10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from N/A to                     

Commission file number 1-10959

STANDARD PACIFIC CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   33-0475989

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

15326 Alton Parkway, Irvine, CA   92618-2338
(Address of principal executive offices)   (Zip Code)

(Registrant’s telephone number, including area code) (949) 789-1600

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  x     No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   x            Accelerated filer   ¨             Non-accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨     No  x.

Registrant’s shares of common stock outstanding at November 1, 2007: 72,777,896

 



Table of Contents

STANDARD PACIFIC CORP.

FORM 10-Q

INDEX

 

          Page No.

PART I.         Financial Information

  

ITEM 1.

  

Financial Statements

  
  

Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2007 and 2006

   2
  

Condensed Consolidated Balance Sheets as of
September 30, 2007 and December 31, 2006

   3
  

Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2007 and 2006

   4
  

Notes to Unaudited Condensed Consolidated Financial Statements

   5

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   30

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   53

ITEM 4.

  

Controls and Procedures

   54

PART II.         Other Information

  

ITEM 1.

  

Legal Proceedings

   57

ITEM 1A.

  

Risk Factors

   57

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   60

ITEM 3.

  

Defaults Upon Senior Securities

   60

ITEM 4.

  

Submission of Matters to a Vote of Security Holders

   60

ITEM 5.

  

Other Information

   60

ITEM 6.

  

Exhibits

   60

SIGNATURES

   61

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007     2006     2007     2006  
     (Dollars in thousands, except per share amounts)  
     (Unaudited)  

Homebuilding:

        

Home sale revenues

   $ 618,246     $ 828,398     $ 1,875,023     $ 2,704,836  

Land sale revenues

     57,264       5,715       193,656       12,176  
                                

Revenues

     675,510       834,113       2,068,679       2,717,012  
                                

Cost of home sales

     (612,902 )     (669,579 )     (1,834,231 )     (2,010,976 )

Cost of land sales

     (114,336 )     (5,592 )     (315,306 )     (15,224 )
                                

Cost of sales

     (727,238 )     (675,171 )     (2,149,537 )     (2,026,200 )
                                

Gross margin

     (51,728 )     158,942       (80,858 )     690,812  
                                

Selling, general and administrative expenses

     (99,458 )     (111,449 )     (297,364 )     (349,824 )

Income (loss) from unconsolidated joint ventures

     (38,700 )     5,153       (119,414 )     30,897  

Other expense

     (4,360 )     (6,801 )     (34,256 )     (19,303 )
                                

Homebuilding pretax income (loss)

     (194,246 )     45,845       (531,892 )     352,582  
                                

Financial Services:

        

Revenues

     2,336       5,726       12,015       15,519  

Expenses

     (3,593 )     (4,845 )     (11,923 )     (13,957 )

Income from unconsolidated joint ventures

     248       394       780       1,435  

Other income

     210       299       690       950  
                                

Financial services pretax income (loss)

     (799 )     1,574       1,562       3,947  
                                

Income (loss) before taxes

     (195,045 )     47,419       (530,330 )     356,529  

(Provision) benefit for income taxes

     75,379       (16,572 )     203,954       (134,430 )
                                

Net income (loss)

   $ (119,666 )   $ 30,847     $ (326,376 )   $ 222,099  
                                

Earnings (Loss) Per Share:

        

Basic

   $ (1.85 )   $ 0.48     $ (5.04 )   $ 3.39  

Diluted

   $ (1.85 )   $ 0.47     $ (5.04 )   $ 3.31  

Weighted Average Common Shares Outstanding:

        

Basic

     64,849,612       64,321,003       64,717,017       65,465,162  

Diluted

     64,849,612       65,688,060       64,717,017       67,068,937  

Cash dividends per share

   $ 0.04     $ 0.04     $ 0.12     $ 0.12  

The accompanying notes are an integral part of these condensed consolidated statements.

 

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STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     September 30,
2007
    December 31,
2006
 
     (Dollars in thousands)  
     (Unaudited)  
ASSETS     

Homebuilding:

    

Cash and equivalents

   $ 5,085     $ 17,376  

Trade and other receivables

     76,288       77,725  

Inventories:

    

Owned

     2,830,588       3,268,788  

Not owned

     124,335       203,197  

Investments in and advances to unconsolidated joint ventures

     327,768       310,699  

Deferred income taxes

     330,232       185,268  

Goodwill and other intangibles

     72,568       102,624  

Other assets

     141,025       59,219  
                
     3,907,889       4,224,896  
                

Financial Services:

    

Cash and equivalents

     21,822       14,727  

Mortgage loans held for sale

     78,204       254,958  

Mortgage loans held for investment

     10,471       —    

Other assets

     11,552       8,360  
                
     122,049       278,045  
                

Total Assets

   $ 4,029,938     $ 4,502,941  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Homebuilding:

    

Accounts payable

   $ 116,368     $ 109,444  

Accrued liabilities

     281,165       280,905  

Liabilities from inventories not owned

     44,051       83,149  

Revolving credit facility

     253,500       289,500  

Trust deed and other notes payable

     98,341       52,498  

Senior notes payable

     1,424,318       1,449,245  

Senior subordinated notes payable

     249,319       149,232  
                
     2,467,062       2,413,973  
                

Financial Services:

    

Accounts payable and other liabilities

     3,924       4,404  

Mortgage credit facilities

     83,163       250,907  
                
     87,087       255,311  
                

Total Liabilities

     2,554,149       2,669,284  
                

Minority Interests

     44,301       69,287  

Stockholders’ Equity:

    

Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued

     —         —    

Common stock, $0.01 par value; 100,000,000 shares authorized; 70,849,786 and 64,422,548 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively

     708       644  

Additional paid-in capital

     329,825       323,099  

Retained earnings

     1,107,777       1,446,043  

Accumulated other comprehensive loss, net of tax

     (6,822 )     (5,416 )
                

Total Stockholders’ Equity

     1,431,488       1,764,370  
                

Total Liabilities and Stockholders’ Equity

   $ 4,029,938     $ 4,502,941  
                

The accompanying notes are an integral part of these condensed consolidated balance sheets.

 

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STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended September 30,  
     2007     2006  
     (Dollars in thousands)  
     (Unaudited)  

Cash Flows From Operating Activities:

    

Net income (loss)

   $ (326,376 )   $ 222,099  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

(Income) loss from unconsolidated joint ventures

     118,634       (32,332 )

Cash distributions of income from unconsolidated joint ventures

     16,085       66,239  

Depreciation and amortization

     5,930       5,431  

Amortization of stock-based compensation

     9,811       12,597  

Excess tax benefits from share-based payment arrangements

     (1,498 )     (2,440 )

Deferred income taxes

     (141,498 )     (6,409 )

Noncash inventory impairment charges and write-offs of deposits and capitalized preacquisition costs

     495,811       78,876  

Noncash goodwill impairment charges

     29,380       —    

Changes in cash and equivalents due to:

    

Trade and other receivables

     (647 )     17,683  

Mortgage loans held for sale

     171,006       25,130  

Inventories - owned

     40,959       (876,871 )

Inventories - not owned

     9,665       76,899  

Other assets

     (81,935 )     (30,626 )

Accounts payable

     4,769       (9,667 )

Accrued liabilities

     (42,521 )     (53,396 )
                

Net cash provided by (used in) operating activities

     307,575       (506,787 )
                

Cash Flows From Investing Activities:

    

Net cash paid for acquisitions

     (2,883 )     (7,530 )

Investments in and advances to unconsolidated home building joint ventures

     (210,640 )     (173,710 )

Mortgage loans held for investment

     (4,723 )     —    

Capital distributions and repayments of advances from unconsolidated home building joint ventures

     65,501       82,785  

Net additions to property and equipment

     (5,358 )     (10,185 )
                

Net cash provided by (used in) investing activities

     (158,103 )     (108,640 )
                

Cash Flows From Financing Activities:

    

Net proceeds from (payments on) revolving credit facility

     (36,000 )     410,700  

Principal payments on trust deed and other notes payable

     (8,602 )     (25,897 )

Principal payments on senior notes payable

     (25,000 )     —    

Net proceeds from the issuance of senior subordinated convertible notes

     97,000       —    

Proceeds from senior term loans

     —         350,000  

Purchase of senior subordinated convertible note hedge

     (9,120 )     —    

Net payments on mortgage credit facilities

     (167,744 )     (27,534 )

Excess tax benefits from share-based payment arrangements

     1,555       2,546  

Dividends paid

     (7,778 )     (7,915 )

Repurchases of common stock

     (2,901 )     (104,705 )

Proceeds from the issuance of common stock under share lending facility

     60       —    

Proceeds from the exercise of stock options

     3,862       1,987  
                

Net cash provided by (used in) financing activities

     (154,668 )     599,182  
                

Net increase (decrease) in cash and equivalents

     (5,196 )     (16,245 )

Cash and equivalents at beginning of period

     32,103       28,623  
                

Cash and equivalents at end of period

   $ 26,907     $ 12,378  
                

The accompanying notes are an integral part of these condensed consolidated statements.

 

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STANDARD PACIFIC CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

 

1. Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by Standard Pacific Corp., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q. Certain information normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles has been omitted pursuant to applicable rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2007 and the results of operations and cash flows for the periods presented.

Certain items in the prior period condensed consolidated financial statements have been reclassified to conform with the current period presentation.

The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006. Unless the context otherwise requires, the terms “we,” “us,” “our” and “the Company” refer to Standard Pacific Corp. and its subsidiaries. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

 

2. Segment Reporting

We operate two principal businesses: Homebuilding and financial services (consisting of our mortgage financing and title operations). In accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), we have determined that each of our homebuilding operating divisions and our financial services operations are our operating segments. Corporate is a non-operating segment.

Our homebuilding operations construct and sell single-family attached and detached homes. In accordance with the aggregation criteria defined in SFAS 131, our homebuilding operating segments have been grouped into three reportable segments: California, consisting of our operating divisions in California; Southwest, consisting of our operating divisions in Arizona, Texas, Colorado and Nevada; and Southeast, consisting of our operating divisions in Florida, North Carolina and Illinois. In particular, we have determined that the homebuilding operating divisions within their respective reportable segments have similar economic characteristics, including similar historical and expected future long-term gross margin percentages. In addition, the operating divisions also share all other relevant aggregation characteristics prescribed in SFAS 131, such as similar product types, production processes and methods of distribution.

Our mortgage financing operations provide mortgage financing to our homebuyers in substantially all of the markets in which we operate. Our title service operations provide title examinations for our homebuyers in Texas and South Florida. Our mortgage financing and title services operations are included in our financial services reportable segment, which is separately reported in our condensed consolidated financial statements under “Financial Services.”

 

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Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance and treasury, information technology, risk management and litigation, and human resources. Corporate also provides the necessary administrative functions to support us as a publicly traded company. A substantial portion of the expenses incurred by Corporate are allocated to the homebuilding operating divisions based on their respective percentage of revenues.

