
overall bonding capacity is available in the market than in the
past, and surety bonds have become more expensive and
restrictive. Additionally, in certain cases where we have
stopped activities in a community, we may have failed to
complete the infrastructure for which the performance bond was
posted. In such cases, sureties for our performance bonds are
required to fulfill our obligations and in the future, may be
unwilling to issue performance bonds or may require additional
collateral to issue or renew performance bonds. An inability to
obtain new or renew existing performance bonds in a timely
manner, on acceptable terms, or at all could result in
limitations on our ability to enter into new contracts or
fulfill existing contracts which could have a material adverse
effect on our financial condition and results of operations.
We are
subject to product liability and warranty claims arising in the
ordinary course of business that could adversely affect our
results of operations.
As a homebuilder, we are subject in the ordinary course of our
business to liability and home warranty claims. We provide our
homebuyers with a limited warranty that provides a one-year or
two-year limited warranty covering workmanship and materials and
a five to ten-year limited warranty covering major structural
defects. Claims arising under these warranties and general
liability claims are common in the homebuilding industry and can
be costly. Although we maintain liability insurance, the
coverage offered by, and availability of, liability insurance
for construction defects is currently limited and, where
coverage is available, it may be costly. We currently have
liability insurance coverage which covers repair costs
associated with warranty claims for structure and design defects
related to homes sold by us during the policy period, subject to
a significant self-insured retention per occurrence. However,
our insurance coverage may contain limitations with respect to
coverage; this insurance coverage may not be adequate to cover
all liability and warranty claims for which we may be liable. In
addition, coverage may be further restricted and become more
costly. Although we generally seek to require our subcontractors
and design professionals to indemnify us for liabilities arising
from their work, we may be unable to enforce any such
contractual indemnities. Uninsured and unindemnified liability
and warranty claims, as well as the cost of insurance coverage,
could adversely affect our results of operations.
Our
business is subject to governmental regulations that may delay,
increase the cost of, prohibit or severely restrict our
development and homebuilding projects.
We are subject to extensive and complex laws and regulations
that affect the land development and homebuilding process,
including laws and regulations related to zoning, permitted land
uses, levels of density, building design, elevation of
properties, water and waste disposal, and use of open spaces. In
addition, we and our subcontractors are subject to laws and
regulations relating to workers health and safety. We also are
subject to a variety of local, state and federal laws and
regulations concerning the protection of health and the
environment. In some of the markets in which we operate, we are
required to pay environmental impact fees, use energy saving
construction materials and give commitments to provide certain
infrastructure such as roads and sewage systems. We must also
obtain permits and approvals from local authorities to complete
residential development or home construction. The laws and
regulations under which we and our subcontractors operate, and
our and their obligations to comply with them, may result in
delays in construction and development, cause us to incur
substantial compliance and other increased costs, and prohibit
or severely restrict development and homebuilding activity in
certain areas in which we operate.
Several states, cities and counties in which we operate have
approved, and others in which we operate may approve, various
slow growth or no growth initiatives and
other ballot measures that could negatively impact the
availability of land and building opportunities within those
localities. Approval of slow or no growth measures would reduce
our ability to build and sell homes in the affected markets and
create additional costs and administration requirements, which
in turn could have an adverse effect on our future revenues.
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Our financial services operations are subject to numerous
federal, state and local laws and regulations. Failure to comply
with these requirements can lead to administrative enforcement
actions, the suspension or loss of required licenses, and claims
for monetary damages.
Our title insurance agency subsidiaries must comply with
applicable insurance laws and regulations. Our mortgage
financing subsidiary must comply with applicable real estate
lending laws and regulations. In addition, to make it possible
for purchasers of some of our homes to obtain FHA-insured or
VA-guaranteed mortgages, we must construct those homes in
compliance with regulations promulgated by those agencies.
The mortgage financing and title insurance subsidiaries are
licensed in the states in which they do business and must comply
with laws and regulations in those states regarding mortgage
financing, homeowners insurance and title insurance
agencies. These laws and regulations include provisions
regarding capitalization, operating procedures, investments,
forms of policies and premiums.
Forward-Looking
Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended, including in the material set forth in the
sections entitled Business and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. These statements
concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts, and typically
include the words anticipate, believe,
expect, estimate, project
and future. Specifically, this annual report
contains forward-looking statements including with respect to:
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our expectations regarding population growth and median income
growth trends and their impact on future housing demand in our
markets;
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our expectation regarding the impact of geographic and customer
diversification;
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our expectations regarding successful implementation of our
asset management strategy and its impact on our business;
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our expectations regarding future land sales;
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our belief regarding growth opportunities within our financial
services business;
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our estimate that we have adequate financial resources to meet
our current and anticipated working capital, including our debt
service payments, and land acquisition and development needs;
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the impact of inflation on our future results of operations;
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our expectations regarding our ability to pass through to our
customers any increases in our costs;
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our expectations regarding our option contracts, investments in
land development joint ventures;
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our expectations regarding the housing market in 2008 and beyond;
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our expectations regarding our use of cash in
operations; and
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our expectations of receiving federal and state income tax
refunds.
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We do not undertake any obligation to update any forward-looking
statements.
These forward-looking statements reflect our current views about
future events and are subject to risks, uncertainties and
assumptions. As a result, actual results may differ
significantly from those expressed in any forward-looking
statement. The most important factors that could prevent us from
achieving our goals, and cause the assumptions underlying
forward-looking statements and the actual results to differ
materially from
31
those expressed in or implied by those forward-looking
statements include, but are not limited to, the following:
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the risks and uncertainties associated with our Chapter 11
cases, including our ability to successfully reorganize and
emerge from Chapter 11;
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a long period of operating under Chapter 11 may harm our
business;
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we may not be able to obtain confirmation of our Chapter 11
plan;
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operating under the Bankruptcy Code may restrict our ability to
pursue our business strategies;
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our debt instruments include restrictive and financial covenants
that limit our operating flexibility;
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our ability to attract, motivate and retain key and essential
personnel is impacted by the Bankruptcy Code which limits our
ability to implement a retention program or take other measures
intended to motivate employees to remain with us;
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we require a significant amount of cash, which may not be
available to us;
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our ability to confirm or consummate a plan of reorganization;
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financial results that may be volatile and may reflect
historical trends;
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our belief that our ability to continue as a going concern will
depend upon our ability to restructure our capital structure;
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our belief that failure to restructure our capital structure
would result in depleting our available funds and not being able
to pay our obligations when they become due;
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our ability to borrow or otherwise finance our business in the
future;
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our ability to identify and acquire, at anticipated prices,
additional homebuilding opportunities
and/or to
effect our growth strategies in our homebuilding operations and
financial services business;
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our relationship with Technical Olympic, S.A. and its control
over our business activities;
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economic or other business conditions that affect the desire or
ability of our customers to purchase new homes in markets in
which we conduct our business, such as increases in interest
rates, inflation, or unemployment rates or declines in median
income growth, consumer confidence or the demand for, or the
price of, housing;
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events which would impede our ability to open new communities
and/or
deliver homes within anticipated time frames
and/or
within anticipated budgets;
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our ability to enter successfully into, utilize, and recognize
the anticipated benefits of, joint ventures and option contracts;
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a further decline in the value of our land and home inventories;
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an increase in the cost of, or shortages in the availability of,
qualified labor and materials;
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our ability to dispose successfully of developed properties or
undeveloped land or homesites at expected prices and within
anticipated time frames;
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our ability to compete in our existing and future markets;
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the impact of hurricanes, tornadoes or other natural disasters
or weather conditions on our business, including the potential
for shortages and increased costs of materials and qualified
labor and the potential for delays in construction and obtaining
government approvals;
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an increase or change in government regulations, or in the
interpretation
and/or
enforcement of existing government regulations;
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32
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the impact of any or all of the above risks on the operations or
financial results of our unconsolidated joint ventures; and
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a change in ownership of our stock, as defined in
Section 382 of the Internal Revenue Code, which would limit
our ability to receive anticipated income tax refunds.
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ITEM 1B.
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Unresolved
Staff Comments
|
By letter dated May 19, 2006, the SEC provided us with
comments relating to various registration statements filed by us
in April 2006 and the Annual Report on
Form 10-K
for the year ended December 31, 2005 filed by us on
March 10, 2006. We responded to the letter on July 21,
2006 and filed amendments to the registration statements.
Through a series of letters with the SEC, responses were
provided to additional comments on the filings noted above, the
Quarterly Report on
Form 10-Q
for the quarter ended July 30, 2006 and the Annual Report
on
Form 10-K
for the year ended December 31, 2006. We have not yet
responded to comments from the SEC in a letter dated
May 11, 2007. These comments relate principally to
disclosures related to the operating results of the Transeastern
JV. We believe that the disclosures were appropriate.
In the Matter of TOUSA, Inc. SEC Inquiry, File
No. FL-3310.
In June 2007, the Company was contacted by the Miami Regional
Office of the SEC requesting the voluntary provision of
documents, and other information from the Company, relating
primarily to corporate and financial information and
communications for the Transeastern JV to determine if there
have been any violations of federal securities laws. The SEC has
advised the Company that this inquiry should not be construed as
an indication that any violations of law have occurred, nor
should it be considered a reflection upon any person, entity, or
security. The Company is cooperating with the inquiry.
We lease our executive offices located at 4000 Hollywood Blvd.,
Suite 500 N, Hollywood, Florida 33021. We lease
substantially all of the office space required for our
homebuilding and financial services operations and our corporate
offices. We believe that our existing facilities exceed our
current and planned levels of operations. We have cancelled a
number of leases and are reviewing others with a view towards
rejecting them as part of our bankruptcy proceedings. We do not
believe that any single leased property is material to our
current or planned operations.
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ITEM 3.
|
Legal
Proceedings
|
Chapter 11
Chapter 11
Cases
On January 29, 2008, TOUSA, Inc. and certain of our
subsidiaries (excluding our financial services subsidiaries and
joint ventures) filed voluntary petitions for reorganization
relief under the provisions of Chapter 11 of Title 11
of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of Florida,
Fort Lauderdale Division. The Chapter 11 cases have
been consolidated solely on an administrative basis and are
pending as Case
No. 08-10928-JKO.
We continue to operate our businesses and manage our properties
as debtors and
debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code and orders
of the Bankruptcy Court. As part of the first day
relief, we sought from the Bankruptcy Court in the
Chapter 11 cases, we obtained Bankruptcy Court approval to,
among other things, continue to pay certain critical vendors and
vendors with lien rights, meet our pre-petition payroll
obligations, maintain our cash management systems, sell homes
free and clear of liens, pay our taxes, continue to provide
employee benefits and maintain our insurance programs. In
addition, the Bankruptcy Court has approved certain trading
notification and transfer procedures designed to allow us to
restrict trading in our common stock (and related securities)
and has also provided for potentially retroactive application of
notice and sell-down procedures for trading in claims against
the debtors estates (in the event that such procedures are
approved in the future) which could negatively impact our
accumulated net operating losses and other tax
33
attributes. The Bankruptcy Court has also entered orders to
establish procedures for the purchase and disposition of real
property by us subject to certain monetary limits without
specific approval for each transaction.
On February 5, 2008, pursuant to an interim order from the
Bankruptcy Court dated January 31, 2008, TOUSA, Inc.
entered into the Senior Secured Super-Priority Debtor in
Possession Credit and Security Agreement. The agreement provided
for a first priority and priming secured revolving credit
interim commitment of up to $134.6 million. The agreement
was subsequently amended to extend it to June 19, 2008. No
funds were drawn under the DIP Credit Agreement. The agreement
was subsequently terminated and we entered into an agreement
with our secured lenders to use cash collateral on hand (cash
generated by our operations, including the sale of excess
inventory and the proceeds of our federal tax refund of
$207.3 million received in April 2008). Under the
Bankruptcy Court order dated June 20, 2008, we are
authorized to use cash collateral of our first lien and second
lien lenders (approximately $358.0 million at the time of
the order) for a period of six months in a manner consistent
with a budget negotiated by the parties. The order further
provides for the paydown of $175.0 million to our first
lien term loan facility secured lenders, subject to disgorgement
provisions in the event that certain claims against the lenders
are successful and repayment is required. The order also
reserves our sole right to paydown an additional
$15.0 million to our fist lien term loan facility secured
lenders. We are permitted under the order to incur liens and
enter into sale/leaseback transactions for model homes subject
to certain limitations. As part of the order, we have granted
the prepetition agents and the lenders various forms of
protection, including liens and claims to protect against any
diminution of the collateral value, payment of accrued, but
unpaid interest on the first priority indebtedness at the
non-default rate and the payment of reasonable fees and expenses
of the agents under our secured facilities.
We have the exclusive right to file a Chapter 11 plan or
plans prior to October 25, 2008 and the exclusive right to
solicit acceptance thereof until December 24, 2008.
Pursuant to section 1121 of the Bankruptcy Code, the
exclusivity periods may be expanded or reduced by the Bankruptcy
Court, but in no event can the exclusivity periods to file and
solicit acceptance of a plan or plans of reorganization be
extended beyond 18 months and 20 months, respectively.
As a result of our Chapter 11 cases and other matters
described herein, including uncertainties related to the fact
that we have not yet had time to complete and obtain
confirmation of a plan or plans of reorganization, there is
substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern, including
our ability to meet our ongoing operational obligations, is
dependent upon, among other things:
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our ability to generate and maintain adequate cash;
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the cost, duration and outcome of the restructuring process;
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our ability to comply with the terms of our cash collateral
order and, if necessary, seek further extensions of our ability
to use cash collateral;
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our ability to achieve profitability following a restructuring
given housing market challenges; and
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|
our ability to retain key employees.
|
These challenges are in addition to those operational and
competitive challenges that we face in connection with our
business. In conjunction with our advisors, we are implementing
strategies to aid our liquidity and our ability to continue as a
going concern. However, such efforts may not be successful.
We have taken and will continue to take aggressive actions to
maximize cash receipts and minimize cash expenditures with the
understanding that certain of these actions may make us less
able to take advantage of future improvements in the
homebuilding market. We continue to take steps to reduce our
general and administrative expenses by streamlining activities
and increasing efficiencies, which have led and will continue to
lead to major reductions in the workforce. However, much of our
efforts to reduce general and administrative expenses are being
offset by professional and consulting fees associated with our
Chapter 11 cases. In addition, we are working with our
existing suppliers and seeking new suppliers, through
competitive bid processes, to reduce construction material and
labor costs. We have and will continue to analyze each
34
community based on anticipated sales absorption rates, net cash
flows and financial returns taking into consideration current
market factors in the homebuilding industry such as the
oversupply of homes available for sale in most of our markets,
less demand, decreased consumer confidence, tighter mortgage
loan underwriting criteria and higher foreclosures. In order to
generate cash and to reduce our inventory to levels consistent
with our business plan, we have taken and will continue to take
the following actions, to the extent possible given the
limitations resulting from our Chapter 11 cases:
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limiting new arrangements to acquire land (by submitting
proposals to increased review);
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engaging in bulk sales of land and unsold homes;
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reducing the number of unsold homes under construction and
limiting
and/or
curtailing development activities in any development where we do
not expect to deliver homes in the near future;
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renegotiating terms or abandoning our rights under option
contracts;
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considering other asset dispositions including the possible sale
of underperforming assets, communities, divisions and joint
venture interests (see Note 15 regarding the June 2007 sale
of our Dallas/Fort Worth division and Note 14
regarding the September 2007 bulk sale of homesites in our
Mid-Atlantic region);
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reducing our speculative home levels; and
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pursuing other initiatives designed to monetize our assets.
|
The foregoing discussion provides general background information
regarding our Chapter 11 Cases, and is not intended to be
an exhaustive description. Additional information regarding our
Chapter 11 Cases, including access to court documents and
other general information about the Chapter 11 Cases, is
available at www.kccllc.net/tousa. Financial information on the
website is prepared according to requirements of federal
bankruptcy law and the local Bankruptcy Court. While such
financial information accurately reflects information required
under federal bankruptcy law, such information may be
unconsolidated, unaudited and prepared in a format different
than that used in our consolidated financial statements prepared
in accordance with generally accepted accounting principles in
the United States and filed under the securities laws. Moreover,
the materials filed with the Bankruptcy Court are not prepared
for the purpose of providing a basis for investment decisions
relating to our stock or debt or for comparison with other
financial information filed with the Securities and Exchange
Commission.
These challenges are in addition to those operational and
competitive challenges that we face in connection with our
business. In conjunction with our advisors, we are implementing
strategies to aid our liquidity and our ability to continue as a
going concern. However, such efforts may not be successful.
Class Action
Lawsuit
TOUSA, Inc. is a defendant in a class action lawsuit pending in
the United States District Court for the Southern District of
Florida. The name and case number of the class action suit is
Durgin, et al., v. TOUSA, Inc., et al.,
No. 06-61844-CIV.
Beginning in December 2006, various stockholder plaintiffs
brought lawsuits seeking class action status in the
U.S. District Court for the Southern District of Florida.
At a hearing held March 29, 2007, the Court consolidated
the actions and heard arguments on the appointment of lead
plaintiff and counsel. On September 7, 2007, the Court
appointed Diamondback Capital Management, LLC as the lead
plaintiff and approved Diamondbacks selection of counsel.
Pursuant to a scheduling order, the lead plaintiff filed a
Consolidated Complaint on November 2, 2007.
The Consolidated Complaint names TOUSA, all of TOUSAs
directors, David Keller, Randy Kotler, Beatriz Koltis, Lonnie
Fedrick, Technical Olympic, S.A., UBS Securities LLC, Citigroup
Global Markets Inc., Deutsche Bank Securities Inc. and JMP
Securities LLC as defendants. The alleged class period is
August 1, 2005 to March 19, 2007. The Consolidated
Complaint alleges that TOUSAs public filings and other
public statements that described the financing for the
Transeastern Joint Venture as non-recourse to TOUSA were false
and misleading. The Consolidated Complaint also alleges that
certain public filings and statements were
35
misleading or suffered from material omissions in failing to
fully disclose or describe the Completion and Carve-Out
Guaranties that TOUSA executed in support of the Transeastern
Joint Venture financing. The Consolidated Complaint asserts
claims under Section 11 of the Securities Act against all
defendants other than Ms. Koltis for strict liability and
negligence regarding the registration statements and prospectus
associated with the September 2005 offering of 4 million
shares of stock. Plaintiffs contend that the registration
statements and prospectus contained material misrepresentations
and suffered from material omissions in the description of the
Transeastern Joint Venture financing and TOUSAs related
obligations. The Consolidated Complaint asserts related claims
against Technical Olympic, S.A. and Messrs. Konstantinos
Stengos, Antonio B. Mon, David Keller and Tommy L. McAden
as controlling persons responsible for the statements in the
registration statements and prospectus. The Consolidated
Complaint also alleges claims under Section 10(b) of the
Exchange Act for fraud with respect to various public statements
about the non-recourse nature of the Transeastern debt and
alleged omissions in disclosing or describing the Guaranties.
These claims are alleged against TOUSA, Messrs. Mon,
McAden, Keller and Kotler and Ms. Koltis. Finally, the
Consolidated Complaint asserts related claims against
Messrs. Mon, Keller, Kotler and McAden as controlling
persons responsible for the various alleged false disclosures.
Plaintiffs seek compensatory damages, plus fees and costs, on
behalf of themselves and the putative class of purchasers of
TOUSA common stock and purchasers and sellers of options on
TOUSA common stock.
On January 30, 2008, TOUSA filed a Motion to Dismiss
Plaintiffs Consolidated Complaint. TOUSA moved to dismiss
plaintiffs claims on the grounds that plaintiffs:
a) could not establish materially false or misleading
statements or omissions; b) could not establish loss
causation; c) failed to plead with particularity facts
giving rise to a strong inference of scienter; and
d) lacked standing to pursue a Section 11 claim. Many
of the other defendants also filed motions to dismiss
and/or
signed on to TOUSAs Motion to Dismiss.
On February 4, 2008, TOUSA filed a Notice of Suggestion of
Bankruptcy notifying the Court that TOUSA filed for bankruptcy
on January 29, 2008. On February 5, 2008 the Court
entered an order staying the action as to TOUSA pursuant to
Section 362 of the United States Bankruptcy Code. The
action continues with respect to defendants other than TOUSA.
On April 30, 2008, lead plaintiff Diamondback Capital
Management moved to withdraw as lead plaintiff. On May 22,
2008, the Court entered an order: granting Diamondback Capital
Managements motion to withdraw as lead plaintiff;
establishing a procedure pursuant to which a new lead plaintiff
would be appointed; extending the time for plaintiffs to respond
to the motions to dismiss until a new lead plaintiff is
selected; and acknowledging that the Court may need to set a
time for the filing of an amended complaint, if requested by the
new lead plaintiff.
On June 6, 2008, two prospective lead plaintiffs filed
motions to be appointed the new lead plaintiff. On July 15,
2008, the Court entered an Order appointing the
Bricklayers & Trowel Trades International Pension Fund
as the new lead plaintiff. The Court further ordered that,
within 15 days of the entry of the Order, the new plaintiff
must either respond to the previously filed Motions to Dismiss,
or file a notice of intent to file an amended complaint. On
July 30, 2008, the new plaintiff filed a notice of intent
to file an amended complaint. On July 31, 2008, following
the notice of intent to file an amended complaint, the Court
denied as moot, without prejudice, the defendants
previously filed motion to dismiss the consolidated complaint.
Under the current schedule set by the Court, the plaintiff must
file its amended complaint by August 29, 2008.
Proceeding
by Official Committee of Unsecured Creditors
In re TOUSA, Inc., Docket
No. 08-10928-JKO;
Adv. Pro
No. 08-1435-JKO.
TOUSA and certain of our subsidiaries are non-parties in an
adversary proceeding brought as part of our Chapter 11
proceedings. This adversary proceeding was brought by the
Official Committee of Unsecured Creditors of TOUSA, Inc. on
behalf of our bankruptcy estates. The adversary proceeding seeks
to avoid certain allegedly fraudulent and preferential
pre-petition transfers of up to $800.0 million made in
connection with the settlement of litigation related to the
Transeastern Joint Venture (the Transeastern
Settlement), and further seeks to avoid as a preferential
transfer any security interest that may have been granted to
certain lenders in a tax refund of approximately
$210.0 million that the Debtors received in June 2008. The
Committees complaint names over
36
60 defendants including the lenders under the credit agreements
funding the Transeastern Joint Venture as well as the original
lenders (and their successors and assigns) and administrators
under the credit agreements entered into as a result of the
Transeastern Settlement. We are not defendants in the adversary
proceeding.
The complaint alleges that, in order to resolve certain
prepetition litigation regarding the Transeastern Joint Venture,
the parties to that litigation entered into a series of
settlement agreements releasing all claims relating to the
Transeastern acquisition. The complaint alleges that, as part of
these settlement agreements, certain TOUSA entities agreed to
pay over $420.0 million to the administrator of the
Transeastern loans and to issue approximately
$135.0 million in notes and warrants. The complaint further
alleges that to fund these payments, TOUSA, TOUSA Homes, LP and
certain of their subsidiaries (the Conveying
Subsidiaries) entered into the three new credit
agreements. According to the complaint, the loans issued under
these new credit agreements were secured by liens on the
property and assets of all of the debtors, including the
Conveying Subsidiaries. The complaint alleges that the Conveying
Subsidiaries were not defendants in the prepetition Transeastern
litigation and were not obligated on the Transeastern debt that
was released in connection with the Transeastern Settlement.
Therefore, the complaint alleges, the Conveying Subsidiaries did
not receive reasonably equivalent value for the secured debt
obligations that they incurred. The complaint also alleges that
the Conveying Subsidiaries were either insolvent at the time of
the Transeastern Settlement or became insolvent as a result of
it, and that the Conveying Subsidiaries were left with
unreasonably small capital as a result of the new credit
agreements. Based on these allegations, the Committee seeks to
have the liens established under the new credit agreements
voided and all amounts already repaid under the new credit
agreements returned. The Committee also seeks to have the
security interest granted on the Debtors tax refund voided
and the new lenders claims seeking allowance of the full
amount of the new loans disallowed in their entirety or reduced.
Proofs of
Claims
The Bankruptcy Court established May 19, 2008 as the bar
date for filing proofs of claim against the Debtors relating to
obligations arising before January 29, 2008. To date,
approximately 4,130 claims have been filed against us totaling
approximately $7.0 billion in asserted liabilities. These
claims are comprised of approximately $1.0 million in
administrative claims, $182.0 million in secured claims,
$73.0 million in priority claims and $6.7 billion in
unsecured claims. There are many claims (at least 1,418) that
have been asserted in unliquidated amounts or that
contain an unliquidated component. Notably, among the
unliquidated claims are the claims of our secured first and
second lien lenders. In addition, the indenture trustees under
the approximately $1.1 billion of our unsecured debentures
each filed an unliquidated claim with respect to such
obligations.
Vista
Lakes
Plaintiffs, purchasers of homes in the Vista Lakes community
near Orlando, filed a class action complaint alleging that their
homes were built on the site of a former bombing range. The
plaintiffs seek recovery under theories of fraud, breach of
contract, strict liability, negligence, and civil conspiracy.
Because the plaintiffs named debtor defendants Tousa, Inc.,
Tousa Homes, Inc., d/b/a Engle Homes Orlando and Tousa Homes, LP
as defendants in this action, the action was removed to federal
court. The plaintiffs then agreed to dismiss the debtor
defendants and the parties entered into a stipulation for
remand. The state court case has been
re-opened
and the parties still remaining as defendants include Tousa
Financial Services (which has not been served) and Universal
Land Title, Inc.
Plaintiffs have granted an extension on the response to the
complaint and the discovery requests up to and including
August 18, 2008 in order to re-evaluate their claims
against the defendants and amend their complaint.