Segment financial information relating to the Company’s homebuilding operations was as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007     2006     2007     2006  
     (Dollars in thousands)  

Homebuilding revenues:

        

California

   $ 304,117     $ 372,357     $ 881,590     $ 1,315,642  

Southwest

     218,931       240,838       740,753       699,395  

Southeast

     152,462       220,918       446,336       701,975  
                                

Total homebuilding revenues

   $ 675,510     $ 834,113     $ 2,068,679     $ 2,717,012  
                                

Homebuilding pretax income (loss):

        

California

   $ (131,723 )   $ 11,763     $ (327,518 )   $ 199,356  

Southwest

     (15,705 )     13,304       (122,917 )     60,267  

Southeast

     (45,677 )     21,418       (77,121 )     103,844  

Corporate

     (1,141 )     (640 )     (4,336 )     (10,885 )
                                

Total homebuilding pretax income (loss)

   $ (194,246 )   $ 45,845     $ (531,892 )   $ 352,582  
                                

Homebuilding income (loss) from unconsolidated joint ventures:

        

California

   $ (37,192 )   $ 5,032     $ (117,919 )   $ 30,777  

Southwest

     2       88       46       101  

Southeast

     (1,510 )     33       (1,541 )     19  
                                

Total homebuilding income (loss) from unconsolidated joint ventures

   $ (38,700 )   $ 5,153     $ (119,414 )   $ 30,897  
                                

Homebuilding pretax income (loss) includes the following non-cash pretax inventory, joint venture and goodwill impairment charges and land deposit write-offs recorded in the following segments:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (Dollars in thousands)

Homebuilding non-cash pretax impairment charges:

           

California (1)

   $ 147,321    $ 40,325    $ 381,486    $ 60,330

Southwest (2)

     21,880      6,864      164,246      6,988

Southeast (3)

     54,292      11,489      113,455      12,539
                           

Total homebuilding non-cash pretax impairment charges

   $ 223,493    $ 58,678    $ 659,187    $ 79,857
                           

(1) The California reportable segment includes our share of non-cash pretax inventory impairment charges related to our unconsolidated joint ventures of $40.2 million and $132.4 million, respectively, for the three and nine months ended September 30, 2007 and $980,000 for the three and nine months ended September 30, 2006.

 

(2) The Southwest reportable segment includes our share of non-cash pretax inventory impairment charges related to our unconsolidated joint ventures of $0.2 million during the three and nine months ended September 30, 2007. Goodwill impairment charges for the Southwest reportable segment were $11.4 million for the nine months ended September 30, 2007.

 

(3) The Southeast reportable segment includes our share of non-cash pretax inventory impairment charges related to our unconsolidated joint ventures of $1.4 million during the three and nine months ended September 30, 2007. Goodwill impairment charges for the Southeast reportable segment were $18.0 million for the nine months ended September 30, 2007.

 

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Table of Contents
     September 30,
2007
   December 31,
2006
     (Dollars in thousands)

Homebuilding assets:

     

California

   $ 1,910,718    $ 1,975,231

Southwest

     863,029      1,175,059

Southeast

     685,563      842,659

Corporate

     448,579      231,947
             

Total homebuilding assets

   $ 3,907,889    $ 4,224,896
             

Homebuilding investments in and advances to unconsolidated joint ventures:

     

California

   $ 233,168    $ 226,582

Southwest

     89,102      79,575

Southeast

     5,498      4,542
             

Total homebuilding investments in and advances to unconsolidated joint ventures

   $ 327,768    $ 310,699
             

 

3. Earnings (Loss) Per Share

We compute earnings (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). This statement requires the presentation of both basic and diluted earnings (loss) per share for financial statement purposes. Basic earnings (loss) per share is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share includes the effect of the potential shares outstanding, including dilutive stock options, nonvested performance share awards, nonvested restricted stock and deferred stock units using the treasury stock method. Shares outstanding under the share lending facility are not treated as outstanding for earnings per share purposes because the share borrower must return to us all borrowed shares (or identical shares) on or about October 1, 2012, or earlier in certain circumstances (see Note 15 for further discussion regarding the share lending facility). For the three and nine months ended September 30, 2007, all dilutive securities were excluded from the calculation as they were anti-dilutive as a result of the net loss for these respective periods. The table set forth below reconciles the components of the basic earnings (loss) per share calculation to diluted earnings (loss) per share.

 

     Three Months Ended September 30,
     2007     2006
     Net Loss     Shares    EPS     Net Income    Shares    EPS
     (Dollars in thousands, except per share amounts)

Basic earnings (loss) per share

   $ (119,666 )   64,849,612    $ (1.85 )   $ 30,847    64,321,003    $ 0.48

Effect of dilutive securities:

               

Stock options

     —       —          —      1,188,164   

Nonvested performance share awards

     —       —          —      68,014   

Nonvested restricted stock

     —       —          —      4,376   

Deferred stock units

     —       —          —      106,503   
                             

Diluted earnings (loss) per share

   $ (119,666 )   64,849,612    $ (1.85 )   $ 30,847    65,688,060    $ 0.47
                                       

 

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     Nine Months Ended September 30,
     2007     2006
     Net Loss     Shares    EPS     Net Income    Shares    EPS
     (Dollars in thousands, except per share amounts)

Basic earnings (loss) per share

   $ (326,376 )   64,717,017    $ (5.04 )   $ 222,099    65,465,162    $ 3.39

Effect of dilutive securities:

               

Stock options

     —       —          —      1,446,430   

Nonvested performance share awards

     —       —          —      45,794   

Nonvested restricted stock

     —       —          —      5,048   

Deferred stock units

     —       —          —      106,503   
                             

Diluted earnings (loss) per share

   $ (326,376 )   64,717,017    $ (5.04 )   $ 222,099    67,068,937    $ 3.31
                                       

 

4. Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007     2006     2007     2006  
     (Dollars in thousands)  

Net income (loss)

   $ (119,666 )   $ 30,847     $ (326,376 )   $ 222,099  

Unrealized loss on interest rate swaps, net of related income tax effects

     (5,252 )     (6,529 )     (1,406 )     (6,146 )
                                

Comprehensive income (loss)

   $ (124,918 )   $ 24,318     $ (327,782 )   $ 215,953  
                                

 

5. Stock-Based Compensation

We account for share-based awards in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123R requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.

The Company has share-based awards outstanding under five different plans, pursuant to which we have granted stock options, performance share awards, and restricted stock grants to key officers, employees, and directors. The exercise price of the share-based awards may not be less than the market value of our common stock on the date of grant. Stock options vest based on either time (generally over a one to four year period) or market performance (based on stock price appreciation) and generally expire between five and ten years after the date of grant. Performance share awards, which have been granted to certain executives, can result in the issuance of up to a specified number of restricted shares of our common stock (“Shares”) contingent upon the degree to which we achieve a single or series of pre-established financial and operating targets during the applicable fiscal year period, subject to downward adjustment based upon the subjective evaluation of the Compensation Committee of our Board of Directors of management’s effectiveness during such period. Once issued, one-third of the Shares vest on each of the first three anniversaries of the grant date of the original performance share award if the executive remains an employee through the applicable vesting date. Restricted stock typically vests over a one to three year period.

During the nine months ended September 30, 2007, we granted 1,285,500 stock options, issued 37,000 shares of restricted stock, and granted performance share awards pursuant to which up to 240,000 Shares may be issued.

 

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Total compensation expense recognized related to stock-based compensation was as follows:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (Dollars in thousands)

Stock options

   $ 1,558    $ 1,587    $ 4,720    $ 5,945

Performance share awards

     1,241      829      3,935      5,466

Restricted stock grants

     378      371      1,156      1,186
                           

Total

   $ 3,177    $ 2,787    $ 9,811    $ 12,597
                           

Total unrecognized compensation expense related to stock-based compensation was as follows:

 

     As of September 30, 2007    As of December 31, 2006
     Unrecognized
Expense
   Weighted
Average
Period
   Unrecognized
Expense
   Weighted
Average
Period
     (Dollars in thousands)

Unvested stock options

   $ 14,032    5.1 years    $ 8,015    2.2 years

Nonvested performance share awards

     5,600    1.9 years      5,727    1.2 years

Nonvested restricted stock grants

     1,220    1.0 years      1,589    1.7 years
                       

Total unrecognized compensation expense

   $ 20,852    4.0 years    $ 15,331    1.8 years
                       

 

6. Variable Interest Entities

We account for variable interest entities under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51 (“FIN 46R”). Under FIN 46R, a variable interest entity (“VIE”) is created when (i) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders, (ii) the entity’s equity holders as a group either (a) lack the direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity or (iii) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights. If an entity is deemed to be a VIE pursuant to FIN 46R, the enterprise that is deemed to absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, is considered the primary beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash flows as defined in FIN 46R (see Note 7 for further discussion).

 

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7. Inventories

Inventories consisted of the following at:

 

     September 30,
2007
   December 31,
2006
     (Dollars in thousands)

Inventories owned:

     

Land and land under development

   $ 1,634,861    $ 2,128,067

Homes completed and under construction

     1,011,234      985,353

Model homes

     184,493      155,368
             

Total inventories owned

   $ 2,830,588    $ 3,268,788
             

Inventories not owned:

     

Land purchase and land option deposits

   $ 35,976    $ 50,755

Variable interest entities, net of deposits

     55,890      82,848

Other land option contracts, net of deposits

     32,469      69,594
             

Total inventories not owned

   $ 124,335    $ 203,197
             

Under FIN 46R, a non-refundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundable deposit, a VIE may have been created. If a VIE exists and we have a variable interest in that entity, FIN 46R requires us to calculate expected losses and residual returns for the VIE based on the probability of estimated future cash flows as described in FIN 46R. If we are deemed to be the primary beneficiary of a VIE based on such calculations, we are required to consolidate the VIE on our balance sheet.

At September 30, 2007 and December 31, 2006, we consolidated 11 and 14 VIEs, respectively, as a result of our options to purchase land or lots from the selling entities. We made cash deposits or issued letters of credit to these VIEs totaling approximately $9.1 million and $11.5 million as of September 30, 2007 and December 31, 2006, respectively, which are included in land purchase and lot option deposits in the table above. Our option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown, which we would have to write off should we not exercise the option. We consolidated these VIEs because we were considered the primary beneficiary in accordance with FIN 46R. As a result, included in our condensed consolidated balance sheets at September 30, 2007 and December 31, 2006 were inventories not owned related to these VIEs of approximately $64.1 million and $92.8 million (which includes $8.2 million and $10.0 million in deposits, exclusive of outstanding letters of credit), liabilities from inventories not owned of approximately $11.6 million and $13.6 million, and minority interests of approximately $44.3 million and $69.3 million, respectively. These amounts were recorded based on each VIE’s estimated fair value upon consolidation. Creditors of these VIEs, if any, have no recourse against us.

Other land option contracts represent specific performance purchase obligations to purchase land that we have with various land sellers. In certain instances, the land option contract contains a binding obligation requiring us to complete lot purchases. In other instances, the land option contract does not obligate us to complete lot purchases but, due to the magnitude of our capitalized preacquisition costs, development and construction expenditures, we are considered economically compelled to complete the lot purchases.

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we record impairment losses on inventories when events and circumstances indicate that they may be impaired, and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Inventories that are determined to be

 

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impaired are written down to their estimated fair value. The operating margins (defined as gross margin less direct selling and marketing costs) used to calculate land residual values and related fair values for the majority of our projects during the nine months ended September 30, 2007 were approximately 10% to 12%, with discount rates in the 15% to 23% range. The following table summarizes inventory impairments recorded during the three and nine month periods ended September 30, 2007 and 2006:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (Dollars in thousands)

Inventory impairments related to:

           

Land under development and homes completed and under construction

   $ 119,584    $ 47,708    $ 360,036    $ 48,582

Land held for sale or sold

     55,654      —        124,546      3,983
                           

Total inventory impairments

   $ 175,238    $ 47,708    $ 484,582    $ 52,565
                           

Remaining carrying value of inventory impaired at period end

   $ 424,470    $ 173,866    $ 780,546    $ 199,678
                           

Number of projects impaired during the period

     52      12      123      15
                           

Total number of projects included in inventories-owned and reviewed for impairment during the period

     398      458      
                   

These charges were included in cost of sales in the accompanying condensed consolidated statements of operations (see Note 2 for breakout of non-cash impairment charges by segment). The impairment charges recorded during the periods noted above stemmed from lower home prices which were driven by increased incentives and discounts resulting from weakened demand experienced during 2006 and 2007 as a result of decreased affordability, tightening of mortgage lending underwriting requirements, decreased liquidity in the mortgage credit markets, and an increased number of communities and completed and existing homes available for sale in the marketplace. Until market conditions stabilize, we may incur additional impairments in the future.

 

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8. Capitalization of Interest

The following is a summary of homebuilding interest capitalized to inventories owned and investments in and advances to unconsolidated joint ventures and amortized to cost of sales and income (loss) from unconsolidated joint ventures for the three and nine months ended September 30, 2007 and 2006:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007     2006     2007     2006  
     (Dollars in thousands)  

Homebuilding interest capitalized to inventories owned and investments in unconsolidated joint ventures, beginning of period

   $ 155,367     $ 115,922     $ 139,470     $ 80,988  

Homebuilding interest incurred and capitalized

     35,759       38,998       102,456       108,599  

Homebuilding interest previously capitalized and amortized

     (27,864 )     (20,970 )     (78,664 )     (55,637 )
                                

Homebuilding interest capitalized to inventories owned and investments in unconsolidated joint ventures, end of period

   $ 163,262     $ 133,950     $ 163,262     $ 133,950  
                                

Capitalized interest as a percentage of inventories owned and investments in unconsolidated joint ventures, end of period

         5.2 %     3.3 %
                    

 

9. Investments in Unconsolidated Land Development and Homebuilding Joint Ventures

We enter into land development and homebuilding joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile and leveraging our capital base. These joint ventures are typically entered into with developers, other homebuilders, land sellers and financial partners. The tables set forth below summarize the combined financial information related to our unconsolidated land development and homebuilding joint ventures accounted for under the equity method:

 

     September 30,
2007
   December 31,
2006
     (Dollars in thousands)

Assets:

     

Cash

   $ 67,491    $ 132,742

Inventories

     2,062,427      2,226,516

Other assets

     32,039      42,632
             

Total assets

   $ 2,161,957    $ 2,401,890
             

Liabilities and Equity:

     

Accounts payable and accrued liabilities

   $ 189,894    $ 257,007

Construction loans and trust deed notes payable

     1,028,067      1,256,356

Equity

     943,996      888,527
             

Total liabilities and equity

   $ 2,161,957    $ 2,401,890
             

Our share of equity shown above was approximately $304.9 million (which includes $45 million of accrued joint venture loan-to-value remargin obligations) and $286.3 million at September 30, 2007 and December 31, 2006, respectively. As of September 30, 2007 and December 31, 2006, we had advances outstanding of approximately $8.5 million and $14.6 million to these unconsolidated joint ventures, which were included in the accounts payable and accrued liabilities balances in the table above. Additionally, as

 

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of September 30, 2007 and December 31, 2006, we had approximately $14.4 million and $9.8 million of homebuilding interest capitalized to investments in unconsolidated joint ventures.

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2007     2006     2007     2006  
     (Dollars in thousands)  

Revenues

   $ 98,664     $ 76,933     $ 286,261     $ 292,475  

Cost of sales and expenses

     (139,413 )     (51,839 )     (416,392 )     (177,652 )
                                

Net income (loss)

   $ (40,749 )   $ 25,094     $ (130,131 )   $ 114,823  
                                

Income (loss) from unconsolidated joint ventures as presented in the accompanying condensed consolidated statements of operations reflects our proportionate share of the income (loss) of these unconsolidated land development and homebuilding joint ventures. Our ownership interests in the joint ventures vary but are generally less than or equal to 50%. The following table summarizes joint venture inventory impairments recorded during the three and nine month periods ended September 30, 2007 and 2006:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (Dollars in thousands)

Joint venture impairments related to:

           

Homebuilding joint ventures

   $ 25,325    $ 980    $ 80,407    $ 980

Land development joint ventures

     16,466      —        53,588      —  
                           

Total joint venture impairments

   $ 41,791    $ 980    $ 133,995    $ 980
                           

Number of projects impaired during the period

     12      1      18      1
                           

Total number of projects included in unconsolidated joint ventures and reviewed for impairment during the period(1)

     61      58      
                   

(1) Certain unconsolidated joint ventures have multiple real estate projects.

These charges were included in income (loss) from unconsolidated joint ventures in the accompanying condensed consolidated statements of operations.

For certain joint ventures for which we are the managing member, we receive management fees, which represent overhead and other reimbursements for costs associated with managing the related real estate projects. During the three months ended September 30, 2007 and 2006, we recognized management fees of approximately $1.7 million and $3.8 million, respectively, and during the nine months ended September 30, 2007 and 2006 we recognized management fees of approximately $5.7 million and $11.8 million, respectively. These management fees were recorded as a reduction of our general and administrative and construction overhead costs. As of September 30, 2007 and 2006, we had approximately $1.1 million and $1.5 million, respectively, in management fees receivable from various joint ventures, which were included in trade and other receivables in the accompanying condensed consolidated balance sheets.

During the three months ended September 30, 2007, we purchased the entire portion of our partners’ interest in two of our Southern California urban joint ventures that experienced construction defect issues for aggregate consideration of approximately $85.3 million. The consideration for these buy-outs consisted of $79.0 million in payments made by us to satisfy the joint ventures’ indebtedness, $4.9 million in payments to be made to one partner during the 2007 fourth quarter and $1.4 million of other working capital obligations. We also purchased our partner’s interest in a Northern California joint venture during the 2007 second quarter for $3.0 million plus the repayment of $81.6 million of the joint venture’s

 

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indebtedness. In addition, we consolidated a Northern California joint venture as of September 30, 2007, in accordance with EITF 04-5 as a result of us revoking our partner’s voting rights for their failure to make required capital contributions (see Note 17 for further discussion).

 

10. Goodwill

The excess amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed was capitalized as goodwill in the accompanying condensed consolidated balance sheets. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS 142 requires that goodwill not be amortized but instead be assessed for impairment at least annually or more frequently if certain impairment indicators are present. For purposes of this test, each of our homebuilding operating divisions has been treated as a reporting unit. During the nine months ended September 30, 2007, we determined that the deteriorating housing market conditions in the San Antonio and Jacksonville markets were indicators of impairment. As a result of the changes in the market outlook and our near-term and long-term forecasts and expected returns, we recorded non-cash pretax goodwill impairment charges totaling $29.4 million to write-off the remaining goodwill balances for our San Antonio and Jacksonville divisions as the estimated fair values of these reporting units were less than their carrying values. These charges were included in other expense in the accompanying condensed consolidated statements of operations.

At September 30, 2007, we had a remaining goodwill balance of $71.9 million related to seven other reporting units.

 

11. Homebuilding Other Assets

Homebuilding other assets consisted of the following at:

 

     September 30,
2007
   December 31,
2006
     (Dollars in thousands)

Income tax receivable

   $ 75,884    $ —  

Property and equipment, net

     19,021      21,482

Deferred compensation assets

     17,270      16,186

Deferred debt issuance costs

     17,216      10,215

Prepaid insurance

     5,753      1,339

Other assets

     5,881      9,997
             

Total homebuilding other assets

   $ 141,025    $ 59,219
             

 

12. Mortgage Loans Held for Investment

Loans are classified as held for investment based on our intent and ability to hold the loans for the foreseeable future or to maturity. Loans held for investment are recorded at their unpaid principal balance, net of discounts and premiums, unamortized net deferred loan origination costs and fees and allowance for loan losses. Discounts, premiums, and net deferred loan origination costs and fees are amortized into income over the contractual life of the loan.

 

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13. Warranty Costs

Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts accrued are based upon historical experience rates. Indirect warranty overhead salaries and related costs are charged to cost of sales in the period incurred. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued liabilities in the accompanying condensed consolidated balance sheets. Changes in our warranty accrual are detailed in the table set forth below:

 

     Nine Months Ended
September 30,
 
     2007     2006  
     (Dollars in thousands)  

Warranty accrual, beginning of the period

   $ 33,555     $ 29,903  

Warranty costs accrued and other adjustments during the period

     9,514       13,203  

Warranty costs paid during the period

     (9,829 )     (12,769 )
                

Warranty accrual, end of the period

   $ 33,240     $ 30,337  
                

 

14. Revolving Credit Facility, Term Loans and Public Notes

On September 14, 2007, we amended our $1.1 billion revolving credit facility, $100 million Term Loan A, and $250 million Term Loan B (collectively, the “Credit Facilities”), to among other things, provide additional operating flexibility under the consolidated tangible net worth, minimum interest coverage and borrowing base covenants contained in these facilities. In connection with relaxing these covenants, we also agreed to an immediate reduction in the leverage covenant and an additional tightening of the leverage covenant over time. In addition, we reduced the total commitment available under our revolving facility from $1.1 billion to $900 million and the outstanding principal amount of the Term Loan B from $250 million to $225 million, making the combined commitments under these facilities more consistent with our anticipated reduced capital needs. These Credit Facilities are guaranteed by most of our wholly-owned subsidiaries other than our mortgage and title subsidiaries.

The financial covenants contained in the Credit Facilities, which are the most restrictive of all of our debt covenants, require us to, among other things, maintain a minimum level of stockholders’ equity, maintain a minimum interest coverage ratio, not exceed a debt to equity ratio and not exceed a maximum ratio of unsold land to net worth. These covenants as well as a borrowing base provision, limit the amount of senior indebtedness we may borrow or keep outstanding under the Credit Facilities and from other sources and also limit our investments in joint ventures. As of and for the nine months ended September 30, 2007, we were in compliance with the covenants of the Credit Facilities. At September 30, 2007, we had $597.9 million in borrowing capacity under our revolving credit facility’s borrowing base provision, of which $253.5 million was consumed by outstanding borrowings and $40.6 million by issued letters of credit. If the remaining $303.8 million available under the borrowing base as of September 30, 2007 were used for borrowing base eligible assets (such as entitled or improved land, land development or home construction costs), then the borrowing base would be increased based on the advance rates applicable to the assets purchased. Interest rates charged under the Credit Facilities include LIBOR and prime rate pricing options.