Other
Litigation
We are also involved in various other claims and legal actions
arising in the ordinary course of business. We do not believe
that the ultimate resolution of these other matters will have a
material adverse effect on our
37
financial condition or results of operations. As of the date of
the Chapter 11 filing, then pending litigation was
generally stayed, and absent further order of the Bankruptcy
Court, most parties may not take any action to recover on
prepetition claims against us.
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ITEM 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
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|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock traded on the New York Stock Exchange
(NYSE) under the symbol TOA until
November 19, 2007 when the NYSE Regulation, Inc. suspended
our common stock and debt securities from trading on the NYSE.
We appealed the suspension. Following our suspension from the
NYSE, we began trading on the Pink Sheet Electronic Quotation
Service under the symbol TOUS. On February 15,
2008, the NYSE denied our appeal and affirmed the decision to
suspend trading in our common stock and debt securities on the
NYSE and commenced delisting procedures. On March 3, 2008,
the NYSE filed Forms 25, Notification of Removal of Listing
and/or
Registration under Section 12(b) of the Securities Exchange
Act of 1934, with the SEC of its intention to remove our common
stock, 9% Senior Notes due July 1, 2010,
9% Senior Notes due July 1, 2010,
71/2% Senior
Subordinated Notes due March 15, 2011,
71/2% Senior
Subordinated Notes due January 15, 2015 and the
103/8% Senior
Subordinated Notes due July 1, 2012 at the opening of
business May 13, 2008.
The table below sets forth the high and low sales price for our
common stock as reported by the Pink Sheet Electronic Quotation
Service or the New York Stock Exchange as applicable for the
periods indicated.
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High
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Low
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Fiscal Year Ended December 31, 2007
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First Quarter
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$
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10.87
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$
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3.66
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Second Quarter
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$
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4.85
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$
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3.32
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Third Quarter
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$
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4.20
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$
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1.61
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Fourth Quarter
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$
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2.08
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$
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0.07
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High
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Low
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Fiscal Year Ended December 31, 2006
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First Quarter
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$
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23.97
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$
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18.31
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Second Quarter
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$
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23.00
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$
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13.26
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Third Quarter
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$
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14.63
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$
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9.66
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Fourth Quarter
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$
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11.37
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$
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6.55
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As of August 6, 2008, there were 34 record holders of our
common stock. The closing sale price of our common stock on
August 6, 2008 was $0.09 per share.
During the year ended December 31, 2007, we did not declare
any common stock dividends. During the year ended
December 31, 2006, we declared a cash dividend of $0.015
per share of common stock in each of February 2006, May 2006,
August 2006 and November 2006. Our cash collateral order
prohibits the payment of dividends and issuance of common stock.
On May 19, 2006, our stockholders approved an amendment to
our Annual and Long Term Incentive Plan increasing the maximum
number of shares that may be granted from 7,500,000 to 8,250,000.
38
PERFORMANCE
GRAPH
The following graph and table compare the cumulative total
stockholder return on our common stock from December 31,
2002 through December 31, 2007 with the performance of:
(i) the Standard & Poors 500 Stock Index
and (ii) the Standard & Poors 600
Homebuilding Index. The comparisons reflected in the graph and
table below are not intended to forecast the future performance
of our stock and may not be indicative of future performance.
The graph and table assume investments of $100 in our stock and
each index on December 31, 2002.
Comparison
of Cumulative Five Year Total Return
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Base Period
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Cumulative Total Return Years Ending December 31,
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December 31,
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Company/Index
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2002
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2003
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2004
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2005
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2006
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2007
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TOUSA, INC.
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100.00
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185.01
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257.52
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268.13
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129.92
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1.60
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S&P 500 INDEX
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100.00
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128.68
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142.69
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149.70
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173.34
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|
|
|
182.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 600 HOMEBUILDING
|
|
|
|
100.00
|
|
|
|
|
178.19
|
|
|
|
|
265.64
|
|
|
|
|
265.20
|
|
|
|
|
218.07
|
|
|
|
|
97.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
ITEM 6.
|
Selected
Financial Data
|
The following Selected Financial Data should be read in
conjunction with the consolidated financial statements and notes
thereto in Item 8 of this report and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this
report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Statement of Income
Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,195.3
|
|
|
$
|
2,504.6
|
|
|
$
|
2,408.0
|
|
|
$
|
2,060.6
|
|
|
$
|
1,608.1
|
|
Homebuilding revenues
|
|
$
|
2,158.8
|
|
|
$
|
2,441.3
|
|
|
$
|
2,360.5
|
|
|
$
|
2,026.1
|
|
|
$
|
1,570.0
|
|
Homebuilding gross profit (loss)
|
|
$
|
(507.4
|
)
|
|
$
|
417.9
|
|
|
$
|
591.0
|
|
|
$
|
422.2
|
|
|
$
|
314.6
|
|
Homebuilding pretax income
(loss)(2)
|
|
$
|
(1,349.3
|
)
|
|
$
|
(265.1
|
)
|
|
$
|
336.1
|
|
|
$
|
187.6
|
|
|
$
|
117.3
|
|
Financial services pretax income
|
|
$
|
(3.7
|
)
|
|
$
|
21.5
|
|
|
$
|
8.5
|
|
|
$
|
8.3
|
|
|
$
|
15.6
|
|
Income (loss) from continuing operations before income
taxes(2)
|
|
$
|
(1,353.0
|
)
|
|
$
|
(243.6
|
)
|
|
$
|
344.6
|
|
|
$
|
195.9
|
|
|
$
|
132.9
|
|
Income (loss) from continuing operations, net of
taxes(2)
|
|
$
|
(1,319.7
|
)
|
|
$
|
(200.8
|
)
|
|
$
|
218.1
|
|
|
$
|
123.4
|
|
|
$
|
84.4
|
|
Share
Data(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common
share
basic(2)(4)
|
|
$
|
(22.22
|
)
|
|
$
|
(3.37
|
)
|
|
$
|
3.82
|
|
|
$
|
2.20
|
|
|
$
|
1.60
|
|
Income (loss) from continuing operations per common
share
diluted(2)(4)
|
|
$
|
(22.22
|
)
|
|
$
|
(3.37
|
)
|
|
$
|
3.68
|
|
|
$
|
2.15
|
|
|
$
|
1.59
|
|
Common stock cash dividends per share
|
|
$
|
|
|
|
$
|
0.060
|
|
|
$
|
0.057
|
|
|
$
|
0.036
|
|
|
$
|
|
|
Statement of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,271.8
|
|
|
$
|
2,078.5
|
|
|
$
|
1,630.2
|
|
|
$
|
1,209.4
|
|
|
$
|
1,099.1
|
|
Total assets
|
|
$
|
1,762.0
|
|
|
$
|
2,842.2
|
|
|
$
|
2,422.7
|
|
|
$
|
1,920.6
|
|
|
$
|
1,536.2
|
|
Homebuilding notes payable and bank
borrowings(5)
|
|
$
|
1,753.8
|
|
|
$
|
1,060.7
|
|
|
$
|
876.6
|
|
|
$
|
811.4
|
|
|
$
|
497.9
|
|
Total
borrowings(5)(6)
|
|
$
|
1,761.6
|
|
|
$
|
1,096.1
|
|
|
$
|
911.7
|
|
|
$
|
860.4
|
|
|
$
|
561.1
|
|
Redeemable preferred
stock(7)
|
|
$
|
3.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Stockholders equity (deficit)
|
|
$
|
(475.5
|
)
|
|
$
|
774.9
|
|
|
$
|
971.3
|
|
|
$
|
662.7
|
|
|
$
|
537.6
|
|
|
|
|
(1) |
|
See Note 9 to the consolidated financial statements for
discussion of discontinued operations and the effect on
comparability. |
|
(2) |
|
Results for 2007 and 2006 include charges totaling
$1.3 billion and $586.7 million, respectively, related
to inventory impairments, abandonment costs, joint venture
impairments, goodwill impairments and the provision for
settlement of loss contingency. |
|
(3) |
|
The shares issued and outstanding, the earnings per share and
the cash dividends per share amounts have been adjusted to
reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on June 1, 2004 and a five-for-four
stock split effected in the form of a 25% stock dividend paid on
March 31, 2005. |
|
(4) |
|
Net of preferred stock dividends and accretion of discount,
initially accrued for in the third quarter of 2007. |
|
(5) |
|
Homebuilding notes payable and bank borrowings and total
borrowings do not include obligations for inventory not owned of
$26.0 million, $300.6 million, $92.9 million,
$126.9 million and $246.2 million as of
December 31, 2007, 2006, 2005, 2004 and 2003 respectively. |
|
(6) |
|
Total borrowings include Homebuilding borrowings and Financial
Services borrowings. |
|
(7) |
|
Issued in connection with the Transeastern JV acquisition. |
40
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and related notes included
elsewhere in this report.
As used in this
Form 10-K,
consolidated information refers only to information
relating to our continuing operations which are consolidated in
our financial statements and exclude the results of our
Dallas/Fort Worth
division which we have classified as a discontinued operation;
and combined information includes consolidated
information and information relating to our unconsolidated joint
ventures. Unless otherwise noted, the information contained
herein is shown on a consolidated basis. Our consolidated
financial statements are presented on a going concern basis,
which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.
On July 31, 2007, we consummated transactions to settle the
disputes regarding the Transeastern JV with the lenders to the
Transeastern JV, its land bankers and our joint venture partner
in the Transeastern JV. Pursuant to the settlement, among other
things, the Transeastern JV became a wholly-owned subsidiary of
ours by merger into one of our subsidiaries. The acquisition of
the Transeastern JV (the TE Acquisition) was
accounted for using the purchase method of accounting. The
results of operations of the Transeastern JV have been included
in our consolidated results beginning on July 31, 2007.
Results of operations prior to July 31, 2007 are included
in the results for the unconsolidated joint ventures.
Executive
Summary
We generate revenues from our homebuilding operations
(Homebuilding) and financial services operations
(Financial Services), which comprise our two
principal business segments. Through our Homebuilding operations
we design, build and market high-quality detached single-family
residences, town homes and condominiums in various metropolitan
markets in nine states located in four major geographic regions,
which are also our reportable segments: Florida, the
Mid-Atlantic, Texas and the West.
|
|
|
|
|
|
|
Florida
|
|
Mid-Atlantic
|
|
Texas
|
|
West
|
|
Central Florida
|
|
Baltimore/Southern Pennsylvania
|
|
Austin
|
|
Colorado
|
Jacksonville
|
|
Nashville
|
|
Houston
|
|
Las Vegas
|
Southeast Florida
|
|
Northern Virginia
|
|
San Antonio
|
|
Phoenix
|
Southwest Florida
|
|
|
|
|
|
|
Tampa/St. Petersburg
|
|
|
|
|
|
|
We conduct our Homebuilding operations through our consolidated
subsidiaries and through various unconsolidated joint ventures
that additionally build and market homes.
Since 2006, the homebuilding industry as a whole has experienced
a significant and sustained decrease in demand for new homes, an
oversupply of new and existing homes available for sale and a
more restrictive mortgage lending environment. Although we
operate in a number of markets, approximately 53% of our
operations are concentrated in Florida and the West, based on
2007 deliveries, which suffered particularly severe downturns in
home buying activity. The rapid increase in new and existing
home prices in these markets over the past several years reduced
housing affordability and tempered buyer demand. In particular,
investors and speculators reduced their purchasing activity and
instead stepped up their efforts to sell the residential
property they had earlier acquired. These trends, which were
more pronounced in markets that had experienced the greatest
levels of price appreciation, resulted in overall fewer home
sales, greater cancellations of home purchase agreements by
buyers, higher inventories of unsold homes and the increased use
by homebuilders, speculators, investors and others of discounts,
incentives, price concessions, broker commissions and
advertising to close home sales compared to the past several
years.
Reflecting these trends, we, like many other homebuilders,
experienced severe liquidity challenges in the credit and
mortgage markets, diminished consumer confidence, increased home
inventories and foreclosures and downward pressure on home
prices. Potential buyers have exhibited both a reduction in
confidence as to the economy in general and a willingness to
delay purchase decisions based on a perception that prices will
41
continue to decline. Prospective homebuyers continue to be
concerned about interest rates and the inability to sell their
current homes or to obtain appraisals at sufficient amounts to
secure mortgage financing as a result of the recent disruption
in the mortgage markets and the tightening of credit standards.
As a result of deteriorating market conditions and liquidity
constraints, we did not exercise certain homesite option
contracts and reviewed our inventories, goodwill, investments in
joint ventures and other assets for possible impairment charges.
As a result, we recognized charges totaling $1.3 billion
for the year ended December 31, 2007 related to inventory
impairments, abandonment costs, joint venture impairments,
goodwill impairments and the settlement of a loss contingency
compared to $586.7 million for the year ended
December 31, 2006.
For the year ended December 31, 2007, we had a loss from
continuing operations, net of taxes, of $1.3 billion
compared to $200.8 million for the year ended
December 31, 2006. Home deliveries from continuing
operations decreased 9%, Homebuilding revenues decreased 12%,
and net sales orders from continuing operations decreased 21%
for the year ended December 31, 2007 as compared to the
year ended December 31, 2006. During the year ended
December 31, 2007, our unconsolidated joint ventures had a
decrease in deliveries of 58% and an increase in net sales
orders of 79% as compared to the year ended December 31,
2006. The increase in net sales orders was due to high
cancellation rates experienced during the third quarter of last
year by the Transeastern JV. Sales orders at our other joint
ventures declined 15%, as compared to prior year, due to
worsening market conditions, decreased demand and higher
cancellation rates in the current year.
Recent
Developments
Chapter 11
Cases
On January 29, 2008, TOUSA, Inc. and certain of our
subsidiaries (excluding our financial services subsidiaries and
joint ventures) filed voluntary petitions for reorganization
relief under the provisions of Chapter 11 of Title 11
of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of Florida,
Fort Lauderdale Division. The Chapter 11 cases have
been consolidated solely on an administrative basis and are
pending as Case
No. 08-10928-JKO.
We continue to operate our businesses and manage our properties
as debtors and
debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code and orders
of the Bankruptcy Court. As part of the first day
relief, we sought from the Bankruptcy Court in the
Chapter 11 cases, we obtained Bankruptcy Court approval to,
among other things, continue to pay certain critical vendors and
vendors with lien rights, meet our pre-petition payroll
obligations, maintain our cash management systems, sell homes
free and clear of liens, pay our taxes, continue to provide
employee benefits and maintain our insurance programs. In
addition, the Bankruptcy Court has approved certain trading
notification and transfer procedures designed to allow us to
restrict trading in our common stock (and related securities)
and has also provided for potentially retroactive application of
notice and sell-down procedures for trading in claims against
the debtors estates (in the event that such procedures are
approved in the future) which could negatively impact our
accumulated net operating losses and other tax attributes. The
Bankruptcy Court has also entered orders to establish procedures
for the purchase and disposition of real property by us subject
to certain monetary limits without specific approval for each
transaction.
On February 5, 2008, pursuant to an interim order from the
Bankruptcy Court dated January 31, 2008, we entered into
the Senior Secured Super-Priority Debtor in Possession Credit
and Security Agreement. The agreement provided for a first
priority and priming secured revolving credit interim commitment
of up to $134.6 million. The agreement was subsequently
amended to extend it to June 19, 2008. No funds were drawn
under the agreement. The agreement was subsequently terminated
and we entered into an agreement with our secured lenders to use
cash collateral on hand (cash generated by our operations,
including the sale of excess inventory and the proceeds of our
federal tax refund of $207.3 million received in April
2008). Under the Bankruptcy Court order dated June 20,
2008, we are authorized to use cash collateral of our first lien
and second lien lenders (approximately $358.0 million at
the time of the order) for a period of six months in a
42
manner consistent with a budget negotiated by the parties. The
order further provides for the paydown of $175.0 million to
our first lien term loan facility secured lenders, subject to
disgorgement provisions in the event that certain claims against
the lenders are successful and repayment is required. The order
also reserves our sole right to paydown an additional
$15.0 million to our fist lien term loan facility secured
lenders. We are permitted under the order to incur liens and
enter into sale/leaseback transactions for model homes subject
to certain limitations. As part of the order, we have granted
the prepetition agents and the lenders various forms of
protection, including liens and claims to protect against any
diminution of the collateral value, payment of accrued, but
unpaid interest on the first priority indebtedness at the
non-default rate and the payment of reasonable fees and expenses
of the agents under our secured facilities.
We have the exclusive right to file a Chapter 11 plan or
plans prior to October 25, 2008 and the exclusive right to
solicit acceptance thereof until December 24, 2008.
Pursuant to section 1121 of the Bankruptcy Code, the
exclusivity periods may be expanded or reduced by the Bankruptcy
Court, but in no event can the exclusivity periods to file and
solicit acceptance of a plan or plans of reorganization be
extended beyond 18 months and 20 months, respectively.
As a result of our Chapter 11 cases and other matters
described herein, including uncertainties related to the fact
that we have not yet had time to complete and obtain
confirmation of a plan or plans of reorganization, there is
substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern, including
our ability to meet our ongoing operational obligations, is
dependent upon, among other things:
|
|
|
|
|
our ability to generate and maintain adequate cash;
|
|
|
|
the cost, duration and outcome of the restructuring process;
|
|
|
|
our ability to comply with the terms of our cash collateral
order and, if necessary, seek further extensions of our ability
to use cash collateral;
|
|
|
|
our ability to achieve profitability following a restructuring
given housing market challenges; and
|
|
|
|
our ability to retain key employees.
|
These challenges are in addition to those operational and
competitive challenges that we face in connection with our
business. In conjunction with our advisors, we are implementing
strategies to aid our liquidity and our ability to continue as a
going concern. However, such efforts may not be successful.
We have taken and will continue to take aggressive actions to
maximize cash receipts and minimize cash expenditures with the
understanding that certain of these actions may make us less
able to take advantage of future improvements in the
homebuilding market. We continue to take steps to reduce our
general and administrative expenses by streamlining activities
and increasing efficiencies, which have led and will continue to
lead to major reductions in the workforce. However, much of our
efforts to reduce general and administrative expenses are being
offset by professional and consulting fees associated with our
Chapter 11 cases. In addition, we are working with our
existing suppliers and seeking new suppliers, through
competitive bid processes, to reduce construction material and
labor costs. We have and will continue to analyze each community
based on anticipated sales absorption rates, net cash flows and
financial returns taking into consideration current market
factors in the homebuilding industry such as the oversupply of
homes available for sale in most of our markets, less demand,
decreased consumer confidence, tighter mortgage loan
underwriting criteria and higher foreclosures. In order to
generate cash and to reduce our inventory to levels consistent
with our business plan, we have taken and will continue to take
the following actions, to the extent possible given the
limitations resulting from our Chapter 11 cases:
|
|
|
|
|
limiting new arrangements to acquire land (by submitting
proposals to increased review);
|
|
|
|
engaging in bulk sales of land and unsold homes;
|
|
|
|
reducing the number of unsold homes under construction and
limiting
and/or
curtailing development activities in any development where we do
not expect to deliver homes in the near future;
|
43
|
|
|
|
|
renegotiating terms or abandoning our rights under option
contracts;
|
|
|
|
considering other asset dispositions including the possible sale
of underperforming assets, communities, divisions and joint
venture interests (see Note 15 regarding the June 2007 sale
of our Dallas/Fort Worth division and Note 14
regarding the September 2007 bulk sale of homesites in our
Mid-Atlantic region);
|
|
|
|
reducing our speculative home levels; and
|
|
|
|
pursuing other initiatives designed to monetize our assets.
|
The foregoing discussion provides general background information
regarding our Chapter 11 Cases, and is not intended to be
an exhaustive description. Additional information regarding our
Chapter 11 Cases, including access to court documents and
other general information about the Chapter 11 Cases, is
available at www.kccllc.net/tousa. Financial information on the
website is prepared according to requirements of federal
bankruptcy law and the local Bankruptcy Court. While such
financial information accurately reflects information required
under federal bankruptcy law, such information may be
unconsolidated, unaudited and prepared in a format different
than that used in our consolidated financial statements prepared
in accordance with generally accepted accounting principles in
the United States and filed under the securities laws. Moreover,
the materials filed with the Bankruptcy Court are not prepared
for the purpose of providing a basis for investment decisions
relating to our stock or debt or for comparison with other
financial information filed with the Securities and Exchange
Commission.
Mortgage
Joint Venture
On January 28, 2008, Preferred Home Mortgage Company, our
wholly-owned residential mortgage lending subsidiary, entered
into an Amended and Restated Agreement of Limited Liability
Company with Wells Fargo Ventures, LLC. The limited liability
company is known as PHMCWF, LLC but does business as
Preferred Home Mortgage Company, an affiliate of Wells
Fargo. Preferred Home Mortgage Company owns 49.9% of the
venture with the balance owned by Wells Fargo. Effective
April 1, 2008, the venture began to carry on the mortgage
business of Preferred Home Mortgage Company. The venture is
managed by a committee composed of six members, three from
Preferred Home Mortgage Company and three from Wells Fargo. The
venture entered into a revolving credit agreement with Wells
Fargo Bank, N.A. providing for advances of up to
$20.0 million. Wells Fargo Home Mortgage provides the
general and administrative support (as well as all loan related
processing, underwriting, closing functions), and is the end
investor for the majority of the loans closed through the joint
venture. Prior to the joint venture, Preferred Home Mortgage
Company had a centralized operations center that provided those
support functions. The majority of these support functions
ceased in June 2008.
Transeastern
JV Settlement
On July 31, 2007, we consummated transactions to settle the
disputes regarding the Transeastern JV with the lenders to the
Transeastern JV, its land bankers and our joint venture partner
in the Transeastern JV. Pursuant to the settlement, among other
things,
|
|
|
|
|
the Transeastern JV became a wholly-owned subsidiary of ours by
merger into one of our subsidiaries, which became a guarantor on
our credit facilities and note indentures (the acquisition was
accounted for using the purchase method of accounting and
results of operations have been included in our consolidated
results beginning on July 31, 2007);
|
|
|
|
the senior secured lenders of the Transeastern JV were repaid in
full, including accrued interest (approximately
$400.0 million in cash);
|
|
|
|
the senior mezzanine lenders to the Transeastern JV received
$20.0 million in aggregate principal amount of
14.75% Senior Subordinated PIK Election Notes due 2015 and
$117.5 million in initial aggregate liquidation preference
of 8% Series A Convertible Preferred PIK Preferred Stock;
|
44
|
|
|
|
|
the junior mezzanine lenders to the Transeastern JV received
warrants to purchase shares of our common stock which had an
estimated fair value of $8.2 million at issuance (based on
the Black-Scholes option pricing model and before issuance
costs);
|
|
|
|
we entered into settlement and mutual release agreements with
the senior mezzanine lenders and the junior mezzanine lenders to
the Transeastern JV which released us from our potential
obligations to them; and
|
|
|
|
we entered into a settlement and mutual release agreement with
Falcone/Ritchie LLC and certain of its affiliates (the
Falcone Entities) concerning the Transeastern JV,
one of which owned 50% of the equity interests in the
Transeastern JV and, among other things, released the Falcone
Entities from claims under the 2005 asset purchase agreement
pursuant to which we acquired our interest in the Transeastern
JV. Pursuant to the settlement agreement, we remain obligated on
certain indemnification obligations, including, without
limitation, related to certain land bank arrangements.
|
To effect the settlement of the Transeastern JV dispute, on
July 31, 2007, we also entered into:
|
|
|
|
|
an amendment to our $800.0 million revolving loan facility,
dated January 30, 2007;
|
|
|
|
a new $200.0 million aggregate principal amount first lien
term loan facility; and
|
|
|
|
a new $300.0 million aggregate principal amount second lien
term loan facility.
|
The proceeds from the first lien and second lien term loans were
used to satisfy claims of the senior secured lenders against the
Transeastern JV, and to pay related expenses. Our existing
$800.0 million revolving loan facility was amended and
restated to reduce the revolving commitments thereunder by
$100.0 million and permit the incurrence of the first and
second lien term loan facilities (and make other conforming
changes relating to the facilities). Net proceeds from these
financings at closing were $470.6 million which is net of a
1% discount and transaction costs.
In connection with the Transeastern JV settlement, we recognized
a loss of $426.6 million, of which $151.6 million was
recognized during the year ended December 31, 2007, and
$275.0 million was recognized during the year ended
December 31, 2006.
We also paid:
|
|
|
|
|
$50.2 million in cash to purchase land under existing land
bank arrangements with the former Transeastern JV
partner; and
|
|
|
|
$33.5 million in interest and expenses.
|
NYSE
Delisting
Effective November 19, 2007, NYSE Regulation, Inc.
suspended our common stock and debt securities from trading on
the NYSE. We appealed the suspension. Following our suspension
from the NYSE, we began trading on the Pink Sheet Electronic
Quotation Service. On February 15, 2008, the NYSE denied
our appeal and affirmed the decision to suspend trading in our
common stock and debt securities on the NYSE and commenced
delisting procedures. On March 3, 2008, the NYSE filed
Forms 25, Notification of Removal of Listing
and/or
Registration under Section 12(b) of the Securities Exchange
Act of 1934, with the SEC of its intention to remove our common
stock, 9% Senior Notes due July 1, 2010,
9% Senior Notes due July 1, 2010,
71/2% Senior
Subordinated Notes due March 15, 2011,
71/2% Senior
Subordinated Notes due January 15, 2015 and the
103/8% Senior
Subordinated Notes due July 1, 2012 at the opening of
business May 13, 2008.
Sale
of Dallas/Fort Worth Operations
On June 6, 2007, we sold substantially all of our
Dallas/Fort Worth division to an unrelated third party for
$56.5 million and realized a pre-tax loss on disposal of
$13.6 million. Results of our Dallas/Fort Worth
operations have been classified as discontinued operations and
prior periods have been restated.