We also have financial covenants under our senior and senior subordinated public notes which contain a leverage covenant, an interest coverage ratio covenant and a restricted payment covenant. We are required to comply with either the interest coverage ratio covenant or the leverage covenant, but we are not required to comply with both simultaneously. The restricted payment covenant limits, among other things, the amount of: (i) investments we can make to our unconsolidated joint ventures and unrestricted subsidiaries; (ii) stock repurchases we can make; and (iii) dividends we can pay. Restricted payments and net losses erode the restricted payment basket, while net income, proceeds from equity issuances, and distributions of income from unconsolidated joint ventures and unrestricted subsidiaries increase the restricted payment basket. The most restrictive restricted payment covenant is contained in the indenture governing our 9  1/4% senior subordinated notes due 2012. As of September 30, 2007, we would have been permitted to make an additional $388.2 million in restricted payments without violating this covenant.

 

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15. Senior Subordinated Convertible Notes

On September 28, 2007, we issued $100 million of 6% senior subordinated convertible notes (the “Notes”) due on October 1, 2012. In connection with this offering we also entered into a convertible note hedge transaction designed to reduce equity dilution associated with the potential conversion of the Notes to our common stock. Net proceeds from the offering were approximately $97.0 million after deducting underwriting fees, $9.1 million of which was used to fund the hedging transaction and the remainder of which was used to repay a portion of indebtedness outstanding under our revolving credit facility. The Notes are convertible into shares of our common stock at an initial conversion rate of 114.2857 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of $8.75 per share), which is subject to adjustment in some events; provided that, as a result of the convertible note hedge transaction, we increased the effective conversion price to us from $8.75 per share to $10.85 per share. The Notes bear interest at 6% per annum and are payable semi-annually commencing April 1, 2008.

To facilitate transactions by which investors in the Notes may hedge their investments in such Notes, we entered into a share lending facility, dated September 24, 2007, with an affiliate of one of the underwriters in the Notes offering, under which we agreed to loan to the share borrower up to 7,839,809 shares of our common stock for a period beginning on the date we entered into the share lending facility and ending on October 1, 2012, or, if earlier, the date as of which we have notified the share borrower of our intention to terminate the facility after the entire principal amount of the Notes ceases to be outstanding as a result of conversion, repurchase or redemption, or earlier in certain circumstances. As of September 30, 2007 and October 1, 2007, 6,000,000 and 7,839,809, respectively, of these shares were outstanding under the share lending facility.

The share borrower will receive all of the proceeds from any sale by it of the borrowed shares of common stock. We received a nominal lending fee of $0.01 per share for each share of common stock that we lent pursuant to the share lending facility. Borrowed shares are issued and outstanding for corporate law purposes and, accordingly, the holders of the borrowed shares will have all of the rights of a holder of our outstanding shares. However, because the share borrower must, on or about October 1, 2012, return to us all borrowed shares (or identical shares or, in certain circumstances, the cash value thereof), the borrowed shares are not considered outstanding for the purpose of computing and reporting our earnings per share in accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”

 

16. Derivative Instruments and Hedging Activities

We account for derivatives and certain hedging activities in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 establishes the accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded as either assets or liabilities in the consolidated balance sheets and to measure these instruments at fair market value. Gains or losses resulting from changes in the fair market value of derivatives are recognized in the consolidated statement of operations or recorded in other comprehensive income (loss), net of tax, and recognized in the condensed consolidated statement of operations when the hedged item affects earnings, depending on the purpose of the derivatives and whether the derivatives qualify for hedged accounting treatment.

Our policy is to designate at a derivative’s inception the specific assets, liabilities or future commitments being hedged and monitor the derivative to determine if the derivative remains an effective hedge. The effectiveness of a derivative as a hedge is based on the high correlation between changes in the derivative’s value and changes in the value of the underlying hedged item. We recognize gains or losses for amounts received or paid when the underlying transaction settles. We do not enter into or hold derivatives for trading or speculative purposes.

 

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In connection with the 6% convertible senior subordinated notes offering we entered into a convertible note hedge transaction that is intended to reduce the potential dilution to the holders of our common stock upon conversion of the convertible notes. The convertible note hedge will expire upon the earlier of (i) the last day on which any of the convertible notes remain outstanding and (ii) the second scheduled trading day immediately preceding the maturity date. Approximately $9.1 million of the net proceeds of the convertible notes offering was used to pay the cost of the convertible note hedge. The cost of this transaction, net of tax, was recorded in stockholders’ equity in our condensed consolidated balance sheets as of September 30, 2007.

In May 2006, we entered into interest rate swap agreements that effectively fixed our 3-month LIBOR rates for our senior term loans through their scheduled maturity dates. The swap agreements have been designated as cash flow hedges and, accordingly, are reflected at their fair market value in accrued liabilities in our condensed consolidated balance sheets at September 30, 2007. The related gain or loss is deferred, net of tax, in stockholders’ equity as accumulated other comprehensive income or loss. During the 2007 third quarter, we repaid $25 million of our Senior Term Loan B which resulted in a portion of the interest rate swap being ineffective, and as a result, we recorded an $872,000 expense during the three month period ended September 30, 2007 to other expense. Other than the ineffective portion of the Term Loan B described above, we believe that there will be no ineffectiveness related to the interest rate swaps, and therefore, no other portion of the accumulated other comprehensive income or loss will be reclassified into future earnings unless the swaps are unwound prior to their respective maturity dates. The net effect on our operating results is that the interest on the variable rate debt being hedged is recorded based on a fixed rate of interest, subject to adjustments in the LIBOR spread under the Term Loan A related to our leverage.

The estimated fair value of the swaps at September 30, 2007 represented a liability of $11.4 million, which was included in accrued liabilities in the accompanying condensed consolidated financial statements. For the three and nine months ended September 30, 2007, we recorded a cumulative after-tax other comprehensive loss of $5.3 million and $1.4 million, respectively, relating to the swap agreements.

 

17. Commitments and Contingencies

 

  a. Land Purchase and Option Agreement

We are subject to customary obligations associated with entering into contracts for the purchase of land and improved homesites. These purchase contracts typically require a cash deposit or delivery of a letter of credit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements. We generally have the right at our discretion to terminate our obligations under these purchase contracts by forfeiting our cash deposit or by repaying amounts drawn under the letter of credit with no further financial responsibility to the land seller. In some instances, we may also expend funds for due diligence, development and construction activities with respect to these contracts prior to purchase, which we will have to write-off should we not purchase the land. At September 30, 2007, we had cash deposits and letters of credit outstanding of approximately $14.2 million and capitalized preacquisition and other development and construction costs of approximately $16.5 million relating to land purchase contracts having a total remaining purchase price of approximately $97.7 million. Approximately $8.6 million of the remaining purchase price is included in inventories not owned in the accompanying condensed consolidated balance sheets.

We also utilize option contracts with land sellers and third-party financial entities as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our revolving credit facility and other corporate financing sources. Option contracts generally require a non-refundable deposit for the right to acquire lots over a

 

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specified period of time at predetermined prices. Our utilization of option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries, general housing market conditions, and geographic preferences. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

If we elect not to exercise our right to acquire lots under an option contract, in most instances we will forfeit our deposit to the seller and write-off amounts expended for due diligence and any development and construction activities undertaken on the optioned land. In addition, in connection with option contracts entered into with third party financial entities, we also generally enter into construction agreements that do not terminate if we elect not to exercise our option. In these instances, we are generally obligated to complete land development improvements on the optioned property at a predetermined cost (paid by the option provider) and are responsible for all cost overruns.

At September 30, 2007, we had cash deposits and letters of credit outstanding of approximately $33.2 million and capitalized preacquisition and other development and construction costs of approximately $7.0 million relating to option contracts having a total remaining purchase price of approximately $392.7 million. Approximately $80.0 million of the remaining purchase price is included in inventories not owned in the accompanying condensed consolidated balance sheets. For the three and nine month periods ended September 30, 2007, we incurred pretax charges of $6.5 million and $13.2 million, respectively, related to the write-offs of option deposits and capitalized preacquisition costs for abandoned projects and recovered $27,000 and $2.0 million, respectively, related to previous write-offs of option deposits and capitalized preacquisition costs for abandoned projects. For the three and nine month periods ended September 30, 2006, we incurred pretax charges of $12.0 million and $28.3 million, respectively, related to the write-offs of option deposits and capitalized preacquisition costs for abandoned projects and recovered $2.0 million related to previous write-offs of option deposits and capitalized preacquisition costs for abandoned projects. These charges were included in other expense in the accompanying consolidated statements of operations. We continue to evaluate the terms of open land option and purchase contracts in light of slower housing market conditions and may write-off additional option deposits and capitalized preacquisition costs in the future, particularly in those instances where land sellers are unwilling to renegotiate significant contract terms.

 

  b. Land Development and Homebuilding Joint Ventures

We enter into land development and homebuilding joint ventures from time to time as a means of:

 

•        accessing lot positions

 

•        establishing strategic alliances

 

•        leveraging our capital base

 

•        expanding our market opportunities

 

•        managing the financial and market risk associated with land holdings

These joint ventures typically obtain secured acquisition, development and construction financing, which reduces the use of funds from our revolving credit facility and other corporate financing sources. We plan to continue using these types of arrangements to finance the development of properties from time to time. At September 30, 2007, our unconsolidated joint ventures had borrowings outstanding that totaled approximately $1,028.1 million and equity that totaled $944.0 million.

Credit Enhancements. We and our joint venture partners generally provide credit enhancements in connection with the joint ventures’ borrowings in the form of loan-to-value maintenance agreements, which require us to repay the venture’s borrowings to the extent such borrowings plus, in certain circumstances, construction completion costs exceed a specified percentage of the value of the property securing the loan. Typically, we share these obligations with our other partners, and in some instances, these obligations are subject to limitations on the amount that we could be required to pay down. At September 30, 2007, approximately $498.1 million of our unconsolidated joint venture borrowings were subject to these credit enhancements by us (of which $196.3 million we would be solely responsible for and $301.8 million which we would be jointly and severally responsible with our partners, either directly under the credit

 

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enhancement or through contribution provisions in the applicable joint venture document). To the extent that these credit enhancements have been provided to lenders who also participate in our revolving credit facility or our Term Loan A, they are effectively cross-defaulted to the revolving credit facility and Term Loan A borrowings.

During the nine months ended September 30, 2007, we made aggregate additional capital contributions of approximately $32.5 million related to three of our Southern California joint ventures and our partners made aggregate additional capital contributions totaling approximately $25.3 million. We anticipate being required to make additional capital contributions and/or remargin payments with respect to other joint ventures, which we currently estimate to be in the range of $45 to $60 million based upon present asset values. We accrued the lower end of the range of this potential liability, which is included in accrued liabilities in our condensed consolidated balance sheet as of September 30, 2007. These amounts have also been reflected in our current cash flow projections, but do not reflect the potential impact of any further reductions in asset values which may continue until market conditions stabilize.