45
Bulk
Sale of Homesites in the Mid-Atlantic (excluding Nashville) and
Virginia Divisions
As part of our asset management initiatives, on
September 25, 2007, we sold 317 homesites to an unrelated
homebuilder. Additionally, as part of the transaction, in the
fourth quarter of 2007, the unrelated homebuilder purchased an
option interest to acquire 250 homesites as well as 34 owned
homesites. The total purchase price for these transactions was
$31.3 million and we realized a pre-tax loss of
$12.5 million. In July 2008, we received a letter of
intent from a party interested in purchasing our remaining
assets in our Pennsylvania, Maryland, Delaware and Virginia
divisions. The letter of intent is subject to a number of
conditions.
SEC
Inquiry
In the Matter of TOUSA, Inc. SEC Inquiry, File
No. FL-3310.
In June of 2007, we were contacted by the Miami Regional Office
of the SEC requesting the voluntary provision of documents, and
other information from the Company, relating primarily to
corporate and financial information and communications related
to the Transeastern Joint Venture. The SEC has advised us that
this inquiry should not be construed as an indication that any
violations of law have occurred, nor should it be considered a
reflection upon any person, entity, or security. We are
cooperating with the inquiry.
Total
Controlled Homesites by our Homebuilding Operations (Including
Joint Ventures)
The following is a summary of our controlled homesites:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Owned
|
|
|
Optioned
|
|
|
Controlled
|
|
|
Owned
|
|
|
Optioned
|
|
|
Controlled
|
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida(1)
|
|
|
8,600
|
|
|
|
600
|
|
|
|
9,200
|
|
|
|
6,900
|
|
|
|
11,000
|
|
|
|
17,900
|
|
Mid-Atlantic
|
|
|
400
|
|
|
|
800
|
|
|
|
1,200
|
|
|
|
800
|
|
|
|
2,700
|
|
|
|
3,500
|
|
Texas(2)
|
|
|
2,500
|
|
|
|
4,000
|
|
|
|
6,500
|
|
|
|
2,700
|
|
|
|
7,800
|
|
|
|
10,500
|
|
West(3)
|
|
|
9,900
|
|
|
|
5,400
|
|
|
|
15,300
|
|
|
|
10,800
|
|
|
|
17,900
|
|
|
|
28,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
21,400
|
|
|
|
10,800
|
|
|
|
32,200
|
|
|
|
21,200
|
|
|
|
39,400
|
|
|
|
60,600
|
|
Discontinued
operations(2)
|
|
|
100
|
|
|
|
100
|
|
|
|
200
|
|
|
|
1,000
|
|
|
|
3,100
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated homesites
|
|
|
21,500
|
|
|
|
10,900
|
|
|
|
32,400
|
|
|
|
22,200
|
|
|
|
42,500
|
|
|
|
64,700
|
|
Unconsolidated joint ventures
|
|
|
2,500
|
|
|
|
1,100
|
|
|
|
3,600
|
|
|
|
2,900
|
|
|
|
2,100
|
|
|
|
5,000
|
|
Transeastern
JV(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,200
|
|
|
|
13,500
|
|
|
|
15,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total
|
|
|
24,000
|
|
|
|
12,000
|
|
|
|
36,000
|
|
|
|
27,300
|
|
|
|
58,100
|
|
|
|
85,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2007, Florida includes 3,700 owned and 200
optioned homesites acquired as part of the TE Acquisition that
met the consolidation criteria at December 31, 2007. The
homesites for these joint ventures were included in
unconsolidated joint ventures at December 31, 2006. |
|
(2) |
|
The Texas region excludes the Dallas/Fort Worth division,
which is classified as a discontinued operation. |
|
(3) |
|
The West region includes 100 owned homesites from joint ventures
that met the consolidation criteria at December 31, 2007.
The homesites for these joint ventures were included in
unconsolidated joint ventures at December 31, 2006. |
46
The following is a summary breakdown of our owned homesites:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residences Completed
|
|
|
Homesites Finished
|
|
|
Raw Land Held for
|
|
|
Total Consolidated
|
|
|
|
or Under Construction
|
|
|
or Under Construction
|
|
|
Future Development
|
|
|
Homesites
|
|
|
|
12/31/07
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/06
|
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida(1)
|
|
|
1,400
|
|
|
|
1,700
|
|
|
|
6,600
|
|
|
|
3,500
|
|
|
|
600
|
|
|
|
1,700
|
|
|
|
8,600
|
|
|
|
6,900
|
|
Mid-Atlantic
|
|
|
100
|
|
|
|
300
|
|
|
|
300
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
|
800
|
|
Texas(2)
|
|
|
700
|
|
|
|
1,000
|
|
|
|
1,400
|
|
|
|
1,100
|
|
|
|
400
|
|
|
|
600
|
|
|
|
2,500
|
|
|
|
2,700
|
|
West(3)
|
|
|
700
|
|
|
|
800
|
|
|
|
2,500
|
|
|
|
2,200
|
|
|
|
6,700
|
|
|
|
7,800
|
|
|
|
9,900
|
|
|
|
10,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
2,900
|
|
|
|
3,800
|
|
|
|
10,800
|
|
|
|
7,300
|
|
|
|
7,700
|
|
|
|
10,100
|
|
|
|
21,400
|
|
|
|
21,200
|
|
Discontinued
operations(2)
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
300
|
|
|
|
100
|
|
|
|
500
|
|
|
|
100
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,900
|
|
|
|
4,000
|
|
|
|
10,800
|
|
|
|
7,600
|
|
|
|
7,800
|
|
|
|
10,600
|
|
|
|
21,500
|
|
|
|
22,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For December 31, 2007, the Florida region includes 3,700
owned homesites acquired as part of the TE Acquisition. |
|
(2) |
|
The Texas region excludes the Dallas/Fort Worth division,
which is now classified as a discontinued operation. |
|
(3) |
|
The West region includes 100 homesites from joint ventures that
met the consolidation criteria at December 31, 2007. The
homesites for these joint ventures were included in
unconsolidated joint ventures at December 31, 2006. |
We use option contracts in addition to land joint ventures in
order to acquire land whenever feasible. Option contracts allow
us to control large homesite positions with reduced capital
investment.
From time to time we acquired and developed larger land parcels
that we believed could yield homesites exceeding the
requirements of our homebuilding activities over the next 3 to
5 years. These additional homesites are typically sold to
other homebuilders. At December 31, 2007, of the 21,400
owned homesites from our continuing operations, 6,300 homesites
are part of this strategy. At December 31, 2007, of the
10,800 homesites controlled through option contracts from
our continuing operations, 4,700 homesites are also part of this
strategy. At December 31, 2007, deposits related to these
controlling homesites under option approximated
$14.9 million. We plan to continue reducing our positions
in these large land transactions in connection with our asset
management activities.
Controlled homesites represent homesites either owned or under
option by our consolidated subsidiaries or by our unconsolidated
joint ventures that build and market homes. We do not include as
controlled homesites those homesites which are included in land
development joint ventures where we do not intend to build
homes. These joint ventures will acquire and develop land to be
sold to us for use in our homebuilding operations or sold to
others. As of December 31, 2007 and 2006, these joint
ventures owned 3,000 and 3,100 homesites, respectively. We
had options to acquire 500 homesites, which are included in our
consolidated homesites under option at December 31, 2006.
We did not have any remaining options to acquire homesites from
these joint ventures at December 31, 2007. Any profits
generated from the purchase of homesites from these joint
ventures are deferred until the ultimate sale to an unrelated
third party. The number of homesites controlled by our
unconsolidated joint ventures, decreased by 17,100 homesites, or
83%, from December 31, 2006, primarily due to the
settlement and purchase of the Transeastern JV. See additional
discussion regarding our joint ventures located in
Liquidity and Capital Resources section.
Due to worsening market conditions impacting the new home
industry, we have applied increasingly conservative standards to
our land retention and option exercise decisions. We have
analyzed each of our communities to determine if they are
aligned with our immediate and mid term goals which are focused
on our ability to monetize assets within a relatively short
period of time. As part of the analysis we have reviewed our
construction processes including our bid procedures, bid
templates and engineering designs in an attempt
47
to reduce costs from home construction. Preacquisition costs,
development costs and the number of home starts and speculative
homes have also been reduced in light of the new challenges
facing the market.
At December 31, 2007, the number of homesites controlled by
our consolidated continuing operations has decreased by 28,400,
or 47%, as compared to December 31, 2006. The decrease in
controlled homesites is a result of our asset management
initiatives including the sale of our Dallas/Fort Worth
division, the bulk sale of homesites in our Mid-Atlantic
(excluding Nashville) and Virginia divisions, other land sales
and the abandonment of rights under certain option contracts. In
connection with our asset management efforts, as well as in part
to our liquidity constraints, during the year ended
December 31, 2007, we did not exercise certain option
contracts which resulted in a reduction of 21,100 optioned
homesites. In addition, the sale of our Dallas/Fort Worth
division and the bulk sale of homesites in our Mid-Atlantic
(excluding Nashville) and Virginia divisions reduced the number
of controlled homesites by approximately 3,700 homesites. This
decrease, however, was partially offset by an increase in the
number of homesites acquired as part of the TE Acquisition as
reflected in the table above. In connection with the abandonment
of our rights under these option contracts, we forfeited cash
deposits of $82.5 million and had letters of credit of
$98.5 million drawn at December 31, 2007, which
increased our outstanding borrowings. Through June 30, 2008
an additional $72.8 million of letters of credit have been
drawn related to the abandonment of option contracts.
Homebuilding
Operations
For the year ended December 31, 2007 total consolidated
home deliveries from continuing operations decreased 9%,
consolidated Homebuilding revenues decreased 12%, and
consolidated net sales orders from continuing operations
decreased 21% as compared to the year ended December 31,
2006. We had a net loss from continuing operations of
$1.3 billion for the year ended December 31, 2007 as
compared to a net loss from continuing operations of
$200.8 million for the year ended December 31, 2006.
For the year ended December 31, 2007, our unconsolidated
joint ventures had an increase in net sales orders of 79% and a
decrease in deliveries of 58% as compared to the year ended
December 31, 2006.
Compared to December 31, 2006, consolidated sales value in
backlog from continuing operations at December 31, 2007
decreased 47% to $736.3 million. Contracts with a
third-party that marketed homes in the United Kingdom included
in backlog at December 31, 2007 were cancelled in 2008.
These contracts were for 511 homes, representing
$115.6 million in revenue. Our unconsolidated joint
ventures had an additional $24.7 million in sales value in
backlog at December 31, 2007. Our sales orders cancellation
rate was approximately 38% for the year ended December 31,
2007 as compared to 32% for the year ended December 31,
2006. Cancellation rates continue to be affected by worsening
market conditions.
We build homes for inventory (speculative homes) and on a
pre-sold basis. At December 31, 2007, we had 2,900 homes
completed or under construction compared to 3,800 homes at
December 31, 2006. Approximately 42% of these homes were
unsold at December 31, 2007, an increase from 35% at
December 31, 2006. At December 31, 2007, we had 532
completed unsold homes in our inventory, up 91% from 279 homes
at December 31, 2006. Approximately 70% of our completed,
unsold homes at December 31, 2007 had been completed for
more than 90 days. As part of our asset management
strategy, we are focusing our efforts on diligently managing the
number and geographic allocation of our speculative homes,
addressing our inventory levels and timing our construction
starts, together with other actions, to strengthen our balance
sheet.
Once a sales contract with a buyer has been approved, we
classify the transaction as a new sales order and
include the home in backlog. Such sales orders are
usually subject to certain contingencies such as the
buyers ability to qualify for financing and ability to
sell their existing home. At closing, title passes to the buyer
and a home is considered to be delivered and is
removed from backlog. Revenues, which are net of buyer
incentives and cost of sales, are recognized upon the delivery
of the home, land or homesite when title is transferred to the
buyer. We estimate that the average period between the execution
of a sales contract for a home and closing is approximately four
months to over a year for pre-sold homes; however, this varies
by market. The principal expenses of our Homebuilding operations
are cost of sales and selling, general and administrative
(SG&A) expenses. Costs of home sales include
land and land development costs, home construction costs,
previously capitalized indirect costs, capitalized interest and
estimated warranty costs.
48
SG&A expenses for our Homebuilding operations include
administrative costs, advertising expenses,
on-site
marketing expenses, sales commission costs and closing costs.
Sales commissions are included in selling, general and
administrative costs when the related revenue is recognized. As
used herein, Homebuilding includes results of home
and land sales. Home sales includes results related
only to the sale of homes.
Financial
Services Operations
To provide homebuyers with a seamless home purchasing
experience, we have a financial services business which provides
mortgage financing and settlement services and offers title,
homeowners and other insurance products to our homebuyers
and others. Our mortgage financing operation derives most of its
revenues from buyers of our homes, although it also offers its
services to existing homeowners refinancing their mortgages. Our
title and settlement services and our insurance agency
operations are used by our homebuyers and a broad range of other
clients purchasing or refinancing residential or commercial real
estate. Our mortgage financing operations revenues consist
primarily of origination and premium fee income, interest income
and the gain on the sale of mortgages which is recognized when
the loans and related servicing rights are sold to third party
investors. Our title operations revenues consist primarily
of fees and premiums from title insurance and settlement
services. The principal expenses of our Financial Services
operations are SG&A expenses, which consist primarily of
compensation and interest expense on our warehouse lines of
credit.
During the year ended December 31, 2007, approximately 3%
to 5% of the homebuyers, including those in our unconsolidated
joint ventures, that utilized our mortgage subsidiary obtained
sub-prime loans. We define a sub-prime loan as one where the
buyers FICO score is below 620 and is not an FHA or VA
loan. At December 31, 2007, approximately 4% to 6% of our
backlog that utilized our mortgage subsidiary included
homebuyers seeking sub-prime financing. During the year ended
December 31, 2007, the mortgage markets experienced a
significant disruption, which commenced with increasing rates of
default on sub-prime loans and declines in the
market value of those loans. These events led to an
unprecedented combination of reduced investor demand for
mortgage loans and mortgage-backed securities, tighter credit
underwriting standards, reduced mortgage loan liquidity and
increased credit risk premiums, all of which affected the
availability of nonconforming mortgage products. The tightening
of credit standards in the sub-prime market had an impact on the
Alt-A and prime loans and further negatively impacted current
homebuilding market conditions.
On January 28, 2008, Preferred Home Mortgage Company, our
wholly-owned residential mortgage lending subsidiary, entered
into an Amended and Restated Agreement of Limited Liability
Company with Wells Fargo Ventures, LLC. The limited liability
company is known as PHMCWF, LLC but does business as
Preferred Home Mortgage Company, an affiliate of Wells
Fargo. Preferred Home Mortgage Company owns 49.9% of the
venture with the balance owned by Wells Fargo. Effective
April 1, 2008, the venture began to carry on the mortgage
business of Preferred Home Mortgage Company. The venture is
managed by a committee composed of six members, three from
Preferred Home Mortgage Company and three from Wells Fargo. The
venture entered into a revolving credit agreement with Wells
Fargo Bank, N.A. providing for advances of up to
$20.0 million. Wells Fargo Home Mortgage provides the
general and administrative support (as well as all loan related
processing, underwriting, closing functions), and is the end
investor for the majority of the loans closed through the joint
venture. Prior to the joint venture, Preferred Home Mortgage
Company had a centralized operations center that provided those
support functions. The majority of these support functions
ceased in June 2008.
Critical
Accounting Policies
In the preparation of our consolidated financial statements, we
apply accounting principles generally accepted in the United
States. The application of generally accepted accounting
principles may require management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying results. Listed below are
those policies that we believe are critical or require the use
of complex judgment in their application.
49
Homebuilding
Revenues and Cost of Sales
Revenue from the sale of homes and the sale of land and
homesites is recognized at closing when title passes to the
buyer and all of the following conditions are met: (1) a
sale is consummated; (2) a significant down payment is
received; (3) the earnings process is complete; and
(4) the collection of any remaining receivables is
reasonably assured. As a result, our revenue recognition process
does not involve significant judgments or estimates. However, we
do rely on certain estimates to determine the related
construction and land costs and resulting gross profit
associated with revenues recognized. Our construction and land
costs are comprised of direct and allocated costs, including
interest, indirect construction costs and estimated costs for
future warranties and indemnities. Our estimates are based on
historical results, adjusted for current factors. Land, land
improvements and other common costs are generally allocated on a
relative fair value basis to units within a parcel or community.
Land and land development costs generally include related
interest and property taxes incurred until construction is
substantially completed. We believe that the accounting policy
related to revenue recognition is a critical accounting policy
because of the significance of revenue.
Financial
Services Revenues and Expenses
Our Financial Services operations generate revenues from
mortgage financing, title insurance and settlement services and
property and casualty insurance agency operations. Our mortgage
financing operations revenues consist primarily of
origination and premium fee income, interest income and the gain
on the sale of the mortgages. Revenue from our mortgage
financing operations is recognized when the mortgage loans and
related servicing rights are sold to third-party investors.
Substantially all of our mortgages are sold to private investors
within 30 days of closing. Title operations revenues
consist primarily of title insurance policy commissions and
settlement services fees, which are recognized at the time of
settlement. Our property and casualty insurance revenues are
recognized when commissions are received from third-party
insurers. As a result, our revenue recognition process does not
involve significant judgments or estimates. We believe that the
accounting policy related to revenue recognition is a critical
accounting policy because of the significance of revenue.
Impairment
of Long-Lived Assets
Housing communities and land/homesites under development are
stated at the lower of cost or net realizable value. Property
and equipment is carried at cost less accumulated depreciation.
We assess these assets for impairment in accordance with the
provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets is measured by
comparing the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. We believe
that the accounting for impairment of long-lived assets is a
critical accounting policy because of the assumptions inherent
in the evaluations and the impact of recognizing impairments
would be material to our consolidated financial statements.
These evaluations for impairment are significantly impacted by
estimates of future revenues, costs and expenses and other
factors involving some amount of uncertainty. Therefore, due to
uncertainties in the estimation process, actual results could
differ from such estimates. If an asset is considered to be
impaired, the impairment loss to be recognized is measured by
the amount by which the carrying amount of the asset exceeds the
fair value of the asset. During the year ended December 31,
2007, we recorded impairment losses of $180.8 million on
active communities, including $3.9 million of inventory
impairments recognized on assets consolidated under SFAS 66
for which we do not have title to the underlying asset.
Investments
in Unconsolidated Joint Ventures
We evaluate our investments in and receivables from our
unconsolidated joint ventures in accordance with the provisions
of Accounting Principles Board Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock,
Statement of Position
78-9,
Accounting for Investments in Real Estate Ventures, and
Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan.
Recoverability of our investments in and receivables from
unconsolidated joint ventures are measured by
50
comparing the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the
assets. We believe that the accounting for the impairments of
our investments in and receivables from our unconsolidated joint
ventures is a critical accounting policy because of the
assumptions inherent in the evaluations and the impact of
recognizing these impairments would be material to our
consolidated financial statements. These evaluations for
impairment are significantly impacted by estimates of future
revenues, costs and expenses and other factors involving some
amount of uncertainty. Therefore, due to uncertainties in the
estimation process, actual results could differ from such
estimates.
In some instances, we are liable under the joint venture credit
agreements, we have agreed to: complete certain property
development commitments in the event the joint ventures default;
pay an amount necessary to decrease the principal balance of the
joint ventures loans to achieve a certain loan to value
ratio; and, to indemnify the lenders for losses resulting from
fraud, misappropriation and similar acts. We evaluate our
obligations related to these commitments under Statement of
Financial Accounting Standards No. 5, Accounting for
Contingencies. Because of the high degree of judgment
required in determining these estimated obligations, actual
amounts could differ from our current estimates.
Goodwill
Goodwill is accounted for in accordance with the provisions of
SFAS No. 142, Goodwill and Other Intangible
Assets. Pursuant to SFAS No. 142, goodwill is not
subject to amortization. Goodwill is subject to at least an
annual assessment for impairment by applying a fair-value based
test. For purposes of the impairment test, we consider each
division a reporting unit. Our impairment test is based on
discounted cash flows derived from internal projections. This
process requires us to make assumptions on future revenues,
costs and timing of expected cash flows. Due to the degree of
judgment required and uncertainties surrounding such estimates,
actual results could differ from such estimates. To the extent
additional information arises or our strategies change, it is
possible that our conclusion regarding goodwill impairment could
change, which could have a material effect on our financial
position and results of operations. For these reasons, we
consider the accounting estimate related to goodwill impairment
to be a critical accounting estimate. We performed impairment
tests during the year ended December 31, 2007 and
determined that the goodwill recorded in each of our
Homebuilding regions was impaired; accordingly, we wrote off
$89.7 million of goodwill. Additionally, during the year
ended December 31, 2007, we wrote off $3.9 million of
Finance Services goodwill and $3.1 million of goodwill
related to Dallas/Fort Worth, which has been accounted for
as a discontinued operation.
Homesite
Option Contracts and Consolidation of Variable Interest
Entities
We enter into option contracts to purchase homesites and land
held for development in the ordinary course of business. Option
contracts allow us to control significant homesite positions
with minimal capital investment. Our liability for
nonperformance under such contracts is generally limited to
forfeiture of the related deposits. However, in some cases we
are obligated to complete construction of certain improvements
notwithstanding the cancellation of the option. Although we are
typically compensated for this work, in certain cases we are
responsible for any cost overruns. At December 31, 2007, we
had option contracts from continuing operations on 10,800
homesites. At December 31, 2007 and December 31, 2006,
we had non-refundable deposits aggregating $56.9 million
and $216.6 million, respectively, included in inventory. In
addition, at December 31, 2007 and December 31, 2006,
we had issued $44.9 million and $257.8 million,
respectively, in letters of credit under option contracts.
We enter into option contracts with land sellers and third-party
financial entities as a method of acquiring developed homesites.
From time to time to leverage our ability to acquire and finance
the development of these homesites, we transfer our option right
to third parties. Option contracts generally require the payment
of a non-refundable cash deposit or the issuance of a letter of
credit for the right to acquire homesites over a specified
period of time at predetermined prices. Typically, our deposits
or letters of credit are less than 20% of the underlying
purchase price. We generally have the right at our discretion to
terminate our obligations under these option agreements by
forfeiting our cash deposit or repaying amounts drawn under the
letter of credit with no further financial responsibility. In
some cases, these contracts give the other party the right to
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require us to purchase homesites or guarantee minimum returns.
(see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Financial Condition, Liquidity and
Capital Resources Off-Balance Sheet
Arrangements). We do not have legal title to these assets.
Additionally, we do not have an investment in the third-party
acquirer and do not guarantee their liabilities. However, if
certain conditions are met, including the deposit
and/or
letters of credit exceeding certain significance levels as
compared to the remaining homesites under the option contract,
we will include the homesites in inventory with a corresponding
liability in obligations for inventory not owned.
Homebuilders may enter into option contracts for the purchase of
land or homesites with land sellers and third-party financial
entities, some of which qualify as Variable Interest Entities
(VIEs) under Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities
(FIN 46(R) ). FIN 46(R) addresses
consolidation by business enterprises of VIEs in which an entity
absorbs a majority of the expected losses, receives a majority
of the entitys expected residual returns, or both, as a
result of ownership, contractual or other financial interests in
the entity, which have one or both of the following
characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities
without additional subordinated support from other parties,
which is provided through other interests that will absorb some
or all of the expected losses of the entity; or (2) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
(a) the direct or indirect ability to make decisions about
the entitys activities through voting rights or similar
rights; or (b) the obligation to absorb the expected losses
of the entity if they occur, which makes it possible for the
entity to finance its activities; or (c) the right to
receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the
expected losses.
In applying FIN 46(R) to our homesite option contracts and
other transactions with VIEs, we make estimates regarding cash
flows and other assumptions. We believe that our critical
assumptions underlying these estimates are reasonable based on
historical evidence and industry practice. Based on our analysis
of transactions entered into with VIEs, we determined that we
are the primary beneficiary of certain of these homesite option
contracts. Consequently, FIN 46(R) requires us to
consolidate the assets (homesites) at their fair value, although
(1) we have no legal title to the assets, (2) our
maximum exposure to loss is generally limited to the deposits or
letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us. We classify these assets as inventory not
owned with a corresponding liability in obligations
for inventory not owned in the accompanying consolidated
statement of financial condition. Additionally, we have entered
into arrangements with VIEs to acquire homesites in which our
variable interest is insignificant and, therefore, we have
determined that we are not the primary beneficiary and are not
required to consolidate the assets of such VIEs.
In addition to land options recorded pursuant to FIN 46(R),
we evaluate land options in accordance with the provisions of
SFAS No. 49, Product Financing Arrangements.
When our deposits and pre-acquisition development costs exceed
certain thresholds, or we have determined that we are compelled
to exercise our option, we record the remaining purchase price
of the land in the consolidated statements of financial
condition under obligations for inventory not owned.
Stock-Based
Compensation
Effective January 1, 2006, we adopted
SFAS No. 123(R), Share-Based Payment,
(SFAS 123R) using the modified prospective
method. SFAS No. 123R generally requires entities to
recognize the cost of employee services in exchange for awards
of equity instruments based on the grant-date fair value of
those awards. That cost, based on the estimated number of awards
that are expected to vest, will be recognized over the period
during which the employee is required to provide the service in
exchange for the award. No compensation cost is recognized for
awards for which employees do not render the requisite service.
The grant-date fair value of employee share options and similar
instruments was estimated using the Black-Scholes valuation
model.
The Black-Scholes valuation model requires the input of
subjective assumptions, including the expected life of the
stock-based award and stock price volatility. The assumptions
used are managements best estimates,
52
but the estimates involve inherent uncertainties and the
application of management judgment. As a result, if other
assumptions had been used, the recorded and pro forma
stock-based compensation expense could have been materially
different from that depicted in the consolidated financial
statements.
Warranty
Reserves
In the normal course of business we will incur warranty related
costs associated with homes that have been delivered to the
homebuyers. Warranty reserves are established by charging cost
of sales and recognizing a liability for the estimated warranty
costs for each home that is delivered. We monitor this reserve
on a regular basis by evaluating the historical warranty
experience in each market in which we operate and the reserve is
adjusted as appropriate for current quantitative and qualitative
factors. Actual future warranty costs could differ from our
currently estimated amounts.