Land Development and Construction Completion Agreements. We and our joint venture partners are generally obligated to the project lenders to complete land development improvements and the construction of planned homes if the joint venture does not perform the required development and construction. Provided we and the other joint venture partners are in compliance with these completion obligations, the project lenders would be obligated to fund these improvements through any financing commitments available under the applicable joint venture development and construction loans, with any completion costs in excess of the funding commitments being borne directly by us and our joint venture partners.

Environmental Indemnities. We and our joint venture partners have from time to time provided unsecured environmental indemnities to joint venture project lenders. In each case, we have performed due diligence on potential environmental risks. These indemnities obligate us and, in certain instances, our joint venture partners, to reimburse the project lenders for claims related to environmental matters for which they are held responsible.

Surety Indemnities. We and our joint venture partners have also agreed to indemnify third party surety providers with respect to performance bonds issued on behalf of certain of our joint ventures. If a joint venture does not perform its obligations, the surety bond could be called. If these surety bonds are called and the joint venture fails to reimburse the surety, we and our joint venture partners would be obligated to indemnify the surety. These surety indemnity arrangements are generally joint and several obligations with our joint venture partners. At September 30, 2007, our joint ventures had approximately $83.4 million of surety bonds outstanding subject to these indemnity arrangements by us and our partners.

 

  c. Surety Bonds

We issue surety bonds to third parties in the normal course of business to ensure completion of the infrastructure of our projects. At September 30, 2007, we had approximately $537.3 million in surety bonds outstanding (exclusive of surety bonds related to our joint ventures).

 

  d. Mortgage Loans and Commitments

We commit to making mortgage loans to our homebuyers through our mortgage financing subsidiary, Standard Pacific Mortgage. Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $43.4 million at September 30, 2007 and carried a weighted average interest rate of approximately 6.2% percent. Interest rate risks related to these obligations are generally mitigated by Standard Pacific Mortgage preselling the loans to third party investors or through its interest rate hedging program. As of September 30, 2007, Standard Pacific Mortgage had approximately $63.0 million of closed mortgage loans held for sale and mortgage loans in process which were or are expected to be originated on a non-presold basis, of which approximately $63.0 million were hedged by forward sale commitments of mortgage-backed securities. In addition, as of September 30, 2007, Standard Pacific Mortgage held approximately $61.4 million in closed mortgage loans held for sale and mortgage loans in process which were presold to third party investors subject to completion of the investors’ administrative review of the applicable loan documents.

 

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Standard Pacific Mortgage sells the loans it originates in the secondary mortgage market, with servicing rights released on a non-recourse basis. This sale is subject to Standard Pacific Mortgage’s obligation to repay its gain on sale if the loan is prepaid by the borrower within a certain time period following such sale, or to repurchase the loan if, among other things, the borrower defaults on the loan within a specified period following the sale, the purchaser’s underwriting guidelines are not met, or there is fraud in connection with the loan.

During the three months ended September 30, 2007, we entered into forward commitments for mortgage products with third party investors totaling $195 million. These forward commitments allow us to lock in mortgage rates and prices for a specified period of time on specified products being sold by Standard Pacific Mortgage prior to the origination date. At September 30, 2007, our remaining forward commitments with third party investors was $167.3 million.

 

18. Income Tax Uncertainties

Effective January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”). FIN 48 defines the methodology for recognizing the benefits of tax return positions as well as guidance regarding the measurement of the resulting tax benefits. FIN 48 requires an enterprise to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from these estimates.

As a result of the implementation of FIN 48, we recognized a $4.1 million liability (including potential interest and penalties) as of January 1, 2007 related to unrecognized tax benefits, that if recognized, would lower our effective tax rate. The charge was reflected as a reduction of beginning retained earnings as of January 1, 2007. We classify estimated interest and penalties related to unrecognized tax benefits in our provision for income taxes.

As of September 30, 2007, we remain subject to examination by certain tax jurisdictions for the tax years ended December 31, 2003 through 2006. There were no significant changes in the accrued liability related to uncertain tax positions during the three and nine months ended September 30, 2007, nor do we anticipate significant changes during the next 12-month period.

 

19. Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We have not yet determined the impact of adopting SFAS 157 on our financial condition and results of operations.

 

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In November 2006, the FASB ratified EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment Under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums” (“EITF 06-8”). The EITF states that the adequacy of the buyer’s continuing investment under SFAS 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. This consensus could require that additional deposits be collected by developers of condominium projects that wish to recognize profit during the construction period under the percentage-of-completion method. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. We do not believe the adoption of EITF 06-8 will have a material impact on our financial condition or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which includes amendments to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” SFAS 159 permits entities to measure financial instruments and certain related items at their fair value at specified election dates. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not yet determined the impact of adopting SFAS 159 on our financial condition and results of operations.

 

20. Supplemental Disclosure to Consolidated Statements of Cash Flows

The following are supplemental disclosures to the consolidated statements of cash flows:

 

     Nine Months Ended September 30,
     2007    2006
     (Dollars in thousands)

Supplemental Disclosures of Cash Flow Information:

     

Cash paid during the period for:

     

Interest

   $ 104,341    $ 94,392

Income taxes

   $ 13,899    $ 211,836

Supplemental Disclosure of Noncash Activities:

     

Inventory received as distributions from unconsolidated homebuilding joint ventures

   $ 45,711    $ 15,915

Increase in inventory in connection with consolidation of joint venture

   $ 64,268    $ —  

Increase in investments in and advances to unconsolidated joint ventures related to accrued joint venture loan-to-value remargin obligations

   $ 45,000    $ —  

Underwriting discount capitalized in connection with issuance of senior subordinated convertible notes

   $ 3,000    $ —  

Increase in trust deed notes payable in connection with consolidation of joint venture

   $ 66,166    $ —  

Reduction in seller trust deed note payable in connection with modification of purchase agreement

   $ 14,079    $ —  

Changes in inventories not owned

   $ 64,084    $ 202,202

Changes in liabilities from inventories not owned

   $ 39,098    $ 66,896

Changes in minority interests

   $ 24,986    $ 269,098

 

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21. Supplemental Guarantor Information

Our 100% owned direct and indirect subsidiaries (“Guarantor Subsidiaries”), other than our financial services subsidiary, title services subsidiary, and certain other subsidiaries (collectively, “Non-Guarantor Subsidiaries”), guarantee our outstanding senior and senior subordinated public notes payable. The guarantees are full and unconditional and joint and several. Presented below are the condensed consolidating financial statements for our Guarantor Subsidiaries and Non-Guarantor Subsidiaries.

STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2007

 

     Standard
Pacific Corp.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Adjustments
   Consolidated
Standard
Pacific Corp.
 
     (Dollars in thousands)  

Homebuilding:

           

Revenues

   $ 304,117     $ 371,393     $ —       $ —      $ 675,510  

Cost of sales

     (347,773 )     (379,465 )     —         —        (727,238 )
                                       

Gross margin

     (43,656 )     (8,072 )     —         —        (51,728 )
                                       

Selling, general and administrative expenses

     (47,541 )     (51,917 )     —         —        (99,458 )

Income (loss) from unconsolidated joint ventures

     (39,254 )     554       —         —        (38,700 )

Equity income (loss) of subsidiaries

     (39,729 )     —         —         39,729      —    

Other income (expense)

     (4,456 )     96       —         —        (4,360 )
                                       

Homebuilding pretax income (loss)

     (174,636 )     (59,339 )     —         39,729      (194,246 )
                                       

Financial Services:

           

Revenues

     —         —         2,336       —        2,336  

Expenses

     —         —         (3,593 )     —        (3,593 )

Income from unconsolidated joint ventures

     —         248       —         —        248  

Other income (expense)

     (195 )     210       195       —        210  
                                       

Financial services pretax income (loss)

     (195 )     458       (1,062 )     —        (799 )
                                       

Income (loss) before taxes

     (174,831 )     (58,881 )     (1,062 )     39,729      (195,045 )

(Provision) benefit for income taxes

     55,165       19,926       288       —        75,379  
                                       

Net income (loss)

   $ (119,666 )   $ (38,955 )   $ (774 )   $ 39,729    $ (119,666 )
                                       

 

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STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006

 

     Standard
Pacific Corp.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated
Standard
Pacific Corp.
 
     (Dollars in thousands)  

Homebuilding:

          

Revenues

   $ 372,356     $ 461,757     $ —       $ —       $ 834,113  

Cost of sales

     (318,258 )     (356,913 )     —         —         (675,171 )
                                        

Gross margin

     54,098       104,844       —         —         158,942  
                                        

Selling, general and administrative expenses

     (48,800 )     (62,649 )     —         —         (111,449 )

Income from unconsolidated joint ventures

     2,006       3,147       —         —         5,153  

Equity income of subsidiaries

     30,396       —         —         (30,396 )     —    

Other income (expense)

     (4,275 )     (2,526 )     —         —         (6,801 )
                                        

Homebuilding pretax income

     33,425       42,816       —         (30,396 )     45,845  
                                        

Financial Services:

          

Revenues

     —         —         5,726       —         5,726  

Expenses

     —         —         (4,845 )     —         (4,845 )

Income from unconsolidated joint ventures

     —         394       —         —         394  

Other income (expense)

     (275 )     299       275       —         299  
                                        

Financial services pretax income (loss)

     (275 )     693       1,156       —         1,574  
                                        

Income before taxes

     33,150       43,509       1,156       (30,396 )     47,419  

Provision for income taxes

     (2,303 )     (13,916 )     (353 )     —         (16,572 )
                                        

Net income

   $ 30,847     $ 29,593     $ 803     $ (30,396 )   $ 30,847  
                                        

 

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STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2007

 

     Standard
Pacific Corp.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Adjustments
   Consolidated
Standard
Pacific Corp.
 
     (Dollars in thousands)  

Homebuilding:

           

Revenues

   $ 875,606     $ 1,193,073     $ —       $ —      $ 2,068,679  

Cost of sales

     (950,647 )     (1,198,890 )     —         —        (2,149,537 )
                                       

Gross margin

     (75,041 )     (5,817 )     —         —        (80,858 )
                                       

Selling, general and administrative expenses

     (132,875 )     (164,489 )     —         —        (297,364 )

Income (loss) from unconsolidated joint ventures

     (128,596 )     9,182       —         —        (119,414 )

Equity income (loss) of subsidiaries

     (124,430 )     —         —         124,430      —    

Other income (expense)

     (3,185 )     (31,071 )     —         —        (34,256 )
                                       

Homebuilding pretax income (loss)

     (464,127 )     (192,195 )     —         124,430      (531,892 )
                                       

Financial Services:

           

Revenues

     —         —         12,015       —        12,015  

Expenses

     —         —         (11,923 )     —        (11,923 )

Income from unconsolidated joint ventures

     —         780       —         —        780  

Other income (expense)

     (646 )     690       646       —        690  
                                       

Financial services pretax income (loss)

     (646 )     1,470       738       —        1,562  
                                       

Income (loss) before taxes

     (464,773 )     (190,725 )     738       124,430      (530,330 )

(Provision) benefit for income taxes

     138,397       65,813       (256 )     —        203,954  
                                       

Net income (loss)

   $ (326,376 )   $ (124,912 )   $ 482     $ 124,430    $ (326,376 )
                                       

 

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STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2006

 

     Standard
Pacific Corp.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated
Standard
Pacific Corp.
 