Insurance
and Litigation Reserves
Insurance and litigation reserves have been established for
estimated amounts based on an analysis of historical claims. We
have, and require the majority of our subcontractors to have,
general liability insurance that protects us against a portion
of our risk of loss from construction-related claims. We reserve
for costs to cover our self-insured retentions and deductible
amounts under these policies and for any costs in excess of our
coverage limits. Because of the high degree of judgment required
in determining these estimated reserve amounts, actual future
claim costs could differ from our currently estimated amounts.
Income
Taxes
We calculate a provision for income taxes using the asset and
liability method, under which deferred tax assets and
liabilities are recognized by identifying the temporary
differences arising from the different treatment of items for
tax and accounting purposes. We assess the realization of our
deferred tax assets to determine whether an income tax valuation
allowance is required. Based on all available evidence, both
positive and negative, and the weight of that evidence to the
extent such evidence can be objectively verified, we determine
whether it is more likely than not that all or a portion of the
deferred tax assets will be realized. In determining the future
tax consequences of events that have been recognized in our
consolidated financial statements or tax returns, judgment is
required. Differences between the anticipated and actual
outcomes of these future tax consequences could have a material
impact on our consolidated results of operations or financial
position.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of SFAS 109, (FIN 48).
FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is
required to meet before it is recognized in the consolidated
financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. We adopted FIN 48 effective
January 1, 2007, and recognized a $1.3 million
increase in the liability for unrecognized tax benefits, which
was accounted for as a reduction to the retained earnings
balance at January 1, 2007. In accordance with the
transition requirements of FIN 48, results of prior periods
have not been restated.
Results
of Operations Consolidated
Fiscal
Year 2007 compared to Fiscal Year 2006
Total revenues decreased 12% to $2.2 billion for the year
ended December 31, 2007, from $2.5 billion for the
year ended December 31, 2006. This decrease is primarily
attributable to a decrease in Homebuilding revenues of 12%.
For the year ended December 31, 2007, we had a loss from
continuing operations before benefit for income taxes of
$1.4 billion as compared to a loss from continuing
operations before benefit for income taxes of
$243.6 million for the year ended December 31, 2006.
Results for 2007 and 2006 include charges totaling
53
$1.3 billion and $586.7 million, respectively, related
to inventory impairments, abandonment costs, joint venture
impairments, goodwill impairments and the provision for
settlement of loss contingency.
Our effective tax rate was 2.5% and 17.6% for the years ended
December 31, 2007 and 2006, respectively. The 2007
effective tax rate was primarily impacted by a valuation
allowance on our deferred tax asset. The 2006 effective tax rate
was primarily impacted by a valuation allowance on certain
deferred tax assets and the non-deductible state portion of the
impairment of our investment in unconsolidated joint ventures,
and the provision of the settlement of a loss contingency in
connection with the Transeastern JV.
For the year ended December 31, 2007, we had a loss from
continuing operations, net of taxes, of $1.3 billion (or a
loss of $22.22 per diluted share) compared to a loss from
continuing operations, net of taxes, of $200.8 million (or
a loss of $3.37 per diluted share) for the year ended
December 31, 2006. For the year ended December 31,
2007, we had a net loss of $1.3 billion (or a loss of
$22.60 per diluted share) compared to a net loss of
$201.2 million (or a loss of $3.38 per diluted share) for
the year ended December 31, 2006.
Homebuilding
Homebuilding revenues decreased 12% to $2.2 billion for the
year ended December 31, 2007, from $2.4 billion for
the year ended December 31, 2006. This decrease is
primarily due to a decrease in revenue from home sales to
$2.0 billion for the year ended December 31, 2007 from
$2.3 billion for the year ended December 31, 2006. The
decrease in revenue from home sales, which is net of buyer
incentives, was due to a 9% decrease in the number of deliveries
from continuing operations to 6,580 for the year ended
December 31, 2007 from 7,260 for the year ended
December 31, 2006. The average price of homes delivered
from continuing operations fell slightly, decreasing to $311,000
for the year ended December 31, 2007, from $318,000 for the
year ended December 31, 2006. We expect our home sales
revenues to continue to decrease in 2008 as the number of home
deliveries declines and the average price of homes delivered
continues to be impacted by increased incentives as a result of
severe market conditions in the new and existing home industry
combined with diminished consumer confidence, the oversupply of
new and existing homes available for sale, increased
foreclosures and downward pressure on home prices.
For the year ended December 31, 2007, we had a homebuilding
gross loss of $507.4 million as compared to a gross profit
of $417.9 million for the year ended December 31,
2006. This decrease is primarily due to an increase in inventory
impairments and abandonment costs during the year ended
December 31, 2007 in addition to the decrease in the number
of deliveries coupled with higher incentives on homes delivered
in response to challenging homebuilding market conditions.
Inventory impairments and abandonment costs were
$852.7 million for the year ended December 31, 2007
compared to $153.2 million for the year ended
December 31, 2006. For the year ended December 31,
2007, our incentives from continuing operations increased to
$43,900 per home delivered from $21,200 per home delivered for
the year ended December 31, 2006. We expect gross margins
to continue to decline in 2008 due to our expected continued use
of higher incentives to drive our sales rates and downward
pressure on home prices in response to challenging market
conditions.
SG&A expenses increased to $362.7 million for the year
ended December 31, 2007, from $358.3 million for the
year ended December 31, 2006. This increase in expenses is
due to: (i) an increase of $22.6 million in
professional and consultant fees related to the Transeastern JV
settlement and professional services obtained in connection with
the development of a long term business plan and the evaluation
of our restructuring options; and (ii) an increase of
$9.3 million in selling and marketing expenses. The
increase in SG&A expenses was partially offset by a
reduction in overhead and related expenses.
SG&A expenses as a percentage of revenues from home sales
for the year ended December 31, 2007 increased to 18%, as
compared to 16% for the year ended December 31, 2006. The
increase in SG&A expenses as a percentage of home sales
revenues is due to the factors discussed above. We expect our
selling expenses as a percentage of our revenue from home sales
to continue to increase in 2008 due to the competition for
homebuyers.
54
For the year ended December 31, 2007, we had a loss from
unconsolidated joint ventures of $14.9 million compared to
income from unconsolidated joint ventures of $104.7 million
for the year ended December 31, 2006. The decrease in our
earnings from unconsolidated joint ventures is primarily due to:
(i) reduced earnings in the joint ventures as our joint
ventures are experiencing similar severe market conditions as
our consolidated operations and (ii) a reduction in the
number of joint ventures. In addition, during the year ended
December 31, 2007 and 2006, we recorded impairment losses
of $194.1 million and $152.8 million, respectively,
related to unconsolidated joint ventures. For the year ended
December 31, 2007, our unconsolidated joint ventures
delivered 1,666 homes as compared to 3,951 homes delivered
during the comparable period in the prior year.
Net Sales
Orders and Homes in Backlog (Consolidated)
For the year ended December 31, 2007, net sales orders from
continuing operations decreased by 21% to 4,836 as compared to
6,085 for the year ended December 31, 2006. The decrease in
net sales orders is due to decreased demand for new homes and
higher cancellation rates. We expect these factors to continue
to negatively impact our net sales orders until the markets
normalize.
Our cancellation rate increased to 38% for the year ended
December 31, 2007 from 32% for the year ended
December 31, 2006. Except for our West region, all of our
regions experienced increases in cancellation rates for the year
ended December 31, 2007 when compared with the same period
in 2006. Our Florida region had the largest increase in
cancellation rate to 47% for the year ended December 31,
2007 from 33% for the year ended December 31, 2006. Our
Texas region also experienced a large increase in cancellation
rate to 35% for the year ended December 31, 2007 from 28%
for the year ended December 31, 2006. The cancellation rate
for our Mid-Atlantic region was 33% for the year ended
December 31, 2007, which represents an 8% increase over the
comparative period in the prior year. The cancellation rate for
our West region was 36% for the year ended December 31,
2007, which represents an 8% decrease over the comparative
period in the prior year.
We had 2,379 homes in backlog from continuing operations as of
December 31, 2007, as compared to 3,869 homes in backlog as
of December 31, 2006. The 39% decrease in backlog units is
primarily due to a decline in sales orders and an increase in
cancellation rates as a result of decreased demand. The sales
value of backlog from continuing operations decreased 47% to
$736.3 million at December 31, 2007, from
$1.4 billion at December 31, 2006, due to the decrease
in the number of homes in backlog in addition to a decrease in
the average selling price of homes in backlog to $310,000 from
$361,000 from period to period. The decrease in the average
selling price of homes in backlog was primarily due to increased
incentives and a change in product mix. Contracts with a
third-party that marketed homes in the United Kingdom included
in backlog at December 31, 2007 were cancelled in 2008.
These contracts were for 511 homes, representing
$115.6 million in revenue. At June 30, 2008, our
consolidated continuing operations had 1,580 homes in backlog
representing $479.3 million in revenue. We expect the
average selling price of homes in backlog to decrease in the
future as cancellations remain higher than historical levels and
higher incentives are offered to move home inventory.
Net Sales
Orders and Homes in Backlog (Unconsolidated Joint
Ventures)
For the year ended December 31, 2007, net sales orders
increased by 79% as compared to the year ended December 31,
2006. The increase in net sales orders was due to high
cancellation rates experienced during the third quarter of last
year by the Transeastern JV. Sales orders at our other joint
ventures declined 15% due to worsening market conditions,
decreased demand and higher cancellation rates in the current
year. We expect these factors to continue to negatively impact
our combined net sales orders until the markets strengthen. The
decrease in net sales orders at our joint ventures other than
the Transeastern JV was also due to a decline in the number of
active communities. We intend to limit the use of joint ventures
that build and sell homes.
We had 94 homes in backlog as of December 31, 2007, as
compared to 1,199 homes in backlog as of December 31, 2006.
The 92% decrease in backlog is primarily due to a decline in net
sales orders due to the factors described above. Additionally,
the results of operations of the Transeastern JV, which were
previously included in the results for the unconsolidated joint
ventures, have been included in our consolidated results
beginning on July 31, 2007.
55
Joint venture revenues are not included in our consolidated
financial statements. At December 31, 2007, the sales value
of our joint ventures homes in backlog was
$24.7 million compared to $365.6 million at
December 31, 2006. This decrease is due to the decrease in
the number of homes in backlog and the decrease in the average
selling price of homes in backlog to $263,000 from $305,000 from
year to year.
In some cases our Chapter 11 filings have constituted an
event of default under the joint venture lender agreements which
have resulted in the joint ventures debt becoming
immediately due and payable, limiting the joint ventures
access to future capital. See additional discussion regarding
our joint ventures located in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations Financial
Condition, Liquidity and Capital Resources.
Financial
Services
Financial Services revenues decreased to $36.5 million for
the year ended December 31, 2007, from $63.3 million
for the year ended December 31, 2006. This 42% decrease is
due primarily to a decrease in the number of closings at our
title operations. For the year ended December 31, 2007, our
mix of mortgage originations was 6% adjustable rate mortgages
(of which approximately 91% were interest only) and 94% fixed
rate mortgages, which is a shift from 19% adjustable rate
mortgages (of which approximately 89% were interest only) and
81% fixed rate mortgages in the comparable period of the prior
year. The average FICO score of our homebuyers during the year
ended December 31, 2007 was 731, and the average
loan-to-value ratio on first mortgages was 79%. For the years
ended December 31, 2007 and 2006, approximately 10% of our
homebuyers paid in cash. Our combined mortgage operations
capture ratio for non-cash homebuyers increased to 70% for the
year ended December 31, 2007 from 69% for the year ended
December 31, 2006. The number of closings at our mortgage
operations decreased to 5,192 for the year ended
December 31, 2007, from 6,276 for the year ended
December 31, 2006. Our combined title operations capture
ratio was 97% for the year ended December 31, 2007, down
slightly from the comparative prior periods 98% capture
ratio. The number of closings at our title operations decreased
to 13,792 for the year ended December 31, 2007, from 23,248
for the same period in 2006 as a result of deteriorating market
conditions. Non-affiliated customers accounted for approximately
41% of our title company revenues for the year ended
December 31, 2007.
Financial Services expenses decreased to $36.3 million for
the year ended December 31, 2007, from $41.8 million
for the year ended December 31, 2006. This 13% decrease is
a result of reduced staff levels in 2007 versus 2006 in response
to a more challenging housing market.
Discontinued
Operations
On June 6, 2007, we sold substantially all of our
Dallas/Fort Worth division to an independent third-party
for $56.5 million and realized a pre-tax loss on disposal
of $13.6 million.
In accordance with SFAS 144, results of our
Dallas/Fort Worth division have been classified as
discontinued operations, and prior periods have been restated to
be consistent with the December 31, 2007 presentation.
Discontinued operations include Dallas/Fort Worth division
revenues of $47.9 million and $132.7 million for the
year ended December 31, 2007 and 2006, respectively. The
Dallas/Fort Worth division had a net loss of
$22.8 million for the year ended December 31, 2007 as
compared to a net loss of $0.4 million for the year ended
December 31, 2006.
Fiscal
Year 2006 Compared to Fiscal Year 2005
Total revenues from continuing operations increased 4% to
$2.5 billion for the year ended December 31, 2006,
from $2.4 billion for the year ended December 31,
2005. This increase was attributable to an increase in
Homebuilding revenues of 3%, and an increase in Financial
Services revenues of 33%.
For the year ended December 31, 2006, we had a loss from
continuing operations before benefit for income taxes of
$243.6 million as compared to income from continuing
operations before benefit for income taxes of
$344.6 million for the year ended December 31, 2005.
This decrease is due primarily to (1) $153.2 million
in inventory impairments and write-offs of land deposits and
related abandonment costs, (2) $152.8 million in
56
impairments related to our unconsolidated joint ventures,
(3) a $275.0 million increase in the estimated loss
contingency related to the settlement of the Transeastern JV
litigation, and (4) goodwill impairments totaling
$5.7 million.
Our effective tax rate was 17.6% and 36.7% for the year ended
December 31, 2006 and 2005, respectively. The 2006
effective tax rate was primarily impacted by a valuation
allowance on certain deferred tax assets and the non-deductible
state portion of the impairment of our investment in
unconsolidated joint ventures, and the provision of the
settlement of a loss contingency in connection with the
Transeastern JV.
For the year ended December 31, 2006, we had a loss from
continuing operations, net of taxes, of $200.8 million (or
a loss of $3.37 per diluted share) compared to net income from
continuing operations, net of taxes, of $218.1 million (or
$3.82 per diluted share) for the year ended December 31,
2005. For the year ended December 31, 2006, we had a net
loss of $201.2 million (or a loss of $3.38 per diluted
share) compared to net income of $218.3 million (or $3.68
per diluted share) for the year ended December 31, 2005.
Homebuilding
Homebuilding revenues increased 3% to $2.4 billion for the
year ended December 31, 2006 compared to the comparable
period in the prior year. This increase was due to a 6% increase
in revenue from home sales to $2.3 billion for the year
ended December 31, 2006 from $2.2 billion for the year
ended December 31, 2005, partially offset by a 29% decrease
in revenue from land sales to $131.9 million for the year
ended December 31, 2006 from $186.1 million for the
comparable period in 2005. The increase in revenue from home
sales, which is net of buyer incentives, was due to a 7%
increase in the average price of homes delivered to $318,000 for
the year ended December 31, 2006, from $297,000 for the
year ended December 31, 2005. The increase in the average
price of homes delivered is due to increased demand in many of
our markets in 2005 which allowed us to increase prices, and to
a lesser degree to changes in product mix. The decrease in
revenue from land sales was due to the sale of various large
tracts of land, particularly in the Phoenix market, during the
year ended December 31, 2005.
For the year ended December 31, 2006, we had a homebuilding
gross profit of $417.9 million as compared to a gross
profit of $591.0 million for the year ended
December 31, 2005. This decrease is primarily due to an
increase in inventory impairments and abandonment costs to
$153.2 million for the year ended December 31, 2006 in
addition to the decrease in the number of deliveries and higher
incentives on homes delivered in response to softening demand.
For the year ended December 31, 2006, our incentives
increased to $21,200 per home delivered from $8,800 per home
delivered for the year ended December 31, 2005.
SG&A expenses increased to $358.3 million for the year
ended December 31, 2006, from $309.1 million for the
year ended December 31, 2005. The increase in SG&A
expenses is due primarily to: (1) an increase of
$38.8 million in direct selling and advertising expenses,
which include commissions, closing costs, advertising and sales
associates compensation, as a result of the more challenging
housing market; (2) an increase of $10.1 million in
severance expenses resulting from employee termination benefits
and contract termination costs relating to certain consulting
contracts for which we did not expect to receive economic
benefit during the remaining terms; (3) an increase of $5.0
in stock-based compensation expense; and
(4) $3.5 million in professional fees related to the
Transeastern JV.
SG&A expenses as a percentage of revenues from home sales
for the year ended December 31, 2006 increased to 16%, as
compared to 14% for the year ended December 31, 2005. The
increase in SG&A expenses as a percentage of home sales
revenues is due to the factors discussed above. Our ratio of
SG&A expenses as a percentage of revenues from home sales
is also affected by the fact that our consolidated revenues from
home sales do not include revenues recognized by our
unconsolidated joint ventures; however, the compensation and
other expenses capitalized by us in connection with certain of
these joint ventures are included in our consolidated SG&A
expenses.
For the year ended December 31, 2006, we had income from
unconsolidated joint ventures of $104.7 million compared to
income of $45.7 million for the year ended
December 31, 2005. This increase is the result of an
increase in deliveries to 3,951 for the year ended
December 31, 2006 from 1,666 deliveries for
57
the year ended December 31, 2005. Impairments on
unconsolidated joint ventures totaled $152.8 million for
the year ended December 31, 2006 and consist of
(1) $145.1 million related to our investment in the
Transeastern JV and (2) $7.7 million from a joint
venture in Southwest Florida.
Net Sales
Orders and Homes in Backlog (Consolidated)
For the year ended December 31, 2006, net sales orders from
continuing operations decreased by 24% to 6,085 as compared to
8,042 for the year ended December 31, 2006. The decrease in
net sales orders is due to decreased demand for new homes and
higher cancellation rates, especially during the second half of
2006.
Our cancellation rate increased to 32% for the year ended
December 31, 2006 from 17% for the year ended
December 31, 2005. All of our regions experienced increases
in cancellation rates for the year ended December 31, 2006
when compared with the same period in 2005. Our West region had
the largest increase in cancellation rate to 44% for the year
ended December 31, 2006 from 18% for the year ended
December 31, 2005. Our Florida region also experienced a
large increase in cancellation rate to 33% for the year ended
December 31, 2006 from 11% for the year ended
December 31, 2005. The cancellation rate for our
Mid-Atlantic
region was 25% for the year ended December 31, 2006, which
represents a 6% increase over the comparative period in the
prior year. The cancellation rate for our Texas region was 28%
for the year ended December 31, 2006, which represents a 5%
decrease over the comparative period in the prior year.
We had 3,869 homes in backlog at December 31, 2006, as
compared to 4,984 homes in backlog at December 31, 2005.
The 22% decrease in backlog is primarily due to a decline in
sales orders and an increase in cancellation rates as a result
of decreased demand. The sales value of backlog decreased 17% to
$1.4 billion at December 31, 2006, from
$1.7 billion at December 31, 2005, due to the decrease
in the number of homes in backlog. The decrease in the sales
value of backlog was partially offset by a 6% increase in
average sales price to $361,000 from $339,000 for the same
periods.
Net Sales
Orders and Homes in Backlog (Unconsolidated Joint
Ventures)
For the year ended December 31, 2006, unconsolidated joint
ventures net sales orders decreased by 77% to 456 as compared to
2,009 for the year ended December 31, 2006 due to
challenging market conditions, decreased demand and higher
cancellation rates especially in the Transeastern JV. The
decrease in net sales orders was also due to a decline in the
number of active communities as we limit the use of joint
ventures that build and sell homes.
We had 1,199 homes in backlog as of December 31, 2006, as
compared to 4,749 homes in backlog as of December 31, 2005.
The 75% decrease in backlog primarily is due to a decline in net
sales orders due to the factors described above.
Joint venture revenues are not included in our consolidated
financial statements. At December 31, 2006, the sales value
of our joint ventures homes in backlog was
$365.6 million compared to $1.5 billion at
December 31, 2005. This decrease is due primarily to the
decrease in the number of homes in backlog. In addition, the
average selling price of homes in backlog decreased to $305,000
from $318,000 from period to period.
Financial
Services
Financial Services revenues increased to $63.3 million for
the year ended December 31, 2006, from $47.5 million
for the year ended December 31, 2005. This 33% increase was
due primarily to an increase in the number of closings at our
mortgage and title operations and increased revenue per loan at
our mortgage operations due to a shift toward more fixed rate
mortgages. For the year ended December 31, 2006, our mix of
mortgage originations was 19% adjustable rate mortgages (of
which approximately 89% were interest only) and 81% fixed rate
mortgages, which is a shift from 34% adjustable rate mortgages
and 66% fixed rate mortgages in the comparable period in 2005.
The average FICO score of our homebuyers during the year ended
December 31, 2006 was 728, and the average loan to value
ratio on first mortgages was 77%. For the year ended
December 31, 2006, approximately 10% of our homebuyers paid
in cash as compared to 11%
58
during the year ended December 31, 2005. Our combined
mortgage operations capture ratio for non-cash homebuyers
(excluding the Transeastern JV) increased to 69% for the year
ended December 31, 2006 from 65% for the year ended
December 31, 2005. The number of closings at our mortgage
operations decreased to 5,192 for the year ended
December 31, 2006, from 5,455 for the year ended
December 31, 2005. Our combined title operations capture
ratio (excluding the Transeastern JV) increased to 98% of our
homebuyers for the year ended December 31, 2006, from 91%
for the comparable period in 2005. The capture ratio for the
year ended December 31, 2005 was affected by an
organizational change in our Phoenix operations causing a loss
of closings during the period. The number of closings at our
title operations decreased slightly to 23,248 for the year ended
December 31, 2006, from 23,530 for the same period in 2005.
Non-affiliated customers accounted for approximately 66% of our
title company revenues for the year ended December 31, 2006.
Financial Services expenses increased to $41.8 million for
the year ended December 31, 2006, from $39.0 million
for the year ended December 31, 2005. This 7% increase is a
result of increased compensation and slightly higher staff
levels in 2006 compared to 2005.
Discontinued
Operations
On June 6, 2007, we sold substantially all of our
Dallas/Fort Worth division to Wall Homes Texas LLC for
$56.5 million and realized a pre-tax loss on disposal of
$13.6 million.
In accordance with SFAS 144, results of our
Dallas/Fort Worth division have been classified as
discontinued operations, and prior periods have been restated to
be consistent with the December 31, 2007 presentation.
Discontinued operations include Dallas/Fort Worth division
revenues of $132.7 million and $101.0 million for the
year ended December 31, 2006 and 2005, respectively. The
Dallas/Fort Worth division had a net loss of
$0.4 million for the year ended December 31, 2006 as
compared to net income of $0.2 million for the year ended
December 31, 2005.
Reportable
Segments
Our operating segments are aggregated into reportable segments
in accordance with Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and
Related Information, based primarily upon similar economic
characteristics, product type, geographic area, and information
used by the chief operating decision maker to allocate resources
and assess performance. Our reportable segments consist of our
four major Homebuilding geographic regions (Florida,
Mid-Atlantic, Texas and the West) and our Financial Services
operations.
Homebuilding
Operations
The reportable segments for our Homebuilding operations are as
follows:
Florida: Central Florida, Jacksonville,
Southeast Florida, Southwest Florida, Tampa/St. Petersburg
Mid-Atlantic: Baltimore/Southern Pennsylvania,
Nashville, Northern Virginia (on September 25, 2007 we sold
in bulk, home sites in our Mid-Atlantic (excluding Nashville)
and Virginia divisions)
Texas: Austin, Houston, San Antonio (on
June 6, 2007, we sold substantially all of our
Dallas/Fort Worth division)
West: Colorado, Las Vegas, Phoenix
59
Selected
Homebuilding Operations and Financial Data
The following tables set forth selected operational and
financial data for our Homebuilding operations for the periods
indicated (dollars in millions, except average price in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Homebuilding revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of homes
|
|
$
|
849.1
|
|
|
$
|
999.2
|
|
|
$
|
829.4
|
|
Sales of land
|
|
|
42.8
|
|
|
|
18.8
|
|
|
|
29.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Florida
|
|
|
891.9
|
|
|
|
1,018.0
|
|
|
|
859.2
|
|
Mid-Atlantic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of homes
|
|
|
228.2
|
|
|
|
258.8
|
|
|
|
290.3
|
|
Sales of land
|
|
|
36.8
|
|
|
|
47.2
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mid-Atlantic
|
|
|
265.0
|
|
|
|
306.0
|
|
|
|
290.9
|
|
Texas(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of
homes(1)
|
|
|
625.4
|
|
|
|
592.0
|
|
|
|
408.4
|
|
Sales of
land(1)
|
|
|
9.6
|
|
|
|
10.3
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Texas(1)
|
|
|
635.0
|
|
|
|
602.3
|
|
|
|
415.4
|
|
West:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of homes
|
|
|
346.7
|
|
|
|
459.4
|
|
|
|
646.3
|
|
Sales of land
|
|
|
20.2
|
|
|
|
55.6
|
|
|
|
148.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total West
|
|
|
366.9
|
|
|
|
515.0
|
|
|
|
795.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homebuilding revenues
|
|
$
|
2,158.8
|
|
|
$
|
2,441.3
|
|
|
$
|
2,360.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Texas region excludes the Dallas division, which is now
classified as a discontinued operation. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
$
|
(543.6
|
)
|
|
$
|
11.8
|
|
|
$
|
138.1
|
|
Mid-Atlantic
|
|
|
(119.0
|
)
|
|
|
(20.9
|
)
|
|
|
38.1
|
|
Texas(1)
|
|
|
52.4
|
|
|
|
59.4
|
|
|
|
33.6
|
|
West
|
|
|
(473.1
|
)
|
|
|
26.4
|
|
|
|
186.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Homebuilding
|
|
|
(1,083.3
|
)
|
|
|
76.7
|
|
|
|
396.2
|
|
Financial Services
|
|
|
(0.8
|
)
|
|
|
21.5
|
|
|
|
8.5
|
|
Corporate and unallocated
|
|
|
(268.9
|
)
|
|
|
(341.8
|
)
|
|
|
(60.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from continuing operations before income
taxes
|
|
$
|
(1,353.0
|
)
|
|
$
|
(243.6
|
)
|
|
$
|
344.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Texas region excludes the Dallas division, which is now
classified as a discontinued operation. |
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Impairment charges on active communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
$
|
95.8
|
|
|
$
|
13.2
|
|
|
$
|
1.8
|
|
Mid-Atlantic
|
|
|
16.0
|
|
|
|
26.2
|
|
|
|
0.8
|
|
Texas(1)
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
|
|
West
|
|
|
68.0
|
|
|
|
41.9
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180.8
|
|
|
|
81.9
|
|
|
|
6.5
|
|
Write-offs of deposits and abandonment costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
370.1
|
|
|
|
8.3
|
|
|
|
|
|
Mid-Atlantic
|
|
|
63.3
|
|
|
|
11.8
|
|
|
|
|
|
Texas(1)
|
|
|
5.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
West
|
|
|
233.2
|
|
|
|
51.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
671.9
|
|
|
|
71.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairments and abandonment costs
|
|
$
|
852.7
|
|
|
$
|
153.2
|
|
|
$
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Texas region excludes the Dallas division, which is now
classified as a discontinued operation. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Deliveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
2,471
|
|
|
$
|
849.1
|
|
|
|
2,742
|
|
|
$
|
999.2
|
|
|
|
2,785
|
|
|
$
|
829.4
|
|
Mid-Atlantic
|
|
|
649
|
|
|
|
228.2
|
|
|
|
683
|
|
|
|
258.8
|
|
|
|
697
|
|
|
|
290.3
|
|
Texas(1)
|
|
|
2,421
|
|
|
|
625.4
|
|
|
|
2,382
|
|
|
|
592.0
|
|
|
|
1,610
|
|
|
|
408.4
|
|
West
|
|
|
1,039
|
|
|
|
346.7
|
|
|
|
1,453
|
|
|
|
459.4
|
|
|
|
2,228
|
|
|
|
646.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
6,580
|
|
|
|
2,049.4
|
|
|
|
7,260
|
|
|
|
2,309.4
|
|
|
|
7,320
|
|
|
|
2,174.4
|
|
Discontinued
operations(1)
|
|
|
190
|
|
|
|
44.9
|
|
|
|
564
|
|
|
|
129.7
|
|
|
|
449
|
|
|
|
92.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,770
|
|
|
|
2,094.3
|
|
|
|
7,824
|
|
|
|
2,439.1
|
|
|
|
7,769
|
|
|
|
2,266.6
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida (excluding Transeastern)
|
|
|
40
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transeastern
|
|
|
739
|
|
|
|
174.8
|
|
|
|
2,173
|
|
|
|
659.3
|
|
|
|
347
|
|
|
|
106.6
|
|
Mid-Atlantic
|
|
|
16
|
|
|
|
4.0
|
|
|
|
108
|
|
|
|
31.2
|
|
|
|
185
|
|
|
|
55.5
|
|
West
|
|
|
871
|
|
|
|
255.9
|
|
|
|
1,670
|
|
|
|
590.7
|
|
|
|
1,134
|
|
|
|
382.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated joint ventures
|
|
|
1,666
|
|
|
|
446.0
|
|
|
|
3,951
|
|
|
|
1,281.2
|
|
|
|
1,666
|
|
|
|
544.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total
|
|
|
8,436
|
|
|
$
|
2,540.3
|
|
|
|
11,775
|
|
|
$
|
3,720.3
|
|
|
|
9,435
|
|
|
$
|
2,810.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Texas region excludes the Dallas division, which is now
classified as a discontinued operation. |
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Net Sales
Orders(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
1,349
|
|
|
$
|
381.9
|
|
|
|
2,028
|
|
|
$
|
809.2
|
|
|
|
2,794
|
|
|
$
|
959.2
|
|
Mid-Atlantic
|
|
|
517
|
|
|
|
174.6
|
|
|
|
588
|
|
|
|
227.8
|
|
|
|
597
|
|
|
|
243.1
|
|
Texas(2)
|
|
|
1,996
|
|
|
|
506.6
|
|
|
|
2,406
|
|
|
|
611.3
|
|
|
|
2,182
|
|
|
|
558.2
|
|
West
|
|
|
974
|
|
|
|
269.8
|
|
|
|
1,063
|
|
|
|
345.6
|
|
|
|
2,469
|
|
|
|
817.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
4,836
|
|
|
|
1,332.9
|
|
|
|
6,085
|
|
|
|
1,993.9
|
|
|
|
8,042
|
|
|
|
2,578.1
|
|
Discontinued
operations(2)
|
|
|
60
|
|
|
|
15.6
|
|
|
|
498
|
|
|
|
119.8
|
|
|
|
572
|
|
|
|
124.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,896
|
|
|
|
1,348.5
|
|
|
|
6,583
|
|
|
|
2,113.7
|
|
|
|
8,614
|
|
|
|
2,702.5
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida (excluding Transeastern)
|
|
|
12
|
|
|
|
1.7
|
|
|
|
10
|
|
|
|
4.7
|
|
|
|
4
|
|
|
|
1.7
|
|
Transeastern
|
|
|
248
|
|
|
|
27.1
|
|
|
|
(208
|
)
|
|
|
(32.6
|
)
|
|
|
387
|
|
|
|
118.4
|
|
Mid-Atlantic
|
|
|
19
|
|
|
|
3.8
|
|
|
|
74
|
|
|
|
18.0
|
|
|
|
141
|
|
|
|
47.3
|
|
West
|
|
|
536
|
|
|
|
129.5
|
|
|
|
580
|
|
|
|
161.0
|
|
|
|
1,477
|
|
|
|
548.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated joint ventures
|
|
|
815
|
|
|
|
162.1
|
|
|
|
456
|
|
|
|
151.1
|
|
|
|
2,009
|
|
|
|
715.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total
|
|
|
5,711
|
|
|
$
|
1,510.6
|
|
|
|
7,039
|
|
|
$
|
2,264.8
|
|
|
|
10,623
|
|
|
$
|
3,417.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of cancellations. |
|
(2) |
|
The Texas region excludes the Dallas division, which is now
classified as a discontinued operation. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
|
Homes
|
|
|
$
|
|
|
Price
|
|
|
Homes
|
|
|
$
|
|
|
Price
|
|
|
Homes
|
|
|
$
|
|
|
Price
|
|
|
Sales Backlog:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida(1)
|
|
|
1,330
|
|
|
$
|
435.7
|
|
|
$
|
328
|
|
|
|
2,228
|
|
|
$
|
851.9
|
|
|
$
|
382
|
|
|
|
2,937
|
|
|
$
|
1,036.7
|
|
|
$
|
353
|
|
Mid-Atlantic
|
|
|
80
|
|
|
|
28.1
|
|
|
$
|
351
|
|
|
|
206
|
|
|
|
80.5
|
|
|
$
|
391
|
|
|
|
246
|
|
|
|
94.7
|
|
|
$
|
385
|
|
Texas(2)
|
|
|
549
|
|
|
|
154.8
|
|
|
$
|
282
|
|
|
|
974
|
|
|
|
273.6
|
|
|
$
|
281
|
|
|
|
950
|
|
|
|
254.3
|
|
|
$
|
268
|
|
West
|
|
|
420
|
|
|
|
117.7
|
|
|
$
|
280
|
|
|
|
461
|
|
|
|
189.9
|
|
|
$
|
412
|
|
|
|
851
|
|
|
|
303.8
|
|
|
$
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
2,379
|
|
|
|
736.3
|
|
|
$
|
310
|
|
|
|
3,869
|
|
|
|
1,395.9
|
|
|
$
|
361
|
|
|
|
4,984
|
|
|
|
1,689.5
|
|
|
$
|
339
|
|
Discontinued
operations(2)
|
|
|
3
|
|
|
|
0.8
|
|
|
$
|
253
|
|
|
|
222
|
|
|
|
55.1
|
|
|
$
|
248
|
|
|
|
288
|
|
|
|
65.0
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
2,382
|
|
|
|
737.1
|
|
|
$
|
309
|
|
|
|
4,091
|
|
|
|
1,451.0
|
|
|
$
|
355
|
|
|
|
5,272
|
|
|
|
1,754.5
|
|
|
$
|
333
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida (excluding Transeastern)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
14.2
|
|
|
$
|
308
|
|
|
|
36
|
|
|
|
9.5
|
|
|
$
|
261
|
|
Transeastern
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
697
|
|
|
|
194.3
|
|
|
$
|
279
|
|
|
|
3,078
|
|
|
|
886.2
|
|
|
$
|
288
|
|
Mid-Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
1.3
|
|
|
$
|
434
|
|
|
|
92
|
|
|
|
31.3
|
|
|
$
|
341
|
|
West
|
|
|
94
|
|
|
|
24.7
|
|
|
$
|
263
|
|
|
|
453
|
|
|
|
155.8
|
|
|
$
|
344
|
|
|
|
1,543
|
|
|
|
585.5
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated joint ventures
|
|
|
94
|
|
|
|
24.7
|
|
|
$
|
263
|
|
|
|
1,199
|
|
|
|
365.6
|
|
|
$
|
305
|
|
|
|
4,749
|
|
|
|
1,512.5
|
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total
|
|
|
2,476
|
|
|
$
|
761.8
|
|
|
$
|
308
|
|
|
|
5,290
|
|
|
$
|
1,816.6
|
|
|
$
|
343
|
|
|
|
10,021
|
|
|
$
|
3,267.0
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contracts with a third-party that marketed homes in the United
Kingdom included in backlog at December 31, 2007 were
cancelled in 2008. These contracts were for 511 homes
representing $115.6 million in revenue. |
|
(2) |
|
The Texas region excludes the Dallas division, which is now
classified as a discontinued operation. |
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Deliveries
|
|
|
Sales Orders
|
|
|
Deliveries
|
|
|
Sales Orders
|
|
|
Deliveries
|
|
|
Sales Orders
|
|
|
Average Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
$
|
344
|
|
|
$
|
283
|
|
|
$
|
364
|
|
|
$
|
399
|
|
|
$
|
298
|
|
|
$
|
343
|
|
Mid-Atlantic
|
|
$
|
352
|
|
|
$
|
338
|
|
|
$
|
379
|
|
|
$
|
387
|
|
|
$
|
417
|
|
|
$
|
407
|
|
Texas(1)
|
|
$
|
258
|
|
|
$
|
254
|
|
|
$
|
249
|
|
|
$
|
254
|
|
|
$
|
254
|
|
|
$
|
256
|
|
West
|
|
$
|
334
|
|
|
$
|
277
|
|
|
$
|
316
|
|
|
$
|
325
|
|
|
$
|
290
|
|
|
$
|
331
|
|
Continuing operations
|
|
$
|
311
|
|
|
$
|
276
|
|
|
$
|
318
|
|
|
$
|
328
|
|
|
$
|
297
|
|
|
$
|
321
|
|
Discontinued
operations(1)
|
|
$
|
236
|
|
|
$
|
259
|
|
|
$
|
230
|
|
|
$
|
241
|
|
|
$
|
205
|
|
|
$
|
218
|
|
Total
|
|
$
|
309
|
|
|
$
|
275
|
|
|
$
|
312
|
|
|
$
|
321
|
|
|
$
|
292
|
|
|
$
|
314
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida (excluding Transeastern)
|
|
$
|
282
|
|
|
$
|
142
|
|
|
$
|
|
|
|
$
|
476
|
|
|
$
|
|
|
|
$
|
410
|
|
Transeastern
|
|
$
|
237
|
|
|
$
|
109
|
|
|
$
|
303
|
|
|
$
|
157
|
|
|
$
|
307
|
|
|
$
|
306
|
|
Mid-Atlantic
|
|
$
|
249
|
|
|
$
|
202
|
|
|
$
|
289
|
|
|
$
|
243
|
|
|
$
|
300
|
|
|
$
|
336
|
|
West
|
|
$
|
294
|
|
|
$
|
242
|
|
|
$
|
354
|
|
|
$
|
278
|
|
|
$
|
337
|
|
|
$
|
371
|
|
Total unconsolidated joint ventures
|
|
$
|
268
|
|
|
$
|
199
|
|
|
$
|
324
|
|
|
$
|
332
|
|
|
$
|
327
|
|
|
$
|
356
|
|
Combined total
|
|
$
|
301
|
|
|
$
|
265
|
|
|
$
|
316
|
|
|
$
|
322
|
|
|
$
|
298
|
|
|
$
|
322
|
|
|
|
|
(1) |
|
The Texas region excludes the Dallas division, which is now
classified as a discontinued operation. |
Fiscal
Year 2007 Compared to Fiscal Year 2006
Florida: Homebuilding revenues decreased 12%
to $892.0 million for the year ended December 31, 2007
from $1.0 billion for the year ended December 31,
2006. The decrease in Homebuilding revenues was due to a 15%
decrease in revenues from home sales to $849.1 million for
the year ended December 31, 2007 from $999.2 million
for the year ended December 31, 2006, partially offset by
an increase in revenue from land sales to $42.8 million for
the year ended December 31, 2007 from $18.8 million
for the year ended December 31, 2006. The decrease in
revenue from home sales was due to a 10% decrease in the number
of home deliveries to 2,471 homes delivered for the year ended
December 31, 2007 from 2,742 homes delivered for the year
ended December 31, 2006, and a 6% decrease in the average
selling price of homes to $344,000 for the year ended
December 31, 2007 from $364,000 for the year ended
December 31, 2006.
The gross margin on home sales decreased to 8% for the year
ended December 31, 2007 from 26% for the year ended
December 31, 2006. During the year ended December 31,
2007, we recognized $95.8 million in impairment charges
compared to $13.2 million for the year ended
December 31, 2006. Gross margin on home sales, excluding
impairments, was 19% for the year ended December 31, 2007,
compared to 27% for the year ended December 31, 2006. This
decrease in gross margin was primarily due to an increase in
sales incentives offered to home buyers. The average sales
incentive per home delivered increased 193% to $66,300 per home
for the year ended December 31, 2007, from $22,600 for the
year ended December 31, 2006.
For the year ended December 31, 2007, we generated a loss
of $372.7 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$370.1 million, as compared to a loss on land sales of
$1.6 million during the year ended December 31, 2006,
which included $8.3 million of write-offs of deposits and
abandonments costs.
For the year ended December 31, 2007, we incurred
$90.5 million of impairment charges and accrued obligations
related to our unconsolidated joint ventures as compared to
$152.8 million for the year ended December 31, 2006.
Mid-Atlantic: Homebuilding revenues decreased
13% to $265.0 million for the year ended December 31,
2007 from $306.0 million for the year ended
December 31, 2006. The decrease in Homebuilding revenues
was
63
primarily due to a 12% decrease in revenues from home sales to
$228.2 million for the year ended December 31, 2007
from $258.8 million for the year ended December 31,
2006, and in part due to a decrease in revenue from land sales
to $36.8 million for the year ended December 31, 2007
from $47.2 million for the year ended December 31,
2006. The decrease in revenue from home sales was due to:
(1) a 5% decrease in the number of home deliveries to 649
homes delivered for the year ended December 31, 2007 from
683 homes delivered for the year ended December 31, 2006,
and (2) a 7% decrease in the average selling price of homes
to $352,000 for the year ended December 31, 2007 from
$379,000 for the year ended December 31, 2006.
The gross margin on home sales decreased to 6% for the year
ended December 31, 2007 from 11% for the year ended
December 31, 2006. During the year ended December 31,
2007, we recognized $16.0 million in impairment charges
compared to $26.2 million for the year ended
December 31, 2006. Gross margin on home sales, excluding
impairments, was 13% for the year ended December 31, 2007,
compared to 21% for the year ended December 31, 2006. This
decrease in gross margin was primarily due to an increase in
sales incentives offered to home buyers. The average sales
incentive per home delivered increased 27% to $31,400 per home
for the year ended December 31, 2007, from $24,800 for the
year ended December 31, 2006.
For the year ended December 31, 2007, we generated a loss
of $76.8 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$63.3 million, as compared to a loss on land sales of
$19.2 million during the year ended December 31, 2006,
which included $11.8 million of write-offs of deposits and
abandonments costs.
Texas: Homebuilding revenues increased 5% to
$635.0 million for the year ended December 31, 2007
from $602.3 million for the year ended December 31,
2006. The increase in Homebuilding revenues was primarily due to
a 6% increase in revenues from home sales to $625.4 million
for the year ended December 31, 2007 from
$592.0 million for the year ended December 31, 2006,
partially offset by a decrease in revenue from land sales to
$9.6 million for the year ended December 31, 2007 from
$10.3 million for the year ended December 31, 2006.
The increase in revenue from home sales was due to a 2% increase
in the number of home deliveries to 2,421 homes delivered for
the year ended December 31, 2007 from 2,382 homes delivered
for the year ended December 31, 2006, and a 4% increase in
the average selling price of homes to $258,000 for the year
ended December 31, 2007 from $249,000 for the year ended
December 31, 2006.
The gross margin on home sales was 22% for the year ended
December 31, 2007, consistent with the comparable prior
year. During the year ended December 31, 2007, we
recognized $1.0 million in impairment charges compared to
$0.6 million for the year ended December 31, 2006. The
average sales incentive per home delivered increased 38% to
$18,100 per home for the year ended December 31, 2007, from
$13,100 for the year ended December 31, 2006.
For the year ended December 31, 2007, we generated a loss
of $4.3 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$5.3 million, compared to a $1.7 million profit during
the year ended December 31, 2006, which included
$0.2 million of write-offs of deposits and abandonments
costs.
West: Homebuilding revenues decreased 29% to
$366.9 million for the year ended December 31, 2007
from $515.0 million for the year ended December 31,
2006. The decrease in Homebuilding revenues was primarily due to
a 25% decrease in revenues from home sales to
$346.7 million for the year ended December 31, 2007
from $459.4 million for the year ended December 31,
2006, and in part due to a decrease in revenue from land sales
to $20.2 million for the year ended December 31, 2007
from $55.6 million for the year ended December 31,
2006. The decrease in revenue from home sales was due to a 28%
decrease in the number of home deliveries to 1,039 homes
delivered for the year ended December 31, 2007 from 1,453
homes delivered for the year ended December 31, 2006,
partially offset by a 6% increase in the average selling price
of homes to $334,000 for the year ended December 31, 2007
from $316,000 for the year ended December 31, 2006.
The gross margin on home sales decreased to (9)% for the year
ended December 31, 2007 from 15% for the year ended
December 31, 2006. During the year ended December 31,
2007, we recognized $68.0 million in impairment charges
compared to $41.9 million for the year ended
December 31, 2006. Gross margin on
64
home sales, excluding impairments, was 11% for the year ended
December 31, 2007, compared to 24% for the year ended
December 31, 2006. This decrease in gross margin was
primarily due to an increase in sales incentives offered to home
buyers. The average sales incentive per home delivered increased
95% to $58,900 per home for the year ended December 31,
2007, from $30,200 for the year ended December 31, 2006.
For the year ended December 31, 2007, we generated a loss
of $240.5 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$233.2 million, as compared to a loss on land sales of
$44.3 million during year ended December 31, 2006,
which included $51.0 million of write-offs of deposits and
abandonment costs.
For the year ended December 31, 2007, we incurred
$99.9 million of impairment charges and accrued obligations
related to our unconsolidated joint ventures as compared to none
for the year ended December 31, 2006.
Fiscal
Year 2006 Compared to Fiscal Year 2005
Florida: Homebuilding revenues increased 18%
to $1.0 billion for the year ended December 31, 2006
from $859.2 million for the year ended December 31,
2005. The increase in Homebuilding revenues was primarily due to
a 20% increase in revenues from home sales to
$999.2 million for the year ended December 31, 2006
from $829.4 million for the year ended December 31,
2005, partially offset by a decrease in revenue from land sales
to $18.8 million for the year ended December 31, 2006
from $29.8 million for the year ended December 31,
2005. The increase in revenue from home sales was due to a 22%
increase the average selling price of homes to $364,000 for the
year ended December 31, 2006 from $298,000 for the year
ended December 31, 2005, partially offset by a 2% decrease
in the number of home deliveries to 2,742 homes delivered for
the year ended December 31, 2006 from 2,785 homes delivered
for the year ended December 31, 2005.
The gross margin on home sales increased to 26% for the year
ended December 31, 2006 from 25% for the year ended
December 31, 2005. During the year ended December 31,
2006, we recognized $13.2 million in impairment charges
compared to $1.8 million for the year ended
December 31, 2005. Gross margin on home sales, excluding
impairments, was 27% for the year ended December 31, 2006,
compared to 25% for the year ended December 31, 2005. The
average sales incentive per home delivered increased 562% to
$22,600 per home for the year ended December 31, 2006, from
$3,400 for the year ended December 31, 2005.
For the year ended December 31, 2006, we generated a loss
of $1.6 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$8.3 million, as compared to a profit on land sales of
$15.4 million during year ended December 31, 2005.
There were no write-offs of deposits and abandonment costs for
the year ended December 31, 2005.
Impairments on our investments in, and related receivables from,
unconsolidated joint ventures of $152.8 million were
recognized during the year ended December 31, 2006.
Mid-Atlantic: Homebuilding revenues increased
5% to $306.0 million for the year ended December 31,
2006 from $290.9 million for the year ended
December 31, 2005. The increase in Homebuilding revenues
was due to a sizeable increase in revenues from land sales to
$47.2 million for the year ended December 31, 2006
from $0.6 million for the year ended December 31,
2005, partially offset by a 11% decrease in revenue from home
sales to $258.8 million for the year ended
December 31, 2006 from $290.3 million for the year
ended December 31, 2005. The decrease in revenue from home
sales was due to a 9% decrease the average selling price of
homes to $379,000 for the year ended December 31, 2006 from
$417,000 for the year ended December 31, 2005, and a 2%
decrease in the number of home deliveries to 683 homes delivered
for the year ended December 31, 2006 from 697 homes
delivered for the year ended December 31, 2005.
The gross margin on home sales decreased to 11% for the year
ended December 31, 2006 from 24% for the year ended
December 31, 2005. During the year ended December 31,
2006, we recognized $26.2 million in impairment charges
compared to $0.8 million for the year ended
December 31, 2005. Gross margin on home sales, excluding
impairments, was 21% for the year ended December 31, 2006,
compared to 24% for the year ended December 31, 2005. This
decrease in gross margin was primarily due to an increase in
sales
65
incentives offered to home buyers. The average sales incentive
per home delivered increased 249% to $24,800 per home for the
year ended December 31, 2006, from $7,100 for the year
ended December 31, 2005.
For the year ended December 31, 2006, we generated a loss
of $19.2 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$11.8 million, as compared to a loss on land sales of
$4.6 million during year ended December 31, 2005.
There were not any write-offs of deposits and abandonment costs
for the year ended December 31, 2005.
Texas: Homebuilding revenues increased 45% to
$602.3 million for the year ended December 31, 2006
from $415.4 million for the year ended December 31,
2005. The increase in Homebuilding revenues was primarily due to
a 45% increase in revenues from home sales to
$592.0 million for the year ended December 31, 2006
from $408.4 million for the year ended December 31,
2005, and in part to an increase in revenue from land sales to
$10.3 million for the year ended December 31, 2006
from $7.0 million for the year ended December 31,
2005. The increase in revenue from home sales was due to a 48%
increase in the number of home deliveries to 2,382 homes
delivered for the year ended December 31, 2006 from 1,610
homes delivered for the year ended December 31, 2005,
partially offset by a 2% decrease the average selling price of
homes to $249,000 for the year ended December 31, 2006 from
$254,000 for the year ended December 31, 2005.
The gross margin on home sales was 22% for the year ended
December 31, 2006, consistent with the comparable prior
year. During the year ended December 31, 2006, we
recognized $0.6 million in impairment charges. There were
no impairment charges on home sales for the year ended
December 31, 2005. The average sales incentive per home
delivered decreased 27% to $13,100 per home for the year ended
December 31, 2006, from $17,900 for the year ended
December 31, 2005.
For the year ended December 31, 2006, we generated a profit
of $1.7 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$0.3 million, as compared to a loss on land sales of
$1.6 million during year ended December 31, 2005,
which also included $0.2 million of write-offs of deposits
and abandonment costs.
West: Homebuilding revenues decreased 35% to
$515.1 million for the year ended December 31, 2006
from $795.0 million for the year ended December 31,
2005. The decrease in Homebuilding revenues was due to a 29%
decrease in revenues from home sales to $459.5 million for
the year ended December 31, 2006 from $646.3 million
for the year ended December 31, 2005, and a decrease in
revenue from land sales to $55.6 million for the year ended
December 31, 2006 from $148.7 million for the year
ended December 31, 2005. The decrease in revenue from home
sales was due to a 35% decrease in the number of home deliveries
to 1,453 homes delivered for the year ended December 31,
2006 from 2,228 homes delivered for the year ended
December 31, 2005, partially offset by a 9% increase the
average selling price of homes to $316,000 for the year ended
December 31, 2006 from $290,000 for the year ended
December 31, 2005.
The gross margin on home sales decreased to 15% for the year
ended December 31, 2006 from 28% for the year ended
December 31, 2005. For the year ended December 31,
2006, we recognized $41.9 million in impairment charges
compared to $3.9 million for the year ended
December 31, 2005. Gross margin on home sales, excluding
impairments, was 24% for the year ended December 31, 2006,
compared to 28% for the year ended December 31, 2005. This
decrease in gross margin was primarily due to an increase in
sales incentives offered to home buyers. The average sales
incentive per home delivered increased 222% to $30,200 per home
for the year ended December 31, 2006, from $9,400 for the
year ended December 31, 2005.