                 (Dollars in thousands)              

Homebuilding:

          

Revenues

   $ 1,314,933     $ 1,402,079     $ —       $ —       $ 2,717,012  

Cost of sales

     (986,961 )     (1,039,239 )     —         —         (2,026,200 )
                                        

Gross margin

     327,972       362,840       —         —         690,812  
                                        

Selling, general and administrative expenses

     (162,528 )     (187,296 )     —         —         (349,824 )

Income from unconsolidated joint ventures

     11,419       19,478       —         —         30,897  

Equity income of subsidiaries

     133,703       —         —         (133,703 )     —    

Other income (expense)

     (19,061 )     (242 )     —         —         (19,303 )
                                        

Homebuilding pretax income

     291,505       194,780       —         (133,703 )     352,582  
                                        

Financial Services:

          

Revenues

     —         —         15,519       —         15,519  

Expenses

     —         —         (13,957 )     —         (13,957 )

Income from unconsolidated joint ventures

     —         1,435       —         —         1,435  

Other income (expense)

     (809 )     950       809       —         950  
                                        

Financial services pretax income (loss)

     (809 )     2,385       2,371       —         3,947  
                                        

Income before taxes

     290,696       197,165       2,371       (133,703 )     356,529  

Provision for income taxes

     (68,597 )     (65,190 )     (643 )     —         (134,430 )
                                        

Net income

   $ 222,099     $ 131,975     $ 1,728     $ (133,703 )   $ 222,099  
                                        

 

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STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2007

 

     Standard
Pacific Corp.
   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Consolidating
Adjustments
    Consolidated
Standard
Pacific Corp.
     (Dollars in thousands)

ASSETS

             

Homebuilding:

             

Cash and equivalents

   $ 489    $ 896    $ 3,700    $ —       $ 5,085

Trade and other receivables

     700,296      27,431      4,077      (655,516 )     76,288

Inventories:

             

Owned

     1,287,240      1,381,910      161,438      —         2,830,588

Not owned

     32,020      92,315      —        —         124,335

Investments in and advances to unconsolidated joint ventures

     160,416      167,352      —        —         327,768

Investments in subsidiaries

     1,054,663      —        —        (1,054,663 )     —  

Deferred income taxes

     329,536      —        —        696       330,232

Goodwill and other intangibles

     2,691      69,877      —        —         72,568

Other assets

     145,482      12,046      12      (16,515 )     141,025
                                   
     3,712,833      1,751,827      169,227      (1,725,998 )     3,907,889
                                   

Financial Services:

             

Cash and equivalents

     —        —        21,822      —         21,822

Mortgage loans held for sale

     —        —        78,204      —         78,204

Mortgage loans held for investment

     —        —        10,471      —         10,471

Other assets

     —        —        12,248      (696 )     11,552
                                   
     —        —        122,745      (696 )     122,049
                                   

Total Assets

   $ 3,712,833    $ 1,751,827    $ 291,972    $ (1,726,694 )   $ 4,029,938
                                   

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Homebuilding:

             

Accounts payable

   $ 68,079    $ 46,278    $ 2,011    $ —         116,368

Accrued liabilities

     239,134      696,922      625      (655,516 )     281,165

Liabilities from inventories not owned

     12,691      31,360      —        —         44,051

Revolving credit facility

     253,500      —        —        —         253,500

Trust deed and other notes payable

     27,419      4,756      66,166      —         98,341

Senior notes payable

     1,424,318      —        —        —         1,424,318

Senior subordinated notes payable

     249,319      —        —        —         249,319
                                   
     2,274,460      779,316      68,802      (655,516 )     2,467,062
                                   

Financial Services:

             

Accounts payable and other liabilities

     —        —        8,304      (4,380 )     3,924

Mortgage credit facilities

     —        —        95,298      (12,135 )     83,163
                                   
     —        —        103,602      (16,515 )     87,087
                                   

Total Liabilities

     2,274,460      779,316      172,404      (672,031 )     2,554,149
                                   

Minority Interests

     6,885      37,416      —        —         44,301

Stockholders’ Equity:

             

Total Stockholders’ Equity

     1,431,488      935,095      119,568      (1,054,663 )     1,431,488
                                   

Total Liabilities and Stockholders’ Equity

   $ 3,712,833    $ 1,751,827    $ 291,972    $ (1,726,694 )   $ 4,029,938
                                   

 

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Table of Contents

STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2006

 

     Standard
Pacific Corp.
   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Consolidating
Adjustments
    Consolidated
Standard
Pacific Corp.
     (Dollars in thousands)

ASSETS

             

Homebuilding:

             

Cash and equivalents

   $ 16,349    $ 1,020    $ 7    $ —       $ 17,376

Trade and other receivables

     1,019,404      37,946      3,771      (983,396 )     77,725

Inventories:

             

Owned

     1,528,794      1,707,133      32,861      —         3,268,788

Not owned

     93,819      109,378      —        —         203,197

Investments in and advances to unconsolidated joint ventures

     176,779      133,920      —        —         310,699

Investments in subsidiaries

     991,444      —        —        (991,444 )     —  

Deferred income taxes

     184,424      —        —        844       185,268

Goodwill and other intangibles

     2,691      99,933      —        —         102,624

Other assets

     42,497      16,710      12      —         59,219
                                   
     4,056,201      2,106,040      36,651      (1,973,996 )     4,224,896
                                   

Financial Services:

             

Cash and equivalents

     —        —        14,727      —         14,727

Mortgage loans held for sale

     —        —        254,958      —         254,958

Other assets

     —        —        9,204      (844 )     8,360
                                   
     —        —        278,889      (844 )     278,045
                                   

Total Assets

   $ 4,056,201    $ 2,106,040    $ 315,540    $ (1,974,840 )   $ 4,502,941
                                   

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Homebuilding:

             

Accounts payable

   $ 67,727    $ 41,716    $ 1    $ —       $ 109,444

Accrued liabilities

     223,585      1,003,374      37,342      (983,396 )     280,905

Liabilities from inventories not owned

     46,119      37,030      —        —         83,149

Revolving credit facility

     289,500      —        —        —         289,500

Trust deed and other notes payable

     44,765      7,733      —        —         52,498

Senior notes payable

     1,449,245      —        —        —         1,449,245

Senior subordinated notes payable

     149,232      —        —        —         149,232
                                   
     2,270,173      1,089,853      37,343      (983,396 )     2,413,973
                                   

Financial Services:

             

Accounts payable and other liabilities

     —        —        4,404      —         4,404

Mortgage credit facilities

     —        —        250,907      —         250,907
                                   
     —        —        255,311      —         255,311
                                   

Total Liabilities

     2,270,173      1,089,853      292,654      (983,396 )     2,669,284
                                   

Minority Interests

     21,658      47,629      —        —         69,287

Stockholders’ Equity:

             

Total Stockholders’ Equity

     1,764,370      968,558      22,886      (991,444 )     1,764,370
                                   

Total Liabilities and Stockholders’ Equity

   $ 4,056,201    $ 2,106,040    $ 315,540    $ (1,974,840 )   $ 4,502,941
                                   

 

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Table of Contents

STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2007

 

     Standard
Pacific Corp.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated
Standard
Pacific Corp.
 
     (Dollars in thousands)  

Cash Flows From Operating Activities:

          

Net cash provided by (used in) operating activities

   $ 85,056     $ 36,565     $ 173,819     $ 12,135     $ 307,575  
                                        

Cash Flows From Investing Activities:

          

Net cash paid for acquisitions

     (2,883 )     —         —         —         (2,883 )

Investments in and advances to unconsolidated homebuilding joint ventures

     (167,104 )     (43,536 )     —         —         (210,640 )

Mortgage loans held for investment

     —         —         (4,723 )     —         (4,723 )

Capital distributions and repayments of advances from unconsolidated homebuilding joint ventures

     54,157       11,344       —         —         65,501  

Net additions to property and equipment

     (1,139 )     (1,520 )     (2,699 )     —         (5,358 )
                                        

Net cash provided by (used in) investing activities

     (116,969 )     (33,712 )     (7,422 )     —         (158,103 )
                                        

Cash Flows From Financing Activities:

          

Net proceeds from (payments on) revolving credit facility

     (36,000 )     —         —         —         (36,000 )

Principal payments on trust deed and other notes payable

     (5,625 )     (2,977 )     —         —         (8,602 )

Principal payments on senior notes payable

     (25,000 )     —         —         —         (25,000 )

Proceeds from the issuance of senior subordinated convertible notes

     97,000       —         —         —         97,000  

Purchase of senior subordinated convertible note hedge

     (9,120 )     —         —         —         (9,120 )

Net payments on mortgage credit facilities

     —         —         (155,609 )     (12,135 )     (167,744 )

Excess tax benefits from share-based payment arrangements

     1,555       —         —         —         1,555  

Dividends paid

     (7,778 )     —         —         —         (7,778 )

Repurchases of common stock

     (2,901 )     —         —         —         (2,901 )

Proceeds from the issuance of common stock under share lending facility

     60       —         —         —         60  

Proceeds from the exercise of stock options

     3,862       —         —         —         3,862  
                                        

Net cash provided by (used in) financing activities

     16,053       (2,977 )     (155,609 )     (12,135 )     (154,668 )
                                        

Net increase (decrease) in cash and equivalents

     (15,860 )     (124 )     10,788       —         (5,196 )

Cash and equivalents at beginning of period

     16,349       1,020       14,734       —         32,103  
                                        

Cash and equivalents at end of period

   $ 489     $ 896     $ 25,522     $ —       $ 26,907  
                                        

 

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Table of Contents

STANDARD PACIFIC CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2006

 

     Standard
Pacific Corp.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Adjustments
   Consolidated
Standard
Pacific Corp.
 
     (Dollars in thousands)  

Cash Flows From Operating Activities:

           

Net cash provided by (used in) operating activities

   $ (603,974 )   $ 71,827     $ 25,360     $ —      $ (506,787 )
                                       

Cash Flows From Investing Activities:

           

Net cash paid for acquisitions

     (7,530 )     —         —         —        (7,530 )

Investments in and advances to unconsolidated homebuilding joint ventures

     (129,754 )     (43,956 )     —         —        (173,710 )

Capital distributions and repayments of advances from unconsolidated homebuilding joint ventures

     81,736       1,049       —         —        82,785  

Net additions to property and equipment

     (4,688 )     (5,037 )     (460 )     —        (10,185 )
                                       

Net cash used in investing activities

     (60,236 )     (47,944 )     (460 )     —        (108,640 )
                                       

Cash Flows From Financing Activities:

           

Net proceeds from revolving credit facility

     410,700       —         —         —        410,700  

Principal payments on trust deed and other notes payable

     (1,550 )     (24,347 )     —         —        (25,897 )

Proceeds from senior notes

     350,000       —         —         —        350,000  

Net payments on mortgage credit facilities

     —         —         (27,534 )     —        (27,534 )

Excess tax benefits from share-based payment arrangements

     2,546       —         —         —        2,546  

Dividends paid

     (7,915 )     —         —         —        (7,915 )

Repurchases of common stock

     (104,705 )     —         —         —        (104,705 )

Proceeds from the exercise of stock options

     1,987       —         —         —        1,987  
                                       

Net cash provided by (used in) financing activities

     651,063       (24,347 )     (27,534 )     —        599,182  
                                       

Net decrease in cash and equivalents

     (13,147 )     (464 )     (2,634 )     —        (16,245 )

Cash and equivalents at beginning of period

     16,911       1,907       9,805       —        28,623  
                                       

Cash and equivalents at end of period

   $ 3,764     $ 1,443     $ 7,171     $ —      $ 12,378  
                                       

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those that impact our most critical accounting policies. We base our estimates and judgments on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies related to the following accounts or activities are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates:

 

   

Segment reporting;

 

   

Business combinations and goodwill;

 

   

Variable interest entities;

 

   

Limited partnerships and limited liability companies;

 

   

Unconsolidated homebuilding and land development joint ventures;

 

   

Inventories;

 

   

Cost of sales;

 

   

Warranty accruals; and

 

   

Insurance and litigation accruals.