For the year ended December 31, 2006, we generated a loss
of $44.3 million on our revenues from land sales, which
included write-offs of deposits and abandonment costs of
$51.0 million, as compared to a profit on land sales of
$36.3 million during year ended December 31, 2005.
There were no write-offs of deposits and abandonment costs for
the year ended December 31, 2005.
Operating income for the year ended December 31, 2006
included a $5.7 million charge for the impairment of
goodwill at our Colorado division.
66
Financial
Services Operations
The following table presents selected financial data related to
our Financial Services reportable segment for the periods
indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
$
|
36.5
|
|
|
$
|
63.3
|
|
|
$
|
47.5
|
|
Expenses
|
|
|
36.3
|
|
|
|
41.8
|
|
|
|
39.0
|
|
Goodwill Impairment
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services pretax income
|
|
$
|
(3.7
|
)
|
|
$
|
21.5
|
|
|
$
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Sources
and Uses of Cash
Our Homebuilding operations primary uses of cash have been
for land acquisitions, construction and development
expenditures, joint venture investments, and SG&A
expenditures. Our sources of cash to finance these uses have
been primarily cash generated from operations and cash from our
financing activities.
Our Financial Services operations primarily use cash to fund
mortgages, prior to their sale, and SG&A expenditures. We
rely primarily on internally generated funds, which include the
proceeds generated from the sale of mortgages, and the mortgage
operations warehouse lines of credit to fund these
operations. Our income before non-cash charges generally is our
most significant source of operating cash flow.
At December 31, 2007, we had unrestricted cash and cash
equivalents of $76.5 million as compared to
$54.2 million at December 31, 2006.
We are operating our businesses as debtors and
debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code and orders
of the Bankruptcy Court. As a result, we are subject to the
risks and uncertainties associated with our Chapter 11
cases which include, among other things:
|
|
|
|
|
our ability to operate subject to the terms of the
debtors-in-possession
financing;
|
|
|
|
our ability to obtain final approval of the debtor in possession
financing or some other financing alternative;
|
|
|
|
limitations on our ability to implement and execute our business
plans and strategy;
|
|
|
|
our ability to obtain and maintain normal terms with existing
and potential homebuyers, vendors and service providers and
maintain contracts and leases that are critical to our
operations;
|
|
|
|
our ability to obtain needed approval from the Bankruptcy Court
for transactions outside of the ordinary course of business,
which may limit our ability to respond on a timely basis to
certain events or take advantage of certain opportunities;
|
|
|
|
limitations on our ability to obtain Bankruptcy Court approval
with respect to motions in the Chapter 11 cases that we may
seek from time to time or potentially adverse decisions by the
Bankruptcy Court with respect to such motions, including as a
result of the actions of our creditors and other third parties,
who may oppose our plans or who may seek to require us to take
actions that we oppose;
|
|
|
|
limitations on our ability to reject contracts or leases that
are burdensome or uneconomical;
|
|
|
|
limitations on our ability to raise capital, including through
sales of assets; and
|
|
|
|
our ability to attract, motivate and retain key and essential
personnel is impacted by the Bankruptcy Code which limits our
ability to implement a retention program or take other measures
intended to motivate employees to remain with us.
|
67
These risks and uncertainties could negatively affect our
business and operations in various ways. For example, events or
publicity associated with our Chapter 11 cases could
adversely affect our relationships with existing and potential
homebuyers, vendors and employees, which in turn could adversely
affect our operations and financial condition, particularly if
such proceedings are protracted.
As a result of our Chapter 11 cases and the other matters
described herein, including the uncertainties related to the
fact that we have not yet had time to complete and obtain
confirmation of a plan of reorganization, there is substantial
doubt about our ability to continue as a going concern. Our
ability to continue as a going concern, including our ability to
meet our ongoing operational obligations, is dependent upon,
among other things:
|
|
|
|
|
our ability to generate and maintain adequate cash;
|
|
|
|
the cost, duration and outcome of the restructuring process;
|
|
|
|
our ability to comply with the terms of our cash collateral
order and, if necessary, seek further extensions of our ability
to use cash collateral;
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|
|
|
our ability to achieve profitability following a restructuring
given housing market challenges; and
|
|
|
|
our ability to retain key employees.
|
These challenges are in addition to those operational and
competitive challenges that we face in connection with our
business.
As a result of severe market conditions and our liquidity
constraints, during the year ended December 31, 2007, we
abandoned our rights under certain option agreements which
resulted in a 21,100 unit decline in our controlled
homesites. Abandonment decisions were made following in depth
community by community analyses of all option contracts based on
projected returns, amount and timing of incremental cash flow,
and owned homesites. In connection with the abandonment of our
rights under these option contracts, we forfeited cash deposits
of $82.5 million and had letters of credit of
$98.5 million drawn at December 31, 2007, which
increased our outstanding borrowings. Through June 30, 2008
an additional $72.8 million of letters of credit have been
drawn related to the abandonment of option contracts. In certain
instances, we have entered into development agreements in
connection with option contracts which require us to complete
the development of the land, at a fixed reimbursable amount,
even if we choose not to exercise our option and forfeit our
deposit and even if our costs exceed the reimbursable amount. As
of December 31, 2007 we recorded a $43.6 million loss
accrual with respect thereto. See Note 3 to our
consolidated financial statements included herein. In 2008, we
expect to continue to reduce inventory in an attempt to further
align our inventory levels to housing demand in those markets we
serve, reduce our cost of sales relating to construction and
labor costs for the homes we build, and reduce our selling,
general and administrative costs to levels consistent with fewer
home deliveries to operate within our liquidity constraints.
These or future actions may not be sufficient to allow us to
continue our operations.
Our consolidated financial statements are presented on a going
concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. We
have $1.8 billion in borrowings, have experienced
significant losses for the years ended December 31, 2007
and 2006 and continue to generate negative cash flows from
operations. For the year ended December 31, 2007, we
incurred a net loss from continuing operations of
$1.3 billion and had stockholders deficit of
$475.5 million, which was a significant decrease compared
to $774.9 million at December 31, 2006. There is
substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern and emerge
successfully from our Chapter 11 cases will depend upon our
development and consummation of a plan of reorganization. The
accompanying consolidated financial statements do not include
any adjustments to reflect the possible future effects on the
recoverability and classification of assets.
For the year ended December 31, 2007, cash used in
operating activities was $79.4 million, as compared to
$146.9 million during the year ended December 31,
2006. The improvement in the use of cash by our operating
activities is primarily a result of a decrease in our inventory
during the year ended December 31, 2007. On June 6,
2007, we sold substantially all of our Dallas/Fort Worth
division for approximately
68
$56.5 million in net cash proceeds and on
September 25, 2007 we sold in bulk, home sites in our
Mid-Atlantic and Virginia division for $31.3 million in net
cash proceeds. Both of these transactions helped to offset a
portion of the cash used by our operating activities during the
year ended December 31, 2007.
Cash used in investing activities was $34.0 million during
the year ended December 31, 2007, as compared to
$7.8 million during the year ended December 31, 2006.
The increase in cash used in investing activities is primarily
due to reductions in the receipt of capital distributions from
our unconsolidated joint ventures to $14.3 million during
the year ended December 31, 2007 from $52.9 million
for the prior year period and net acquisition cash disbursement
related to the Transeastern JV acquisition of $7.6 million,
partially offset by a decrease in net additions to property and
equipment to $8.9 million for the year ended
December 31, 2007 compared to $16.4 million for the
prior year period.
Refunds
of Federal & State Income Taxes
In April 2008, we received a $207.3 million refund of
previously paid income taxes for 2005 and 2006 through the
carryback of our taxable loss from 2007. In addition to this
refund resulting from the carryback of the 2007 loss through
June 2008, we have received refunds of overpayments of federal
and state income taxes reflected on our 2006 returns and a quick
refund application for 2007 estimated tax payments totaling
$33.4 million.
Financing
Activities
Our consolidated borrowings at December 31, 2007 were
$1.8 billion, an increase of $0.7 billion as compared
to December 31, 2006. See Note 8 to the consolidated
financial statements for homebuilding borrowings as of
December 31, 2007 and 2006.
The filing of the Chapter 11 cases triggered repayment
obligations under a number of instruments and agreements
relating to our direct and indirect financial obligations. As a
result, all our obligations under the notes became automatically
and immediately due and payable. We believe that any efforts to
enforce the payment obligations are stayed as a result of the
filing of the Chapter 11 cases in the Bankruptcy Court.
On February 5, 2008, pursuant to an interim order from the
Bankruptcy Court dated January 31, 2008, we entered into
the Senior Secured Super-Priority Debtor in Possession Credit
and Security Agreement. The agreement provided for a first
priority and priming secured revolving credit interim commitment
of up to $134.6 million. The agreement was subsequently
amended to extend it to June 19, 2008. No funds were drawn
under the agreement. The agreement was subsequently terminated
and we entered into an agreement with our secured lenders to use
cash collateral on hand (cash generated by our operations,
including the sale of excess inventory and the proceeds of our
federal tax refund of $207.3 million received in April
2008). Under the Bankruptcy Court order dated June 20,
2008, we are authorized to use cash collateral of our first lien
and second lien lenders (approximately $358.0 million at
the time of the order) for a period of six months in a manner
consistent with a budget negotiated by the parties. The order
further provides for the paydown of $175.0 million to our
first lien term loan facility secured lenders, subject to
disgorgement provisions in the event that certain claims against
the lenders are successful and repayment is required. The order
also reserves our sole right to paydown an additional
$15.0 million to our fist lien term loan facility secured
lenders. We are permitted under the order to incur liens and
enter into sale/leaseback transactions for model homes subject
to certain limitations. As part of the order, we have granted
the prepetition agents and the lenders various forms of
protection, including liens and claims to protect against any
diminution of the collateral value, payment of accrued, but
unpaid interest on the first priority indebtedness at the
non-default rate and the payment of reasonable fees and expenses
of the agents under our secured facilities.
Revolving
Loan Facility and First and Second Lien Term Loan
Facilities
To effect the Transeastern JV acquisition, on July 31,
2007, we entered into (i) the $200.0 million aggregate
principal amount first lien term loan facility (the First
Lien Term Loan Facility) and (ii) the
$300.0 million aggregate principal amount second lien term
loan facility (the Second Lien Term Loan Facility),
(First and Second Lien Term Loan Facilities taken together, the
Facilities) with Citicorp
69
North America, Inc. as Administrative Agent. The proceeds
from the credit facilities were used to satisfy claims of the
senior lenders against the Transeastern JV. Our existing
$800.0 million revolving loan facility (the Revolving
Loan Facility) was amended and restated to (i) reduce
the revolving commitments thereunder by $100.0 million and
(ii) permit the incurrence of the Facilities (and make
other conforming changes relating to the Facilities).
Collectively, these transactions are referred to as the
Financing. Net proceeds from the Financing at
closing were $470.6 million which is net of a 1% discount
and transaction costs. The Revolving Loan Facility expires on
March 9, 2010. The First Lien Term Loan Facility expires on
July 31, 2012 and the Second Lien Term Loan Facility
expires on July 31, 2013.
On October 25, 2007, our Revolving Loan Facility was
amended by Amendment No. 1 to the Second Amended and
Restated Revolving Credit Agreement. Among other things, the
existing agreement was amended with respect to (i) the
pricing of loans, (ii) limiting the amounts which may be
borrowed prior to December 31, 2007, (iii) modifying
the definition of a Material Adverse Effect,
(iv) waiving compliance with certain representations and
financial covenants, (v) establishing minimum operating
cash flow requirements, (vi) requiring compliance with
weekly budgets, (vii) inclusion of a five week operating
cash flow covenant at the end of November, (viii) requiring
the payment of certain fees, and (ix) reducing the
Lenders commitments by $50.0 million.
On October 25, 2007, the First Lien Term Loan Facility was
also amended by Amendment No. 1 to the First Lien Term Loan
Credit Agreement to amend certain terms including (i) the
pricing of loans, (ii) the definition of Material
Adverse Effect, and (iii) waiving compliance with
certain financial covenants.
On December 14, 2007, we entered into further amendments to
our First Lien Term Loan Credit Agreement and our Revolving Loan
Facility to, among other things, (i) extend through
February 1, 2008, the waiver of the financial covenants set
forth in Amendment No. 1 to the First Lien Term Loan Credit
Agreement and the Revolving Loan Facility, (ii) revise the
material adverse change representation with respect to matters
disclosed in our quarterly report on
Form 10-Q
for the nine months ended September 30, 2007,
(iii) modify a provision regarding the obligation to pay
amounts owed in connection with certain land banking
arrangements, and (iv) seek waivers of the cross-default
provision resulting from any breach of a covenant regarding the
matters described in (iii) above.
The interest rates on the Facilities and the Revolving Loan
Facility are based on LIBOR plus a margin or an alternate base
rate plus a margin, at our option. For the Revolving Loan
Facility, the LIBOR rates are increased by between 2.50% and
5.25% depending on our leverage ratio (as defined in the
Agreement) and credit ratings. Loans bearing interest at the
base rate (the rate announced by Citibank as its base rate or
0.50% above the Federal Funds Rate) increase between 1.00% and
4.25% in accordance with the same criteria. Based on our current
leverage ratio and credit ratings, our LIBOR loans bear interest
at LIBOR plus 5.25% and our base rate loans bear interest at the
Federal Funds Rate plus 4.25%. For the First Lien Term Loan
Facility, the interest rate is LIBOR plus 5.00% or base rate
plus 4.00%. For the Second Lien Term Loan Facility, the interest
rate is LIBOR plus 7.25% or base rate plus 6.25%. The Second
Lien Term Loan Facility allows us to pay interest, at our
option, (i) in cash, (ii) entirely by increasing the
principal amount of the Second Lien Term Loan Facility, or
(iii) a combination thereof. The Facilities and the New
Revolving Loan Facility are guaranteed by substantially all of
our domestic subsidiaries (the Guarantors). The
obligations are secured by substantially all of our assets,
including those of our Guarantors. Our mortgage and title
subsidiaries are not Guarantors.
Senior
Notes and Senior Subordinated Notes
On April 12, 2006, we issued $250.0 million of
81/4% Senior
Notes due 2011. In connection with the issuance of the
81/4% Senior
Notes, we filed within 90 days of the issuance a
registration statement with the SEC covering a registered offer
to exchange the notes for exchange notes of ours having terms
substantially identical in all material respects to the notes
(except that the exchange notes will not contain terms with
respect to special interest or transfer restrictions). The
registration statement has not been declared effective within
the required 180 days of issuance and, as a result, on
October 9, 2006 in accordance with the terms of the notes
became subject to special interest which accrues at a rate of
0.25% per annum during the
90-day
70
period immediately following the occurrence of such default, and
shall increase by 0.25% per annum at the end of each
90-day
period, up to a maximum of 1.0% per annum. For the year ended
December 31, 2007, we incurred an additional
$2.0 million of additional interest expense as a result of
such default. In addition, we accrued a contingency reserve of
$2.5 million for such interest expected to be incurred in
2008.
Our outstanding senior notes are guaranteed, on a joint and
several basis, by the Guarantor Subsidiaries, which are all of
our material domestic subsidiaries, other than our mortgage and
title subsidiaries (the Non-Guarantor Subsidiaries). Our
outstanding senior subordinated notes are guaranteed on a senior
subordinated basis by all of the Guarantor Subsidiaries. The
senior notes rank pari passu in right of payment with all
of our existing and future unsecured senior debt and senior in
right of payment to our senior subordinated notes and any future
subordinated debt. The senior subordinated notes rank pari
passu in right of payment with all of our existing and
future unsecured senior subordinated debt. The indentures
governing the senior notes and senior subordinated notes
generally require us to maintain a minimum consolidated net
worth and place certain restrictions on our ability, among other
things, to incur additional debt, pay or declare dividends or
other restricted payments, sell assets, enter into transactions
with affiliates, invest in joint ventures above specified
amounts, and merge or consolidate with other entities. Interest
on our outstanding senior notes and senior subordinated notes is
payable semi-annually.
Senior
Subordinated PIK Notes
As part of the transactions to settle the disputes regarding the
Transeastern JV, on July 31, 2007, the senior mezzanine
lenders to the Transeastern JV received $20.0 million in
aggregate principal amount of 14.75% Senior Subordinated
PIK Election Notes due 2015.
Interest on the PIK Notes is payable semi-annually. The Notes
are unsecured senior subordinated obligations of ours, and are
guaranteed on an unsecured senior subordinated basis by each of
our existing and future subsidiaries that guarantee our
7.5% Senior Subordinated Notes due 2015 (the Existing
Notes). We are required to pay 1% of the interest in cash
and the remaining 13.75%, at our option, (i) in cash,
(ii) entirely by increasing the principal amount of the
Notes or issuing new notes, or (iii) a combination thereof.
The Notes will mature on July 1, 2015. The indenture
governing the Notes contains the same covenants as contained in
the indenture governing the Existing Notes and is subject, in
most cases, to any change to such covenants made to the
indenture governing the Existing Notes. The Notes are redeemable
by us at redemption prices greater than their principal amount.
The PIK Notes contain an optional redemption feature that allows
us to redeem up to a maximum of 35% of the aggregate principal
amount of the PIK Notes using the proceeds of subsequent sales
of its equity interest at 114.75% of the aggregate principal
amount of the PIK Notes then outstanding, plus accrued and
unpaid interest. Additionally, after July 1, 2012, subject
to certain terms of our other debt agreements, we may redeem the
PIK Notes at a premium to the principal amount as follows:
2012 107.375%; 2013 103.688%; 2014 and
thereafter 100.000%. The call options exercisable at
anytime after July 1, 2012 at a premium do not require
bifurcation under SFAS 133 because they are only
exercisable by us and they are not contingently exercisable. The
redemption option conditionally exercisable based on the
proceeds raised from an equity offering at 114.75% of up to 35%
of the aggregate outstanding PIK Notes principal represents an
embedded call option that must be bifurcated from the PIK Notes;
however, the fair value of this call option is not material and
has not been bifurcated from the host instrument at
December 31, 2007.
The PIK Notes provide for registration rights for the holders
whereby the interest rate shall increase by 0.25% per annum for
the first 90 days of a registration default, as defined,
which amount shall increase by an additional 0.25% every
90 days a registration default is continuing, not to exceed
1.0% in the aggregate, from and including the date of the
registration default to and excluding the date on which the
registration default is cured. Registration default payments
shall be paid, at our option, in (i) cash,
(ii) additional Notes, or (iii) a combination thereof.
For the year ended December 31, 2007, we have not incurred
additional interest expense as a result of such default.
71
Financial
Services Borrowings
Our mortgage subsidiary has two warehouse lines of credit in
place to fund the origination of residential mortgage loans. The
revolving warehouse line of credit (the Warehouse Line of
Credit), which was entered into on December 5, 2007,
provides for revolving loans of up to $25.0 million. The
Warehouse Line of Credit replaced the $100.0 million
revolving warehouse line of credit that expired on
December 8, 2007. From January 25, 2008 through
December 4, 2008 the availability under the Warehouse Line
of Credit is reduced to $15.0 million. The
$150.0 million mortgage loan purchase facility
(Purchase Facility) was amended to decrease the size
of the facility to $75.0 million. From January 25,
2008 through December 4, 2008 the availability under the
Purchase Facility is reduced to $40.0 million. At no time
may the amount outstanding under the Warehouse Line of Credit
and the purchased loans pursuant to the Purchase Facility exceed
$55.0 million. Both the Warehouse Line of Credit and
Purchase Facility expire on December 4, 2008. The Warehouse
Line of Credit bears interest at the
30-day LIBOR
rate plus a margin of 2.0%, and is secured by funded mortgages,
which are pledged as collateral, and requires our mortgage
subsidiary to maintain certain financial ratios and minimums.
The Warehouse Line of Credit also places certain restrictions
on, among other things, our mortgage subsidiarys ability
to incur additional debt, create liens, pay or make dividends or
other distributions, make equity investments, enter into
transactions with affiliates and merge or consolidate with other
entities. Our mortgage subsidiary was in compliance with all
covenants and restrictions at December 31, 2007. At
December 31, 2007, our mortgage subsidiary had
$7.8 million in borrowings under its Warehouse Line of
Credit, and had the capacity to borrow an additional
$17.2 million, subject to our mortgage subsidiary
satisfying the relevant borrowing conditions. As discussed
above, the borrowing capacity changed on January 25, 2008.
On January 28, 2008, Preferred Home Mortgage Company, our
wholly-owned residential mortgage lending subsidiary, entered
into an Amended and Restated Agreement of Limited Liability
Company with Wells Fargo Ventures, LLC. The limited liability
company is known as PHMCWF, LLC but does business as
Preferred Home Mortgage Company, an affiliate of Wells
Fargo. Preferred Home Mortgage Company owns 49.9% of the
venture with the balance owned by Wells Fargo. Effective
April 1, 2008, the venture began to carry on the mortgage
business of Preferred Home Mortgage Company. The venture is
managed by a committee composed of six members, three from
Preferred Home Mortgage Company and three from Wells Fargo. The
venture entered into a revolving credit agreement with Wells
Fargo Bank, N.A. providing for advances of up to
$20.0 million.
Liquidity
Needs
We continue to have substantial liquidity needs in the operation
of our business and face liquidity challenges. Our business
depends upon our ability to obtain financing for the development
of our residential communities and to provide bonds to ensure
the completion of our projects. We expect to have sufficient
resources and borrowing capacity to meet all of our commitments
throughout the projected term of our Chapter 11 cases.
However, the success of our business plan, including our
restructuring program, and ultimately our plan of
reorganization, will depend on our ability to achieve our
budgeted operating results.
Contractual
Obligations and Commitments
At December 31, 2007, the amount of our annual debt service
payments was $173.9 million. This amount included annual
debt service payments on the senior and senior subordinated
notes of $91.2 million, interest payments on the Revolving
Loan Facility of $19.0 million, interest payments on the
First Lien Term Loan Facility of $19.5 million, interest
payments on the Second Lien Term Loan Facility of
$40.6 million and annual debt service on the Senior
Subordinated PIK Notes of $3.1 million, and interest
payments on the warehouse lines of credit of $0.5 million,
based on the balances outstanding as of December 31, 2007.
As of December 31, 2007, we had an aggregate of
approximately $692.4 million drawn under our Revolving Loan
Facility, term loans and warehouse lines of credit that are
subject to changes in interest rates. An increase or decrease of
1% in interest rates will change our annual debt service
payments by $6.9 million per year.
72
The following summarizes our significant contractual obligations
and commitments as of December 31, 2007 (dollars in
millions):
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|
Payment Due by Period
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|
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Between
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Between
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|
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Less Than
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1 and 3
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|
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3 and 5
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More Than
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|
|
Total
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|
|
1 Year
|
|
|
Years
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|
|
Years
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|
|
5 Years
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|
|
Contractual
Obligations(1):
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|
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|
|
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|
|
|
Debt Obligations (Note 8)
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$
|
1,773.7
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|
|
$
|
1,773.7
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|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest Payments
(Note 8)(2)
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|
|
909.2
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|
|
|
179.6
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|
|
|
363.9
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|
|
|
265.2
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|
|
|
100.5
|
|
Capital Lease Obligations
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Operating Lease Obligations (Note 10)
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30.0
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9.3
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9.7
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5.2
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|
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5.8
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|
Purchase Obligations
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|
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|
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FIN 48 Unrecognized Tax Benefits, net (Note 9)
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7.5
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0.9
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3.8
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|
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2.8
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Other Long-Term Liabilities Reflected on the Registrants
Statement of Financial Condition under GAAP
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Total
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$
|
2,720.4
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|
|
$
|
1,963.5
|
|
|
$
|
377.4
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|
|
$
|
273.2
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|
|
$
|
106.3
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(1) |
|
Does not include obligations for inventory not owned
of $32.0 million at December 31, 2007. See
Notes 2 and 3 to the consolidated financial statements
included elsewhere in this
Form 10-K
for more information on obligations for inventory not
owned. |
|
(2) |
|
Although the Company is currently in default on its debt, for
purposes of calculating interest payment obligations in the
table above, it is assumed that the interest payments would be
made at the regularly scheduled dates through maturity.
Represents scheduled interest payments on fixed rate debt
obligations. Estimates of future interest payments for variable
rate debt are based on interest rates as of December 31,
2007. |
Off-Balance
Sheet Arrangements
Land and
Homesite Option Contracts
In the ordinary course of business, we enter into option
contracts to purchase homesites and land held for development.
Under these option contracts, we have the right to buy homesites
at predetermined prices on a predetermined takedown schedule
anticipated to be commensurate with home starts. Option
contracts generally require the payment of a cash deposit or the
posting of a letter of credit, which is typically less than 20%
of the underlying purchase price, and may require monthly
maintenance payments. At December 31, 2007 we had
non-refundable cash deposits aggregating $56.9 million.
These option contracts are either with land sellers or third
party financial entities who have acquired the land to enter
into the option contract with us. Homesite option contracts are
generally non-recourse, thereby limiting our financial exposure
for non-performance to our cash deposits
and/or
letters of credit. In certain instances, we have entered into
development agreements in connection with option contracts which
require us to complete the development of the land, at a fixed
reimbursable amount, even if we choose not to exercise our
option and forfeit our deposit and even if our costs exceed the
reimbursable amount. As of December 31, 2007, we have
abandoned our rights under option contracts that require us to
complete the development of land for a fixed reimbursable
amount. At December 31, 2007, we recorded a loss accrual of
$10.3 million, in connection with the abandonment of these
option contracts, for our obligations under the development
agreements, based on our estimate of the excess of costs to
complete the development of the land over the fixed reimbursable
amounts. See Note 3 to our consolidated financial
statements included herein.
In addition, certain of these option contracts give the other
party the right to require us to purchase homesites or guarantee
certain minimum returns. During the year ended December 31,
2007, we abandoned our rights under certain option contracts
that give the other party the right to require us to purchase
the homesites. Some of these parties have given notice
exercising their right to require us to purchase the homesites.
We do not have the ability to comply with these notices due to
liquidity constraints. These option
73
contracts were previously consolidated and the inventory was
included in inventory not owned and the corresponding liability
was included in obligations for inventory not owned. As we do
not have the intent or the ability to comply with the
requirement to purchase the property, we have deconsolidated
these option contracts at December 31, 2007. Impairment
charges related to capitalized pre-acquisition costs associated
with these option contracts of $10.6 million were written
off during the year ended December 31, 2007. In addition,
at December 31, 2007, we recorded a loss accrual of
$22.3 million, in connection with the abandonment of these
option contracts, for our estimated obligations under these
option contracts, including $10.5 million for letters of
credit which we anticipated would be drawn due to nonperformance
under such contracts, based on estimated deficiency between the
fair value of the underlying inventory compared to our required
purchase price under the option contract. As of
December 31, 2007, the total required purchase price under
these option contracts was $26.1 million.
We are subject to the normal obligations associated with
entering into contracts for the purchase, development and sale
of real estate in the routine conduct of our business.
Additionally, at December 31, 2007, we had letters of
credit outstanding of approximately $70.6 million primarily
related to land development activities. We are committed under
various letters of credit and performance bonds which are
required for certain development activities, deposits on land
and deposits on homesite purchase contracts. Under these
arrangements, we had total outstanding letters of credit of
$115.5 million. As a result of abandoning our rights under
option contracts, as of December 31, 2007, we accrued
$43.6 million for letters of credits which we anticipated
would be drawn due to nonperformance under such contracts. In
addition, $98.5 million of letters of credit have been
drawn at December 31, 2007, which increased our borrowings
outstanding under our Revolving Loan Facility. Through
June 30, 2008 an additional $72.8 million of letters
of credit have been drawn related to the abandonment of option
contracts.
At December 31, 2007, we have total outstanding
performance/surety bonds of $207.3 million related to land
development activities and have estimated our exposure on our
outstanding surety bonds to be $116.9 million based on land
development remaining to be completed. At December 31,
2007, we recorded an accrual totaling $48.0 million for
surety bonds where we consider it probable that we will be
required to reimburse the surety for amounts drawn related to
defaulted agreements. We have been experiencing a reduction in
availability of security bond capacity. If we are unable to
secure such bonds, we may elect to post alternative forms of
collateral with government entities or escrow agents. Other
forms of collateral, if available, may result in higher costs to
us.
Investments
in Unconsolidated Joint Ventures
We have entered into strategic joint ventures that acquire and
develop land for our Homebuilding operations
and/or that
also build and market homes for sale to third parties. Our
partners in these joint ventures generally are unrelated
homebuilders, land sellers, financial investors or other real
estate entities. In some cases our Chapter 11 filings have
constituted an event of default under the joint venture lender
agreements which have resulted in the debt becoming immediately
due and payable, limiting the joint ventures access to
future capital. In joint ventures where the assets are being
financed with debt, the borrowings are non-recourse to us except
that we have agreed to complete certain property development
commitments in the event the joint ventures default and to
indemnify the lenders for losses resulting from fraud,
misappropriation and similar acts. In some cases, we have agreed
to make capital contributions to the joint venture sufficient to
comply with a specified debt to value ratio. Our obligations
become full recourse upon certain bankruptcy events with respect
to the joint venture. At December 31, 2007 and 2006, we had
investments in unconsolidated joint ventures of
$9.0 million and $129.0 million, respectively. We
account for these investments under the equity method of
accounting. These unconsolidated joint ventures are limited
liability companies or limited partnerships in which we have a
limited partnership interest and a minority interest in the
general partner. At December 31, 2007 and 2006, we had
receivables of $0.3 million and $27.2 million,
respectively, from these joint ventures due to loans and
advances, unpaid management fees and other items.
We believe that the use of off-balance sheet arrangements
enables us to acquire rights in land which we may not have
otherwise been able to acquire at favorable terms. Although, we
view the use of off-balance
74
sheet arrangements as beneficial to our Homebuilding activities,
as a result of our Chapter 11 cases and our reduced
investments in joint ventures, we anticipate only limited use of
joint ventures in the future.
Engle/Sunbelt
Joint Venture
In December 2004, we entered into a joint venture agreement with
Suntous Investors, LLC to form Engle/Sunbelt Holdings, LLC.
Engle/Sunbelt was formed to develop finished homesites and to
build and deliver homes in the Phoenix, Arizona market. Upon its
inception, the venture acquired eight of our existing
communities in Phoenix, Arizona. We and Suntous contributed
capital of approximately $28.0 million and
$3.2 million, respectively, and the joint venture itself
obtained financing arrangements with an aggregate borrowing
capacity of $180.0 million, of which $150.0 million
related to a revolving loan and $30.0 million related to a
mezzanine financing instrument.
In July 2005, we contributed assets to Engle/Sunbelt resulting
in a net capital contribution by us of $5.4 million. At
that time, Engle/Sunbelt amended its financing arrangements to
increase the revolving loan to $250.0 million. On
April 30, 2007, Engle/Sunbelt amended its revolving loan to
reduce the aggregate commitment of the lenders from
$250.0 million to $200.0 million and extended the
maturity date to March 17, 2008. In addition, the amendment
increased the minimum adjusted tangible net worth covenant and
reduced the minimum interest coverage ratio covenant. On
January 16, 2008, the facility was further amended to
reduce the revolving loan limit to $115.0 million and
terminate the mezzanine financing instrument. In addition, the
amendment reduced the minimum interest coverage ratio covenant.
While the borrowings by Engle/Sunbelt were non-recourse to us,
we had obligations to complete construction of certain
improvements and housing units in the event Engle/Sunbelt
defaulted. Additionally, we agreed to indemnify the lenders for,
among other things, potential losses resulting from fraud,
misappropriation, bankruptcy filings and similar acts by
Engle/Sunbelt.
In connection with the July 2005 contribution of assets to
Engle/Sunbelt, we realized a gain of $42.6 million, of
which $36.3 million was deferred due to our continuing
involvement with these assets through our investment. In March
2006, we assigned to Engle/Sunbelt our rights under a contract
to purchase approximately 539 acres of raw land for a price
of $18.7 million with a corresponding gain of
$15.8 million, of which $13.5 million was deferred. In
January 2007, we assigned to Engle/Sunbelt our rights under an
option contract for $5.1 million, all of which was
deferred, payable in the form of a note with a one year term,
bearing interest at 10% per annum. These deferrals were being
recognized in the consolidated statements of operations as homes
were delivered by the joint venture.
During the years ended December 31, 2007, 2006 and 2005, we
recognized revenue previously of $5.7 million,
$10.0 million and $2.7 million, respectively, related
to these transactions which is included in cost of sales-other
in the accompanying consolidated statements of operations. At
December 31, 2006, $22.8 million was deferred and
included in accounts payable and other liabilities in the
accompanying consolidated statement of financial condition.
There were no amounts deferred at December 31, 2007 due to
the write-off of our investment in the joint venture as
discussed below.
Although Engle/Sunbelt was not included in our Chapter 11
filings, our Chapter 11 filings constituted an event of
default under the financing arrangements and
Engle/Sunbelts debt became immediately due and payable.
In April 2008, we entered into a settlement agreement with the
lenders pursuant to which Engle/Sunbelt has agreed to the
appointment of a receiver and further agreed to either, at the
election of the lenders, deliver a deed in lieu of foreclosure
to its assets or consent to a judicial foreclosure. We have also
agreed to assist the lenders in their efforts to complete
certain construction for which we will receive arms length
compensation. Upon transfer of title to the lenders, we will be
relieved from our obligations under the completion and indemnity
agreements. The Bankruptcy Court, in which our Chapter 11
cases are pending, entered an order approving the settlement
agreement.
During the year ended December 31, 2007, we evaluated the
recoverability of our investment in and receivables from
Engle/Sunbelt for impairment under APB 18 and SFAS 114
respectively and recorded an
75
impairment charge of $60.7 million representing the full
value our investment in and receivables from
Engle/Sunbelt,
net of deferred gains of $22.5 million. No completion
obligation accrual has been established at December 31,
2007 with respect to Engle/Sunbelt due to the settlement
agreement reached with the lenders to the joint venture.
TOUSA/Kolter
Joint Venture
In January 2005, we entered into a joint venture with Kolter
Real Estate Group, LLC to form
TOUSA/Kolter
Holdings, LLC (TOUSA/Kolter) for the purpose of
acquiring, developing and selling approximately 1,900 homesites
and commercial property in a master planned community in South
Florida. The joint venture obtained senior and senior
subordinated term loans (the term loans) of which
$47.0 million and $7.0 million, respectively, were
outstanding as of December 31, 2007. We entered into a
Performance and Completion Agreement in favor of the lenders
under which we agreed, among other things, to construct and
complete the horizontal development of the lots and commercial
property and related infrastructure in accordance with certain
agreed plans. The term loans required, among other things,
TOUSA/Kolter to have completed the development of certain lots
by January 7, 2007. Due to unforeseen and unanticipated
delays in the entitlement process and additional development
requests by the county and water management district,
TOUSA/Kolter was unable to complete the development of these
certain lots by the required deadline. On June 21, 2007,
and in response to missing the development deadline,
TOUSA/Kolter amended the existing term loan agreements and we
amended the Performance and Completion Agreement to extend the
Performance and Completion Agreement development deadline to
May 31, 2008. The amendments to the term loan agreements
increased the interest rate on the senior term loan by
100 basis points to LIBOR plus 3.25% and by 50 basis
points to LIBOR plus 8.5% for the senior subordinated term loan.
As a condition to the amendment, we agreed to be responsible for
the additional 150 basis points; accordingly, this would be
a cost of the lots we acquired from TOUSA/Kolter. The amendment
also required us to increase the existing letter of credit by an
additional $1.8 million to $12.1 million and place an
additional $3.0 million cash deposit on the remaining lots
under option. The $3.0 million was used by TOUSA/Kolter to
pay down a portion of the senior term loan.
As we have abandoned our rights under the option contract due to
non-performance, at December 31, 2007, we recorded an
obligation of $12.1 million for the letter of credit we
anticipated would be drawn, wrote-off the $3.0 million cash
deposit and $1.0 million in capitalized pre-acquisition
costs. These costs are included in inventory impairments and
abandonment costs in the accompanying Consolidated Statements of
Operations.
The lenders to the joint venture have declared the loan to the
venture to be in default, but have not demanded performance of
our obligations under either the Performance and Completion
Agreement or the Remargining Agreement. The Remargining
Agreement requires us to pay to the Administrative Agent, upon
default of the joint venture, an amount necessary to decrease
the principal balance of the loan so that the outstanding
balance does not exceed 70% of the value of the joint
ventures assets. Based on the estimated fair value of the
assets of the joint venture, we recorded a $54.0 million
obligation (which includes the $12.1 million letter of
credit accrual), as of December 31, 2007, in connection
with our obligation under the re-margining provisions of the
loan agreement. We did not record any additional contingent
liability under the completion guarantee as the
$54.0 million accrual represents the full joint venture
debt obligation of the joint venture.
During the year ended December 31, 2007, we evaluated the
recoverability of our investment and receivables from
TOUSA/Kolter for impairment under APB 18 and SFAS 114
respectively and recorded an impairment charge of
$58.8 million representing the full value of our investment
in and receivables from TOUSA/Kolter, net of deferred gains of
$12.8 million which were deferred as a result of the
contributed assets and contract assignments to TOUSA/Kolter.
Additionally, we recorded an obligation of $18.9 million
for performance bonds and letters of credit that we placed on
behalf of the joint venture, as we consider it probable that we
will be required to reimburse these amounts for development
remaining to be completed.
76
Centex/TOUSA
at Wellington, LLC
In December 2005, we entered into a joint venture with Centex
Corporation to form Centex/TOUSA at Wellington, LLC
(Centex/TOUSA at Wellington) for the purpose of
acquiring, developing and selling approximately 264 homesites in
a community in South Florida. The joint venture obtained a term
loan of which $31.0 million was outstanding as of
December 31, 2007. The credit agreement requires us to
construct and complete the horizontal development of the lots
and related infrastructure in accordance with certain agreed
upon plans. On August 31, 2007, Centex/TOUSA at Wellington
received a notice from the lender requiring the joint venture
members to contribute approximately $10.0 million to the
joint venture to reduce the outstanding term loan in order to
comply with the 60%
loan-to-value
ratio covenant. We have not made the required equity
contribution.
We evaluated the recoverability of our investment in and
receivables from Centex/TOUSA at Wellington for impairment under
APB 18 and SFAS 114 respectively, and recorded an
impairment of $11.6 million representing the full value of
our investment in and receivables from Centex/TOUSA during the
year ended December 31, 2007. Based on the estimated fair
value of the assets of the joint venture, we recorded a
$15.5 million obligation, as of December 31, 2007, in
connection with our obligation under the re-margining provisions
of the loan agreement which represents our portion of the joint
ventures outstanding debt. We did not record any
additional contingent liability under the completion guarantee
as the $15.5 million accrual represents our portion of the
full joint venture debt obligation.
Layton
Lakes Joint Venture
In connection with our joint venture with Lennar Corporation
(the Layton Lakes Joint Venture) to acquire and
develop land, townhome properties and commercial property in
Arizona, we entered into a Completion and Limited Indemnity
Agreement for the benefit of the lender to the joint venture.
The agreement required us to maintain a tangible net worth of
$400.0 million. As a result of the decrease in our tangible
net worth, this covenant has been breached and the outstanding
$60.0 million loan to the joint venture is in default. The
default has not been cured and the lender, in its discretion,
may accelerate the loan, foreclose on its liens, and exercise
all other contractual remedies, including our completion
guaranty. In addition, the operating agreement of the joint
venture states that a breach by a member of any covenant of such
member contained in any loan agreement entered into in
connection with the financing of the property is an event of
default. Under the operating agreement, a defaulting member does
not have the right to vote or otherwise participate in the
management of the joint venture until the default is cured. A
defaulting member may not take down any lots from the joint
venture.
The joint ventures loan requires that the outstanding loan
balance may not exceed 65% of the value of the joint
ventures assets. Based on an appraisal obtained by the
bank, the joint venture has been notified that a principal
payment is required in order to maintain the specified loan to
value ratio. The joint venture has failed to make such principal
payment.
Additionally, we have not made the $1.0 million capital
contribution to the joint venture required under the operating
agreement and as a result Lennar Corporation made a member loan
to the joint venture for $0.7 million. We have been
informed by Lennar that the interest on the loan accrues at 20%
and that the principal and the interest are due immediately.
Under the operating agreement, the joint venture is not
obligated to convey lots to us until the loan and related
interest are repaid.
We evaluated the recoverability of our investment in and
receivables from Layton Lakes Joint Venture for impairment under
APB 18 and SFAS 114 respectively and recorded an impairment
charge of $24.9 million representing the full value our
investment in and receivables from Layton Lakes Joint Venture.
Additionally, we recorded an obligation of $4.4 million for
performance bonds that we placed on behalf of the joint venture,
as we consider it probable that we will be required to reimburse
these amounts for development remaining to be completed. We did
not record any obligation under the re-margining provision as we
are not a party to the re-margining agreement. We did not record
any additional contingent liability under the completion
guarantee as based on the estimated fair value of the assets of
the joint venture, we do not believe that it is probable that we
will called to perform under the completion obligation. Should
we be called to perform under the
77
completion agreement in the future, we estimate that our portion
of the costs to be incurred approximate $26.6 million.
Transeastern
JV
See discussion in Part I, Item 1 section of this
Form 10-K.
Other
During the year ended December 31, 2007, we evaluated the
recoverability of our investment in and receivables from an
unconsolidated joint venture located in Colorado, under APB 18
and SFAS 114 respectively, and recorded an impairment of
$2.8 million, which is included in loss from unconsolidated
joint ventures in the accompanying consolidated statements of
operations.
Certain of our unconsolidated joint venture agreements require
the ventures to allocate earnings to the members using preferred
return levels based on actual and expected cash flows throughout
the life of the venture. Accordingly, determination of the
allocation of the members earnings in these joint ventures
can only be certain at or near the completion of the project and
upon agreement of the partners. In order to allocate earnings,
the members of the joint venture must make estimates based on
expected cash flows throughout the life of the venture. During
the year ended December 31, 2006, two of our unconsolidated
joint ventures neared completion, which allowed the joint
venture to adjust the income allocation to its members based on
the final cash flow projections. The reallocation of earnings
resulted in the recognition of an additional $5.9 million
in income from unconsolidated joint ventures during the year
ended December 31, 2006. We have evaluated these revisions
in earnings allocations under SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of
Opinion No. 20 and FASB Statement No. 3, and have
appropriately accounted for this change in estimate in our
December 31, 2006 consolidated financial statements.
On August 30, 2006, we terminated one of our unconsolidated
joint ventures that was formed to purchase land, construct and
develop a condominium project in Northern Virginia. As part of
the agreement, we purchased our partners interest in the
venture for $32.6 million. After purchasing our
partners interest, we became the sole member of the entity
as a consolidated subsidiary. The purchase price was allocated
to the net assets of the venture, which were comprised primarily
of inventory.
During the year ended December 31, 2006, we evaluated the
recoverability of our investment in and receivables from an
unconsolidated joint venture located in Southwest Florida, under
APB 18 and SFAS 114 respectively, and recorded an
impairment of $7.7 million, which is included in loss from
unconsolidated joint ventures in the accompanying consolidated
statements of operations.
Recent
Accounting Pronouncements
See Note 2 to our consolidated financial statements.
Seasonality
of Operations
The homebuilding industry tends to be seasonal, as generally
there are more homes sold in the spring and summer months when
the weather is milder, although the number of sales contracts
for new homes is highly dependent on the number of active
communities and the timing of new community openings. Because
new home deliveries trail new home contracts by a number of
months, we typically have the greatest percentage of home
deliveries in the fall and winter, and slow sales in the spring
and summer months could negatively affect our full year results.
We operate primarily in the Southwest and Southeast, where
weather conditions are more suitable to a year-round
construction process than in other parts of the country. Our
operations in Florida and Texas are at risk of repeated and
potentially prolonged disruptions during the Atlantic hurricane
season, which lasts from June 1 until November 30.
78
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
As a result of our senior and senior subordinated notes
offerings, as of December 31, 2007, $1.1 billion of
our outstanding borrowings are based on fixed interest rates. We
are exposed to market risk primarily related to potential
adverse changes in interest rates on our revolving credit
facility, term loans and warehouse lines. The interest rates
relative to these borrowings fluctuate with the prime, Federal
Funds, LIBOR, and Eurodollar lending rates. As of
December 31, 2007, we had an aggregate of approximately
$692.4 million drawn under our Revolving Loan Facility,
term loans and warehouse lines of credit that are subject to
changes in interest rates. An increase or decrease of 1% in
interest rates will change our annual debt service payments by
$6.9 million per year.
On July 31, 2007, as part of the global settlement related
to the Transeastern JV, we entered into (1) a new
$200.0 million aggregate principal amount first lien term
loan facility which expires on July 31, 2012 and (2) a
new $300.0 million aggregate principal amount second lien
term loan facility which expires on July 31, 2013. The
interest rates relative to these borrowings fluctuate with the
LIBOR or Federal Funds lending rate.
The failure to pay interest on certain notes and the filing of
the Chapter 11 cases have constituted events of default or
otherwise triggered repayment obligations under a number of
instruments and agreements relating to our direct and indirect
financial obligations. As a result of the events of default, all
our obligations became automatically and immediately due and
payable and have been reflected as such in the following table.
We believe that any efforts to enforce the payment obligations
are stayed as a result of the filing of the Chapter 11
cases.
The following table presents the future principal payment
obligations and weighted average interest rates associated with
our debt instruments assuming our actual level of indebtedness
as of December 31, 2007 (dollars in millions):
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Expected Maturity Date
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Fair
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Liabilities
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2008
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2009
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2010
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2011
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2012
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Thereafter
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Value
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Debt
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Fixed rate
(71/2)%
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$
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325.0
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$
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13.0
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Fixed rate
(81/4)%
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250.0
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107.3
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Fixed rate (9)%
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300.0
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124.3
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Fixed rate
(103/8)%
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185.0
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10.6
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Fixed rate, Senior Subordinated PIK Notes
(143/4%)
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21.3
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0.2
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Variable rate, First Lien Term Loan Facility (9.8% at
December 31, 2007)
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199.0
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199.0
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Variable rate, Second Lien Term Loan Facility (12.8% at
December 31, 2007)
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317.1
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317.1
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Variable rate, credit facility (11.25% at December 31, 2007)
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168.5
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168.5
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Variable rate, warehouse lines of credit (6.6% at
December 31, 2007)
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7.8
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7.8
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Our operations are interest rate sensitive as overall housing
demand is adversely affected by increases in interest rates. If
mortgage interest rates increase significantly, this may
negatively affect the ability of homebuyers to secure adequate
financing. Higher interest rates also increase our borrowing
costs because, as indicated above, our bank loans will fluctuate
with the prime, Federal Funds, LIBOR, and Eurodollar lending
rates.
We may be adversely affected during periods of high inflation,
primarily because of higher land and construction costs. In
addition, inflation may result in higher interest rates. This
may significantly affect the affordability of permanent mortgage
financing for prospective purchasers, which in turn adversely
affects overall housing demand. In addition, this may increase
our interest costs. We attempt to pass through to our customers
any increases in our costs through increased selling prices and,
to date, inflation has not had a
79
material adverse effect on our results of operations. However,
there is no assurance that inflation will not have a material
adverse impact on our future results of operations.
|
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ITEM 8.
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Financial
Statements and Supplementary Data
|
Financial statements and supplementary data for us are on pages
F-1 through F-66.
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ITEM 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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ITEM 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
To ensure that the information we must disclose in our filings
with the Securities and Exchange Commission is recorded,
processed, summarized, and reported on a timely basis, we have
formalized our disclosure controls and procedures. Our principal
executive officer and principal financial officer have reviewed
and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e),
as of December 31, 2007. Based on such evaluation, such
officers have concluded that, as of December 31, 2007, our
disclosure controls and procedures were effective. There has
been no change in our internal control over financial reporting
during the quarter ended December 31, 2007 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Managements Report on Internal Control over Financial
Reporting is included on
page F-2
of this
Form 10-K.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2007 has been audited by
Ernst &Young LLP, an independent registered public
accounting firm, as stated in their attestation report which is
included on
page F-3
of this
Form 10-K.
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ITEM 9B.
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Other
Information
|
None.
PART III
|
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ITEM 10.
|
Directors
and Executive Officers of the Registrant
|
On August 8, 2007, we submitted to the New York Stock
Exchange an Annual CEO Certification, signed by our
Chief Executive Officer, certifying that our Chief Executive
Officer was not aware of any violation by the Company of the New
York Stock Exchanges corporate governance listing
standards. Additionally, we have filed as exhibits to this
Form 10-K
the CEO/CFO Certifications required under Section 302 of
the Sarbanes-Oxley Act.
80
Set forth in the table below is a list of the Companys
directors and executive officers, serving at the time of the
filing of this Report, together with certain biographical
information, including their ages as of March 15, 2008:
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Directors
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Age
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Principal Occupation
|
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Konstantinos Stengos
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71
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Chairman of the Board, TOUSA, Inc. and President and Managing
Director, Technical Olympic S.A.
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Antonio B. Mon
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62
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Chief Executive Officer and Vice Chairman of TOUSA, Inc.
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Andreas Stengos
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45
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Executive Vice President and General Manager, Technical Olympic
S.A.
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George Stengos
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41
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Managing Director, Mochlos S.A.
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Marianna Stengou
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30
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Vice President, Porto Carras Campus Hospitality Studies S.A.
|
Larry D. Horner
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74
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Retired, Chairman and Chief Executive Officer of KPMG LLP
|
William A. Hasler
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66
|
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Private Investor
|
Tommy L. McAden
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45
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Executive Vice President and Chief Financial Officer, TOUSA, Inc.
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Michael J. Poulos
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77
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Private Investor
|
Susan B. Parks
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51
|
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Chief Executive Officer, Walkstyles, Inc.
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J. Bryan Whitworth
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69
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Of Counsel, Wachtell, Lipton, Rosen & Katz
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Officers
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Age
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Principal Occupation
|
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John Boken
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45
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Chief Restructuring Officer, TOUSA, Inc.
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George Yeonas
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53
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Executive Vice President and Chief Operating Officer TOUSA, Inc.
|
Paul Berkowitz
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59
|
|
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Executive Vice President and Chief of Staff, TOUSA, Inc.
|
Michael Glass
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49
|
|
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President, Financial Services, TOUSA, Inc.
|
Angela Valdes
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|
38
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|
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Vice President and Chief Accounting Officer, TOUSA, Inc.
|
Directors
Konstantinos Stengos has been the Chairman of our Board
since December 15, 1999. Mr. Stengos has served as the
President and Managing Director of Technical Olympic S.A.
(TOSA), our parent company, since he formed TOSA in
1965. Mr. Stengos has also served as Director and President
of Technical Olympic Services, Inc. (TOSI) since
October 2003. Mr. Stengos has been the Chairman and
President of Mochlos S.A., a subsidiary of TOSA, from December
2002 till June 2003 and from May 2004 till today.
Mr. Stengos has been the Chairman, President and Managing
Director of the same company from June 2003 till May 2004.
Mr. Stengos served as Chairman, President and Managing
Director of Porto Carras S.A. from December 1999 to June 2004
and as Chairman and President of the same company from June 2004
to October 2005 and from June 2007 till today.