For a more detailed description of these critical accounting policies, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2006.

 

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Table of Contents

Results of Operations

Selected Financial Information

(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2007     2006     % Change     2007     2006     % Change  
     (Dollars in thousands, except per share amounts)  

Homebuilding:

            

Home sale revenues

   $ 618,246     $ 828,398     (25 %)   $ 1,875,023     $ 2,704,836     (31 %)

Land sale revenues

     57,264       5,715     902 %     193,656       12,176     1,490 %
                                            

Total revenues

     675,510       834,113     (19 %)     2,068,679       2,717,012     (24 %)
                                            

Cost of home sales

     (612,902 )     (669,579 )   (8 %)     (1,834,231 )     (2,010,976 )   (9 %)

Cost of land sales

     (114,336 )     (5,592 )   1,945 %     (315,306 )     (15,224 )   1,971 %
                                            

Total cost of sales

     (727,238 )     (675,171 )   8 %     (2,149,537 )     (2,026,200 )   6 %
                                            

Gross margin

     (51,728 )     158,942     (133 %)     (80,858 )     690,812     (112 %)
                                            

Gross margin percentage

     (7.7 %)     19.1 %       (3.9 %)     25.4 %  
                                    

Selling, general and administrative expenses

     (99,458 )     (111,449 )   (11 %)     (297,364 )     (349,824 )   (15 %)

Income (loss) from unconsolidated joint ventures

     (38,700 )     5,153     (851 %)     (119,414 )     30,897     (486 %)

Other expense

     (4,360 )     (6,801 )   (36 %)     (34,256 )     (19,303 )   77 %
                                            

Homebuilding pretax income (loss)

     (194,246 )     45,845     (524 %)     (531,892 )     352,582     (251 %)
                                            

Financial Services:

            

Revenues

     2,336       5,726     (59 %)     12,015       15,519     (23 %)

Expenses

     (3,593 )     (4,845 )   (26 %)     (11,923 )     (13,957 )   (15 %)

Income from unconsolidated joint ventures

     248       394     (37 %)     780       1,435     (46 %)

Other income

     210       299     (30 %)     690       950     (27 %)
                                            

Financial services pretax income (loss)

     (799 )     1,574     (151 %)     1,562       3,947     (60 %)
                                            

Income (loss) before taxes

     (195,045 )     47,419     (511 %)     (530,330 )     356,529     (249 %)

(Provision) benefit for income taxes

     75,379       (16,572 )   (555 %)     203,954       (134,430 )   (252 %)
                                            

Net income (loss)

   $ (119,666 )   $ 30,847     (488 %)   $ (326,376 )   $ 222,099     (247 %)
                                            

Earnings (Loss) Per Share:

            

Basic

   $ (1.85 )   $ 0.48     (485 %)   $ (5.04 )   $ 3.39     (249 %)

Diluted

   $ (1.85 )   $ 0.47     (494 %)   $ (5.04 )   $ 3.31     (252 %)

Net cash provided by (used in) operating activities

   $ (18,479 )   $ (146,136 )   87 %   $ 307,575     $ (506,787 )   161 %

Net cash provided by (used in) investing activities

   $ (34,614 )   $ (30,161 )   (15 %)   $ (158,103 )   $ (108,640 )   (46 %)

Net cash provided by (used in) financing activities

   $ 57,662     $ 172,929     (67 %)   $ (154,668 )   $ 599,182     (126 %)

Adjusted Homebuilding EBITDA(1)

   $ 63,742     $ 139,063     (54 %)   $ 220,610     $ 540,524     (59 %)

(1) Adjusted Homebuilding EBITDA means net income (loss) (plus cash distributions of income from unconsolidated joint ventures) before (a) income taxes, (b) expensing of previously capitalized interest included in cost of sales, (c) non-cash impairment charges, (d) homebuilding depreciation and amortization, (e) amortization of stock-based compensation, (f) income (loss) from unconsolidated joint ventures and (g) income from financial services subsidiary. Other companies may calculate Adjusted Homebuilding EBITDA (or similarly titled measures) differently. We believe Adjusted Homebuilding EBITDA information is useful to investors as one measure of our ability to service debt and obtain financing. However, it should be noted that Adjusted Homebuilding EBITDA is not a U.S. generally accepted accounting principles (“GAAP”) financial measure. Due to the significance of the GAAP components excluded, Adjusted Homebuilding EBITDA should not be considered in isolation or as an alternative to cash flows from operations or any other liquidity performance measure prescribed by GAAP.

 

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Table of Contents
(1) continued

The table set forth below reconciles net cash provided by (used in) operating activities, calculated and presented in accordance with GAAP, to Adjusted Homebuilding EBITDA:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007     2006     2007     2006  
     (Dollars in thousands)  

Net cash provided by (used in) operating activities

   $ (18,479 )   $ (146,136 )   $ 307,575     $ (506,787 )

Add:

        

Provision (benefit) for income taxes

     (75,379 )     16,572       (203,954 )     134,430  

Expensing of previously capitalized interest included in cost of sales

     26,384       20,802       75,845       55,176  

Excess tax benefits from share-based payment arrangements

     28       14       1,498       2,440  

Less:

        

Income (loss) from financial services subsidiary

     (1,257 )     881       92       1,562  

Depreciation and amortization from financial services subsidiary

     182       147       464       430  

Net changes in operating assets and liabilities:

        

Trade and other receivables

     40,527       8,551       647       (17,683 )

Mortgage loans held for sale

     4,416       11,861       (171,006 )     (25,130 )

Inventories-owned

     57,908       223,418       (40,959 )     876,871  

Inventories-not owned

     (4,744 )     (23,185 )     (9,665 )     (76,899 )

Deferred income taxes

     41,438       5,858       141,498       6,409  

Other assets

     37,908       21,577       81,935       30,626  

Accounts payable

     (35,145 )     (2,884 )     (4,769 )     9,667  

Accrued liabilities

     (12,195 )     3,643       42,521       53,396  
                                

Adjusted Homebuilding EBITDA

   $ 63,742     $ 139,063     $ 220,610     $ 540,524  
                                

 

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Table of Contents

Three and Nine Month Periods Ended September 30, 2007 Compared to Three and Nine Month Periods Ended September 30, 2006

Overview

During the third quarter of 2007, our operations continued to be impacted by weak housing demand in most of the major housing markets across the country. The decline in demand throughout 2006 and into 2007 led to significant home price reductions and incentives to move inventory which eroded our margins and triggered asset impairments and land deposit write-offs. These conditions were brought about as a result of reduced housing affordability, higher interest rates for variable rate loans, a tightening of lending standards, a reduced availability of alternative mortgage products, growing levels of both new and existing housing inventory levels and weaker homebuyer confidence. These conditions contributed to slower sales rates, high levels of cancellations and a reduction in home prices. While our sales cancellation rates for 2007 were lower than the historically high levels experienced during the last two quarters of 2006, we have seen our cancellation rates gradually increase over the last three quarters of 2007 and we continue to face the difficult housing market challenges discussed above.

As demand in our markets decreased and our volumes slowed during 2006, we implemented a plan to adjust our operating strategy, transitioning from a focus on growth and diversification to an emphasis on generating positive cash flow, strengthening our balance sheet and improving our liquidity. As part of this strategy, we are focusing on the following:

 

   

continuing to reduce the level of investment in our homebuilding inventories, including a meaningful reduction in the allocation of capital to land acquisitions, using the cash to pay down debt;

 

   

carefully managing our speculative starts and the timing of our new community openings to better align production with sales;

 

   

continuing to refine our pricing strategy to find the right balance between margins, volume and cash flow generation; and

 

   

making the necessary adjustments in our headcount and overhead structure to reduce the size of the organization to respond to lower volume levels in the near term.

We believe that these measures will result in the generation of positive cash flow in 2007 which will be used to pay down our debt and strengthen our financial position. During the last twelve months ended September 30, 2007, we generated positive cash flows and reduced our level of consolidated homebuilding unsecured debt by approximately $265 million.

For the 2007 third quarter we generated a net loss of $119.7 million, or ($1.85) per diluted share, compared to net income of $30.8 million, or $0.47 per diluted share, for the year earlier period. The decrease in net income was driven primarily by a $240.1 million decrease in homebuilding pretax income to a loss of $194.2 million. For the nine months ended September 30, 2007, we generated a net loss of $326.4 million, or ($5.04) per diluted share, compared to net income of $222.1 million, or $3.31 per diluted share, for the year earlier period. The decrease in net income was driven primarily by an $884.5 million decrease in homebuilding pretax income to a loss of $531.9 million. Our results for the three and nine months ended September 30, 2007 included non-cash pretax inventory impairment charges totaling $223.5 million and $659.2 million, or ($2.12) and ($6.26) per diluted share after tax, respectively, which is discussed in more detail below.

 

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Table of Contents

Homebuilding

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2007     2006     % Change     2007     2006     % Change  
     (Dollars in thousands)  

Homebuilding revenues:

            

California

   $ 304,117     $ 372,357     (18 %)   $ 881,590     $ 1,315,642     (33 %)

Southwest

     218,931       240,838     (9 %)     740,753       699,395     6 %

Southeast

     152,462       220,918     (31 %)     446,336       701,975     (36 %)
                                            

Total homebuilding revenues

   $ 675,510     $ 834,113     (19 %)   $ 2,068,679     $ 2,717,012     (24 %)
                                            

Homebuilding pretax income (loss):

            

California

   $ (131,723 )   $ 11,763     (1,220 %)   $ (327,518 )   $ 199,356     (264 %)

Southwest

     (15,705 )     13,304     (218 %)     (122,917 )     60,267     (304 %)

Southeast

     (45,677 )     21,418     (313 %)     (77,121 )     103,844     (174 %)

Corporate

     (1,141 )     (640 )   (78 %)     (4,336 )     (10,885 )   60 %
                                            

Total homebuilding pretax income (loss)

   $ (194,246 )   $ 45,845     (524 %)   $ (531,892 )   $ 352,582     (251 %)
                                            

Homebuilding pretax income (loss) includes the following non-cash pretax inventory, joint venture and goodwill impairment charges and land deposit write-offs recorded in the following segments:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (Dollars in thousands)

Homebuilding non-cash pretax impairment charges:

           

California

   $ 147,321    $ 40,325    $ 381,486    $ 60,330

Southwest

     21,880      6,864      164,246      6,988

Southeast

     54,292      11,489      113,455      12,539
                           

Total homebuilding non-cash pretax impairment charges

   $ 223,493    $ 58,678    $ 659,187    $ 79,857
                           

Homebuilding pretax income for the 2007 third quarter decreased 524% to a $194.2 million pretax loss compared to pretax income of $45.8 million in the year earlier period. The decrease in pretax income was driven by a 19% decrease in homebuilding revenues to $675.5 million, a negative 7.7% homebuilding gross margin percentage and a $43.9 million decrease in joint venture income (to a loss of $38.7 million), which was partially offset by a $12.0 million decrease in the absolute level of our selling, general and administrative (“SG&A”) expenses and a $2.4 million decrease in other expense. Our homebuilding operations for the 2007 third quarter included the following non-cash pretax charges: a $175.2 million inventory impairment charge; a $41.8 million charge related to our share of joint venture inventory impairments; and a $6.5 million charge related to the write-off of land option deposits and capitalized preacquisition costs for abandoned projects. The inventory impairment charge was included in cost of sales, the joint venture charge was included in income (loss) from unconsolidated joint ventures, and the land deposit and capitalized preacquisition cost write-offs and the goodwill impairment charge were included in other expense for the quarter.