Antonio B. Mon has been a director of the Company, and
our Executive Vice Chairman, Chief Executive Officer, and
President, since June 25, 2002. From October 2001 to June
2002, Mr. Mon served as the Chief Executive Officer of
Technical Olympic, Inc., our former parent company
(TOI). From May 2001 to October 2001,
Mr. Mon was a consultant to TOI. From 1997 to 2001,
Mr. Mon was the Chairman of Maywood Investment Company,
LLC, a private firm engaged in private equity investments and
general consulting. In 1991, Mr. Mon co-founded Pacific
Greystone Corporation, a west coast homebuilder that merged with
Lennar Corporation in 1997, and served as its Vice Chairman from
1991 to 1997. Prior to 1991,
81
Mr. Mon worked in various positions for The Ryland Group,
Inc. (a national homebuilder), M.J. Brock Corporation (a
California homebuilder), and Cigna Corporation (a financial
services corporation).
Andreas Stengos has been a director of the Company since
1999 and Executive Vice President since May 2006. Since
October 2003, Mr. Stengos has served as a director,
Executive Vice President and Treasurer of TOSI. Mr. Stengos
served as the Managing Director of TOSA from 1989 to 1995 and as
General Manager and Technical Director of TOSA from 1995 through
June 2004. Since June 2004, Mr. Stengos has served as the
Executive Vice President and General Manager of TOSA, and as the
General Manager and Executive Vice President of Mochlos, S.A.
George Stengos has been a director of the Company since
1999, and has served as our Executive Vice President since April
2004. Since October 2003, Mr. Stengos has served as a
director, Vice President, and Secretary of TOSI. From 2001 to
December 2002, Mr. Stengos served as President and Chairman
of the Board of Mochlos S.A., a subsidiary of TOSA, and is
currently Managing Director of Mochlos S.A. From 1993 to 2000,
Mr. Stengos was Executive Vice President of Mochlos S.A.
Mr. Stengos has also served as Managing Director of TOSA
since June 30, 2004. Mr. Stengos was also charged
relating to the 1999 sale of certain shares of TOSA discussed
above and those charges were dismissed in January 2007.
Marianna Stengou has been a director of the Company since
2004. Ms. Stengou has served as Vice President of
Porto Carras Campus Hospitality Studies S.A., an affiliate of
TOSA, since April 2002. Ms. Stengou has served in a variety
of positions at TOSA, including most recently as Director of
Human Resources and Quality, from January 2000 to June 2006.
Ms. Stengou served as President and Managing Director of
Toxotis Construction S.A., a subsidiary of TOSA, from November
1997 to June 2004. Ms. Stengou has been a director of TOSA
since June 2003. Ms. Stengou has also served as Executive
Director of Mochlos S.A., a subsidiary of TOSA, from June 2005
to June 2006 and as Director of the same company from July 2006
till today.
Larry D. Horner has been a director of the Company since
1997. Mr. Horner served as Chairman of Pacific USA Holdings
Corp., a subsidiary of Pacific Electric Wire and Cable Co., a
cable manufacturer, from 1994 to 2001, and was Chairman of the
Board of Asia Pacific Wire & Cable Corporation
Limited, a manufacturer of copper wire, cable and fiber optic
wire products, with operations in Southeast Asia, which was
publicly traded on the New York Stock Exchange until 2001. He is
also a former director of Atlantis Plastics, Inc. (a
manufacturer of plastic films and plastic components), UT
Starcom, Inc. (a provider of wireline, wireless, optical, and
access switching solutions), Clinical Data, Inc.(a provider of
biogenetics), and New River Pharmaceuticals, Inc. ,
Mr. Horner was formerly a director of ConocoPhillips (an
energy company) and American General Corp. (an insurance
company). Mr. Horner was formerly associated with KPMG LLP,
a professional services firm, for 35 years, retiring as
Chairman and Chief Executive Officer of both the U.S. and
International firms in 1991. Mr. Horner is a certified
public accountant.
William A. Hasler has been a director of the Company
since 1998. Mr. Hasler served as Co-Chief Executive Officer
of Aphton Corporation, a biopharmaceutical company, from July
1998 to January 2004. From August 1991 to July 1998,
Mr. Hasler served as Dean of the Haas School of Business at
the University of California at Berkeley. Prior to that, he was
both Vice Chairman and a director of KPMG LLP, a professional
services firm. Mr. Hasler also serves on the boards of
Mission West Properties (a real estate investment trust), DiTech
Networks (a global telecommunications equipment supplier for
voice networks), Schwab Funds (a mutual fund company),
Harris-Stratex Networks (a provider of high-speed wireless
transmission solutions), and Genitope Corporation (a
biopharmaceutical company), Mr. Hasler is a certified
public accountant.
Tommy L. McAden has been a director of the Company since
May 2005. Mr. McAden became our Chief Financial Officer on
January 18, 2008. From April 2004 until then,
Mr. McAden served as our Executive Vice
President Strategy and Operations. Mr. McAden
also served as our Vice President of Finance and Administration,
Chief Financial Officer, and Treasurer from June 2002 to
April 2004. Mr. McAden served as a director,
Vice President, and Chief Financial Officer of TOI from
January 2000 to June 2002. From 1994 to December 1999,
Mr. McAden was Chief Accounting Officer of Pacific USA
Holdings Corp. and Chief Financial Officer of Pacific Realty
Group, Inc., which was our former 80% stockholder.
82
Michael J. Poulos has been a director of the Company
since 2000. Mr. Poulos serves as a director of Forethought
Financial Group, Inc., a privately-held life insurance company,
headquartered in Indianapolis, Indiana. Mr. Poulos served
as Chairman, President, and Chief Executive Officer of Western
National Corporation, a life insurance holding company, from
1993 until 1998 when he retired. Mr. Poulos worked for
American General Corporation, from 1970 to 1993, and served as
its President from 1981 to 1991 and as its Vice Chairman from
1991 to 1993. He also served as a Director of American General
Corporation from 1980 to 1993; and again from 1998 to 2001.
Susan B. Parks has been a director of the Company since
2004. She is the founder and, since September 2003, Chief
Executive Officer of WalkStyles, Inc., a consumer products
company. Prior to becoming an entrepreneur, Ms. Parks was
with Kinkos, a multibillion dollar document solutions and
business services company, from August 2002 until September
2003, where she served as the Executive Vice President of
Operations. From August 2000 to January 2002, Ms. Parks was
with Gateway, a personal computer and related products company,
where she served as Senior Vice President of US Markets for
Gateway, leading their US Market business unit, and Senior Vice
President of the Gateway Business division. Ms. Parks also
spent approximately five years with U.S. West, a
telecommunications company, serving in a succession of senior
positions and has served in various leadership positions at both
Mead Corporation and Avery-Dennison.
J. Bryan Whitworth has been a director of the
Company since January 2005. Mr. Whitworth has been Of
Counsel at Wachtell, Lipton, Rosen & Katz, a leading
corporate and securities law firm, since May 2003. Prior to
joining Wachtell, Lipton, Rosen & Katz,
Mr. Whitworth served as Executive Vice President of
ConocoPhillips, a global integrated petroleum company, from
September 2002 to March 2003. Mr. Whitworth joined
ConocoPhillips in 2002, following the merger of Conoco Inc. and
Phillips Petroleum Company. Prior to the merger,
Mr. Whitworth spent more than 30 years with Phillips
Petroleum Co., most recently serving as the Executive Vice
President and Chief Administrative Officer of that company.
Mr. Whitworth also served as Phillips Petroleums
Senior Vice President of Human Resources, Public Relations and
Government Relations, as well as its General Counsel.
Officers
John R. Boken was appointed TOUSAs Chief
Restructuring Officer in January 2008. Mr. Boken has been
an employee of Kroll Zolfo Cooper LLC, an affiliate of KZC
Services, LLC, (collectively, KZC) for over five
years. Mr. Boken has been a managing director at Kroll
Zolfo Cooper LLC since January 2004. He specializes in providing
restructuring advisory and crisis management services to
financially distressed companies and their creditors. As part of
his employment at KZC, from May 2005 until October 2007,
Mr. Boken was Chief Restructuring Officer of auto supplier
Collins & Aikman Corporation during its
chapter 11 proceeding. From May 2005 through December 2005,
he was Chief Executive Officer of Entegra Power Group upon its
emergence from bankruptcy. From May 2003 through December 2003,
Mr. Boken was President and Chief Operating Officer of NRG
Energy, Inc. in its Chapter 11 case. Prior to joining KZC
in July 2002, Mr. Boken was the managing partner of the Los
Angeles corporate restructuring practice of Arthur Andersen.
Mr. Boken will become our Chief Executive Officer
immediately after the filing of the Annual Report on
Form 10K.
George Yeonas became our Executive Vice President and
Chief Operating Officer of TOUSA, Inc. and President of TOUSA
Homes, Inc. in January 2008. Prior to that, Mr. Yeonas was
Executive Vice President of TOUSA Homes since May 2005. Between
November 2004 and May 2005, Mr. Yeonas provided consulting
services to the Company. Prior to joining TOUSA Homes,
Mr. Yeonas was a partner and chief operating officer of
Rocky Gorge Homes. From 1997 to 2002, he was Chief Operating
Officer, a Board Director and Chief Executive Officer of The
Fortress Group. Before The Fortress Group, he held executive
level positions with Arvida, NVR, and Trammell Crow.
Paul Berkowitz became our Executive Vice President and
Chief of Staff in January 2007. Before joining TOUSA,
Mr. Berkowitz was a principal shareholder at Greenberg
Traurig, LLP, a major international law firm, where he served a
wide variety of clients. Mr. Berkowitz concentrated on
corporate and securities law and has extensive experience in
financing transactions, public and private offerings, and
mergers and acquisitions.
83
Michael Glass became our President of Financial Services
in July 2006, overseeing the operations of Universal Land Title,
Inc., Preferred Home Mortgage Company, and Alliance Insurance
and Information Services, LLC each a subsidiary of TOUSA.
Mr. Glass founded Universal Land Title in 1986. He is
active in local, state, and national organizations to set
industry standards. In addition, he headed the acquisition of
Alliance Insurance and Information Services offering
homeowners insurance products to TOUSA homebuyers.
Angela Valdes became our Chief Accounting Officer in July
2007. Prior to that, Ms. Valdes served as TOUSAs
Corporate Controller since 2002 and Vice President since July
2006. Ms. Valdes oversees TOUSAs accounting and
financial reporting functions. Prior to joining TOUSA,
Ms. Valdes spent 11 years in public accounting at
Ernst & Young LLP, specializing in publicly-traded
companies with a focus on the real estate industry.
Ms. Valdes is a certified public accountant.
Certain
Legal Proceedings
As a result of our Chapter 11 cases, Ms. Stengou,
Ms. Parks and Messrs. Konstantinos Stengos,
George Stengos, Andreas Stengos, Mon, Horner, Hasler,
McAden, Poulos and Whitworth have each served as directors of a
company that filed a petition under the federal bankruptcy laws
within the last five years. Similarly, as officers or directors
of TOUSA
and/or
certain of our subsidiaries, Ms. Valdes and
Messrs. Boken, Yeonas, Berkowitz and Glass have served as
directors or executive officers of a company that filed a
petition under the federal bankruptcy laws within the last five
years.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934
requires our directors, executive officers, and persons who own
more than 10% of our outstanding common stock to file with the
Commission reports of changes in their ownership of common
stock. Directors, officers, and greater than 10% stockholders
are also required to furnish us with copies of all forms they
file under this regulation. To our knowledge, based solely on a
review of the copies of such reports furnished to us and
representations that no other reports were required, during the
year ended December 31, 2007, all Section 16(a) filing
requirements applicable to our directors, officers, and greater
than 10% stockholders were satisfied.
Stockholder
Nominees to Board of Directors
We have not adopted procedures by which stockholders may
recommend director candidates for consideration because we do
not intend to hold annual meetings of stockholders during the
pendency of our Chapter 11 cases.
Code of
Business Conduct and Ethics
Our Code of Business Conduct and Ethics covers a wide range of
business practices and procedures. The Code is just one part of
our comprehensive compliance program. It is designed to
supplement, not be a substitute for, other policy statements and
compliance documents which may be published from time to time by
TOUSA and its subsidiaries. The Code applies to all of our
directors, the Principal Executive Officer, the Principal
Financial Officer, the Principal Accounting Officer, the
Controller, and any other officers, associates, agents and
representatives, including consultants. The Code requires that
each individual deal fairly, honestly and constructively with
governmental and regulatory bodies, customers, suppliers, and
competitors, and it prohibits any individuals taking
unfair advantage through manipulation, concealment, abuse of
privileged information, or misrepresentation of material fact.
Further, it imposes an express duty to act in our best interests
and to avoid influences, interests or relationships that could
give rise to an actual or apparent conflict of interest.
Conflicts of interest are prohibited as a matter of policy,
except under guidelines approved by the Board of Directors.
Conflicts of interest may not always be clear-cut, so if there
is ever a question, associates are instructed to consult with
higher levels of management or the Chief of Staff. There can be
no waiver of any part of this Code for any director or officer
except by a vote of the Board of Directors or a designated board
committee that will ascertain whether a waiver is appropriate
under all the circumstances. In case a waiver of this Code is
granted to a director or officer, notice of such waiver will be
posted on our website
84
within five days of the Board of Directors vote or will be
otherwise disclosed as required by applicable law. We granted no
waivers under our Code in 2007. A copy of the Code is posted on
our website at www.tousa.com.
Ethics
Hotline
We strongly encourage our associates to raise possible ethical
issues and offer several channels by which employees and others
may report ethical concerns or incidents, including, without
limitation, concerns about accounting, internal controls or
auditing matters. We provide an Ethics Hotline that is available
24 hours a day, seven days a week. Individuals may choose
to remain anonymous. We prohibit retaliatory actions against
anyone who, in good faith, raises concerns or questions
regarding ethics, discrimination or harassment matters, or
reports suspected violations of other applicable laws,
regulations or policies. Calls to the Ethics Hotline are
received by a vendor, which reports the calls to our Assistant
Vice President of Internal Audit and our Vice President of Human
Resources for review and investigation.
Audit
Committee and Designated Audit Committee Financial
Experts
The Audit Committee consists of Messrs. Hasler, Poulos, and
Whitworth. Our Board of Directors has determined that each of
Messrs. Hasler and Poulos is an audit committee
financial expert as defined by the rules promulgated by
the Securities and Exchange Commission, and that, in the
business judgment of the Board of Directors, Mr. Whitworth
is financially literate. Mr. Hasler serves on the audit
committees of three publicly traded companies in addition to
serving as the chair of the Companys Audit Committee. The
Board of Directors has determined that such simultaneous service
by Mr. Hasler does not impair his ability to serve on the
Companys Audit Committee.
The Audit Committee generally has responsibility for:
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appointing, overseeing, and determining the compensation of our
independent registered public accounting firm;
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reviewing the plan and scope of the accountants audit;
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reviewing our audit and internal control functions;
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approving all permitted non-audit services provided by our
independent registered public accounting firm; and
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reporting to our full Board of Directors regarding all of the
foregoing.
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The Audit Committee meets with the independent registered public
accounting firm and our management in connection with its review
and approval of the unaudited financial statements for inclusion
in our Quarterly Reports on
Form 10-Q
and the annual audited financial statements for inclusion in our
Annual Report on
Form 10-K.
Additionally, the Audit Committee provides our Board of
Directors with such additional information and materials as it
may deem necessary to make our Board of Directors aware of
significant financial matters that require its attention. The
Audit Committee held 8 meetings during the year ended
December 31, 2007 and no actions in writing were taken.
Although our shares are no longer listed on the New York
Stock Exchange, we believe that our Audit Committees
financial experts are independent as defined in the New York
Stock Exchange Listing Standards. The Audit Committees
goals and responsibilities are set forth in a written Audit
Committee charter, a copy of which can be found on the
Companys website, www.tousa.com, under
Investor Information Corporate
Governance.
85
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ITEM 11.
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Executive
Compensation
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COMPENSATION
COMMITTEE REPORT
The Compensation, Human Resources and Benefits Committee has
reviewed and discussed the Compensation Discussion and Analysis
contained in this Annual Report on
Form 10-K
with members of senior management. Based on these reviews and
discussions, the Committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in
TOUSAs Annual Report on
Form 10-K.
Compensation, Human Resources and Benefits Committee
Michael J. Poulos Chairman
Larry D. Horner
Susan B. Parks
COMPENSATION
DISCUSSION AND ANALYSIS
This discussion and analysis discusses and analyzes the
objectives and manner of implementation of our executive
compensation programs for our executive officers identified in
the Summary Compensation Table below. This analysis should be
read in conjunction with the compensation related tables that
immediately follow this discussion and analysis. This discussion
and analysis was prepared in cooperation with our Compensation
Committee, the members of which have reviewed this discussion
and analysis.
Compensation
Philosophy
Guiding Principles. Our compensation
philosophy was developed to balance and align the goals of
stockholders and executive management. As noted below, our
compensation philosophy has been modified as a result of the
filing of our Chapter 11 cases. Because a given years
results are seldom the immediate or sole consequence of
executive actions taken in that year, the Human Resources,
Compensation and Benefits Committee pursues a compensation
policy that recognizes efforts, results, and responsibilities
over the long-term. In administering compensation policy, the
Compensation Committee establishes executive officers base
salaries and variable compensation, consisting of cash bonuses
and various types of longer-term incentives.
Traditionally, the Compensation Committees decision making
process encompasses three underlying principles:
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compensation should be adequate to attract and retain qualified
associates;
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compensation paid to such associates should be based on their
individual duties and responsibilities and their relative
contribution to overall results; and
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compensation should reflect remuneration levels for comparable
positions inside and outside the organization. The Committee
reviews the Companys compensation policies at least
annually with its overall review of executive compensation.
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Since the filing of our Chapter 11 cases, to assist in
achieving our objectives, our Compensation Committee has been
engaged in developing, with the assistance of Towers, Perin,
compensation packages that are designed to reward not only
individual contributions but also our corporate achievement of
certain pre-determined milestones in our Chapter 11
restructuring. This program is designed to encourage our
management team to pursue strategic opportunities in the design,
building and marketing of our homes, while effectively managing
the risks and challenges inherent to a company experiencing a
Chapter 11 restructuring.
Our program is intended to attract, motivate, reward and retain
the management talent required to achieve our corporate
objectives. We analyze our competitors compensation
principles. Our philosophy is that we need to pay our senior
associates between the mean and
75th percentile
in order to retain the senior associates in light of intense
competition for senior managers in the homebuilding industry.
Our compensation philosophy
86
puts a strong emphasis on pay for performance to correlate the
long-term growth of value with managements most
significant compensation opportunities. In addition, we support
a performance oriented environment that rewards achievement of
both our internal goals and enhanced Company performance as
measured against performance levels of comparable companies in
the industry. Finally, we believe that the Company must have the
flexibility to deal with market conditions which are outside the
control of management and to establish a compensation program
designed to attract, motivate and retain executive officers,
particularly in light of the severe challenges currently facing
the homebuilding industry. As such, the Company may elect to pay
bonuses related to the achievement of goals that are not tied to
arithmetic formulas.
In the past, the four primary components of compensation for our
senior executives were base salary, annual cash incentive bonus,
our performance unit program, and a stock option and restricted
stock plan. None of the units granted pursuant to the
performance unit program vested. Therefore all of the units
automatically expired on December 31, 2007 and no units
will be granted in the future.
The relative weighting of the four components was designed to
strongly reward long-term performance. Base pay was targeted at
or below median market levels and typically represents (12% to
15%) of total annual compensation. The annual cash incentive
component is targeted at the
60th percentile
of our peer group and depends on the achievement of annual
performance objectives that are established in advance of the
performance year being measured. If performance objectives are
met, this component would represent approximately (20% to 30%)
of total annual compensation. Finally, the long-term equity
component was (55% to 60%) of total annual compensation.
Determination of Compensation. Our
Compensation Committee is composed entirely of independent
outside directors and is responsible for setting our
compensation policy. The Compensation Committee has
responsibility for setting each component of compensation for
the chief executive officer and utilizes the services of Towers
Perrin in developing the CEO Annual Incentive Bonus Plan
described below. The Compensation Committee is also responsible
for setting the total compensation of members of the Board of
Directors. The chief executive officer and the vice president of
human resources develop initial recommendations for all
components of compensation for the direct reports of the chief
executive officer and present their recommendations to the
Compensation Committee for review and approval. Mr. Mon
presents an evaluation of the executive officers who report
directly to him to the Committee. The evaluation was based on
performance by each of the executive officers against certain
criteria. A primary measure was financial performance as against
budget. Review of performance with respect to our strategic
plans was also considered. Rather than employing strictly
formulaic approaches, these factors were considered as a whole
to determine compensation.
Tax Deductibility of Pay. Under
Section 162(m) of the Internal Revenue Code, compensation
in excess of $1 million that is not paid pursuant to a plan
approved by stockholders and does not satisfy the
performance-based exception of Section 162(m) is not
deductible as a compensation expense by us. Compensation
decisions for the executive officers are made with full
consideration of the implications of Section 162(m).
Although the Compensation Committee intends to structure
arrangements in a manner that preserves deductibility under
Section 162(m), it believes that maintaining flexibility is
important and reserves the right to pay amounts or make awards
that are nondeductible.
Recoupment of Annual Incentives. The
Compensation Committee will evaluate the facts and circumstances
surrounding any restatement of earnings (should one occur) and,
in its sole discretion, may accordingly adjust compensation of
the chief executive officer and others as it deems appropriate,
especially related to annual cash incentive awards.
Components
of Our Compensation Program
Base Pay. The base pay component of total
compensation is paid in cash on a semi-monthly basis. The levels
of base salaries are generally targeted at or below the median
level of the peer group, typically around the
45th percentile. The individuals relative position of
the median pay level is based on a variety of factors, including
experience and tenure in a position, scope of responsibilities,
individual performance and personal contributions to corporate
performance. Annual increases, if any, are based on these same
factors. Highly experienced and long-tenured executives would
not typically receive an increase in base pay each year. The
87
median pay levels are determined from survey information
provided by nationally recognized consulting firms that gather
compensation data from many companies. The specific companies
included in the peer group are: WCI Communities, Jim Walter
Homes, Taylor Morrison, Inc., NVR, Meritage, Kimball Hill Homes,
DR Horton, Centex Homes, Pulte, Mercedes Homes, Lennar
Homes, K. Hovnanian Enterprises, Inc. KB Home, M.D.C.
Holdings, Inc., The Ryland Group, Inc., Standard Pacific
Corporation and Taylor Woodrow, Inc.
Cash Incentive Bonus. The bonus formulas
contained in the employment agreements of our senior officers
are designed to reward personal contribution and performance,
measured by reference to performance measures tailored to the
particular responsibilities of the specific senior officer, such
as achievement of specified targets for return on equity, net
income, divisional profit goals, divisional contribution
targets, customer service rankings,
and/or
overall performance. In the budgeting process, a profit goal
contribution target is set and minimum threshold performance
criteria for officers must be reached before any bonus awards
will be granted. In addition, the individual performance of each
senior officer
and/or any
extraordinary or unusual circumstances or events are taken into
consideration in making bonus awards. As a result, the
Compensation Committee has the discretion to and does, from time
to time, grant discretionary bonuses in excess of the amounts
resulting from the bonus formulae contained in the relevant
employment agreements for our senior officers.
Executive Savings Plan. Effective
December 1, 2004, the Company implemented the TOUSA, Inc.
Executive Savings Plan (the Savings Plan). The
Savings Plan allows a select group of management or highly
compensated employees of the Company or certain of the
Companys subsidiaries to elect to defer up to 90% of their
salary and up to 100% of their bonus. The Company credits an
amount equal to the compensation deferred by a participant to
that participants deferral account under the Savings Plan.
Each participants deferral account is credited with
income, gains and losses based on the performance of investment
funds selected by the participant from a list of funds
designated by the Company. Participants are at all times 100%
vested in the amounts that they choose to defer under the
Savings Plan. The deferred compensation credited to a
participants account is payable in cash, commencing upon a
date specified in advance by the participant pursuant to the
terms of the Savings Plan or, if earlier, the termination of the
participants employment with the Company or its
subsidiary, subject to certain provisions allowing accelerated
distributions in the event of disability, certain changes
of control of the Company
and/or
unforeseeable emergencies. The Company does not make any
contributions under the Savings Plan and may terminate the
Savings Plan and discontinue any further deferrals under the
Savings Plan at any time. The obligation to make distributions
from participant accounts under the Savings Plan is an
unsecured, general obligation of the Company.
Health and Insurance Plans. The Named
Executive Officers are eligible to participate in
company-sponsored benefit programs on the same terms and
conditions as those made available to salaried associates
generally. Basic health benefits, life insurance, disability
benefits and similar programs are provided to ensure that
associates have access to healthcare and income protections for
themselves and their family members. Under TOUSAs medical
plans, higher paid associates are required to pay a
significantly higher amount of the total premiums, while the
premiums paid by lower paid associates receive a higher subsidy
from TOUSA.
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Summary
Compensation Table
The following tables present certain summary information
concerning compensation earned for services rendered by
(i) our Chief Executive Officer, Chief Financial Officer
and our other three most highly compensated executive officers
(the Named Executive Officers). The form of the
tables is set by SEC regulations.
2007
EXECUTIVE COMPENSATION
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Change in
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Pension
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Non-Equity
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Value and
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Stock
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Option
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Incentive Plan
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NQDC
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All Other
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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Antonio B. Mon
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2007
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1,288,408
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(1)
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898,061
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(2)
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654,864
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(3)
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2,841,333
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Chief Executive Officer
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2006
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1,200,562
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1,000,000
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264,795
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(4)
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2,465,357
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Stephen M. Wagman
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2007
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441,663
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325,000
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12,000
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(5)
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778,663
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Executive Vice President &
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2006
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Chief Financial Officer
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George C. Yeonas
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2007
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100,000
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1,125,000
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700,724
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(6)
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1,925,724
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Exec Vice President
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2006
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100,000
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700,000
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(6)
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800,000
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TOUSA Homes
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< |