For the nine months ended September 30, 2007, homebuilding pretax income decreased 251% to a $531.9 million pretax loss compared to $352.6 million of pretax income in the year earlier period. The decrease in pretax income was driven by a 24% decrease in homebuilding revenues to $2,068.7 million, a negative 3.9% homebuilding gross margin percentage, a $150.3 million decrease in joint venture income and a $15.0 million increase in other expense, which was offset in part by a $52.5 million decrease in SG&A expenses. Our homebuilding operations for the nine months ended September 30, 2007 included the following non-cash pretax charges: a $484.6 million inventory impairment charge; a $134.0 million charge related to our share of joint venture inventory impairments; an $11.2 million charge related to the write-off of land option deposits and capitalized preacquisition costs for abandoned projects; and a $29.4 million

 

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goodwill impairment charge. The inventory impairment charge was included in cost of sales, the joint venture charge was included in income (loss) from unconsolidated joint ventures, and the land deposit and capitalized preacquisition cost write-offs and the goodwill impairment charge were included in other expense.

The 19% decrease in homebuilding revenues for the 2007 third quarter was primarily attributable to a 25% decrease in new home deliveries (exclusive of joint ventures) and a 1% decrease in our consolidated average home price to $364,000. These decreases were partially offset by a $51.5 million year-over-year increase in land sale revenues. Land sales totaled $57.3 million for the 2007 third quarter and represented the sale of approximately 1,500 lots. Homebuilding revenues for the nine months ended September 30, 2007 decreased 24% and was driven by a 29% decrease in new home deliveries (exclusive of joint ventures), a 2% decrease in our consolidated average home price to $358,000 and was partially offset by a $181.5 million increase in revenues from land sales.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007    2006    % Change     2007    2006    % Change  

New homes delivered:

                

Southern California

   294    396    (26 %)   764    1,373    (44 %)

Northern California

   172    109    58 %   452    454    0 %
                                

Total California

   466    505    (8 %)   1,216    1,827    (33 %)
                                

Arizona

   247    362    (32 %)   995    996    0 %

Texas

   338    440    (23 %)   1,085    1,446    (25 %)

Colorado

   89    102    (13 %)   270    362    (25 %)

Nevada

   27    —      —       43    —      —    
                                

Total Southwest

   701    904    (22 %)   2,393    2,804    (15 %)
                                

Florida

   305    583    (48 %)   1,015    2,056    (51 %)

Carolinas

   225    262    (14 %)   613    717    (15 %)
                                

Total Southeast

   530    845    (37 %)   1,628    2,773    (41 %)
                                

Consolidated total

   1,697    2,254    (25 %)   5,237    7,404    (29 %)
                                

Unconsolidated joint ventures(1):

                

Southern California

   79    1    7,800 %   202    44    359 %

Northern California

   35    29    21 %   82    69    19 %

Arizona

   —      9    (100 %)   4    20    (80 %)

Illinois

   4    1    300 %   25    1    2,400 %
                                

Total unconsolidated joint ventures

   118    40    195 %   313    134    134 %
                                

Total (including joint ventures)(1)

   1,815    2,294    (21 %)   5,550    7,538    (26 %)
                                

(1) Numbers presented regarding unconsolidated joint ventures reflect total deliveries of such joint ventures. Our ownership interests in these joint ventures vary but are generally less than or equal to 50%.

In California, consolidated new home deliveries (exclusive of joint ventures) decreased 8% during the 2007 third quarter as compared to the prior year period. Deliveries were off 26% in Southern California reflecting the slowdown in order activity experienced throughout the latter half of 2006 and into 2007. While still at depressed levels, deliveries increased 58% in Northern California and were driven by an increase in order trends in the first three quarters of 2007 as compared to the year earlier period.

In the Southwest, new home deliveries (exclusive of joint venture) decreased 22% in the third quarter of 2007 compared to the year earlier period. Deliveries in Arizona during the 2007 third quarter decreased 32% from the 2006 third quarter reflecting the decrease in order activity in the latter half of 2006 and into 2007, coupled with a sharp increase in our cancellation rate in the state throughout most of 2006. New home deliveries were down 23% in Texas, driven primarily by a significant drop in demand in San Antonio and Dallas, which was partially offset by an increase in deliveries from our Austin operations. In Colorado, deliveries were off 13% for the 2007 third quarter in what has continued to be a challenging housing market.

 

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New home deliveries in our Southeast region (exclusive of joint ventures) decreased 37% during the 2007 third quarter compared to the year earlier period. This decrease was primarily due to a 48% year-over-year decline in Florida deliveries due to weaker housing demand which began last year combined with an increase in our cancellation rate in the state over the same period. In the Carolinas, deliveries were off 14% from the year earlier period driven by a decrease in deliveries in both our Raleigh and Charlotte operations as compared to the year earlier period.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2007    2006    % Change     2007    2006    % Change  

Average selling prices of homes delivered:

                

Southern California

   $ 711,000    $ 747,000    (5 %)   $ 722,000    $ 712,000    1 %

Northern California

     483,000      701,000    (31 %)     532,000      746,000    (29 %)
                                        

Total California

     627,000      737,000    (15 %)     651,000      720,000    (10 %)
                                        

Arizona

     290,000      305,000    (5 %)     313,000      295,000    6 %

Texas

     226,000      210,000    8 %     223,000      197,000    13 %

Colorado

     364,000      320,000    14 %     349,000      312,000    12 %

Nevada

     299,000      —      —         320,000      —      —    
                                        

Total Southwest

     269,000      261,000    3 %     276,000      247,000    12 %
                                        

Florida

     274,000      289,000    (5 %)     276,000      274,000    1 %

Carolinas

     241,000      199,000    21 %     230,000      188,000    22 %
                                        

Total Southeast

     260,000      261,000    0 %     259,000      251,000    3 %
                                        

Consolidated (excluding joint ventures)

     364,000      368,000    (1 %)     358,000      365,000    (2 %)

Unconsolidated joint ventures(1)

     558,000      616,000    (9 %)     509,000      736,000    (31 %)
                                        

Total (including joint ventures)(1)

   $ 377,000    $ 372,000    1 %   $ 367,000    $ 372,000    (1 %)
                                        

(1) Numbers presented regarding unconsolidated joint ventures reflect total average selling prices of such joint ventures. Our ownership interests in these joint ventures vary but are generally less than or equal to 50%.

During the 2007 third quarter, our consolidated average home price decreased 1% to $364,000 (excluding joint ventures) compared to the year earlier period. The overall decrease was primarily due to changes in our geographic mix in deliveries combined with an increase in the level of incentives and discounts required to sell homes in California, Florida and Arizona.

Our average home price in California for the 2007 third quarter decreased 15% from the year earlier period driven by the increased use of incentives and discounts and the following regional changes. The average home price in Southern California was off 5% during the 2007 third quarter primarily due to increased incentives and discounts utilized throughout the region to stimulate sales. This decrease was offset in part by a slightly higher proportion of deliveries generated from our Orange County division, which generally delivers more expensive homes (including the delivery of three homes during the 2007 third quarter from its exclusive coastal project where sales prices were in the $6 to $8 million range). In Northern California, the average home price was down 31% as a result of the increased level of incentives and discounts used to sell homes combined with delivering a greater proportion of homes from our more affordable Sacramento and Central Valley markets.

In the Southwest, our average home price for the 2007 third quarter increased 3% over the year earlier period. Our average price in Arizona decreased 5% year-over-year reflecting increased incentives offset in part by a shift in our product mix. The 8% increase in our average price in Texas primarily reflected a significant decline in deliveries from our San Antonio operation, where our homes are generally more affordable than our Dallas and Austin operations.

Our average home price for the 2007 third quarter in the Southeast was flat year-over-year. In Florida, our 2007 third quarter average sales price was down 5% from the year ago period and primarily reflected the increase in the level of incentives and discounts used to sell homes across all of our Florida markets, offset in part by a geographic and product mix shift within the state. Our average price for the 2007 third quarter was up 21% in the Carolinas from the year earlier period and primarily reflected a change in product mix towards larger, more expensive homes in both of our markets in the state as well as moderate price appreciation.

 

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Gross Margin

Our 2007 third quarter homebuilding gross margin percentage was down year-over-year to a negative 7.7% from 19.1% in the prior year. For the three months ended September 30, 2007, we reviewed a total of 398 projects for impairments (which represented all of our projects at quarter end) and recorded impairments for 52 projects totaling $175.2 million, of which $119.6 million related to land under development and homes completed and under construction and $55.6 million related to land that has been or is intended to be sold to third parties. These impairments related primarily to projects located in California, Florida and Arizona and to a lesser degree Texas and Colorado. The operating margins (defined as gross margin less direct selling and marketing costs) used to calculate land residual values and related fair values for the majority of our projects during the nine months ended September 30, 2007 were approximately 10% to 12%, with discount rates in the 15% to 23% range. Our gross margin from home sales was $5.3 million, or 0.9%, for the 2007 third quarter versus $158.8 million, or 19.2%, for the year earlier period. Excluding housing inventory impairment charges of $119.6 million and $47.7 million, respectively, for the three months ended September 30, 2007 and 2006, our 2007 third quarter gross margin percentage from home sales would have been 20.2% versus 24.9% in the year earlier period. The 470 basis point decrease in the year-over-year as adjusted gross margin percentage was driven primarily by lower gross margins in California, Arizona and Florida. The lower gross margins in these markets were driven by increased incentives and discounts resulting from weakening demand during last year and this year related to decreased affordability, more limited availability of mortgage credit, and an increased number of communities and completed and existing homes available for sale in the marketplace. These factors have created a much more competitive market for new homes, which has continued to put downward pressure on home prices. Until market conditions stabilize, we may continue to incur additional inventory impairment charges.

SG&A Expenses

Our SG&A expense rate (including corporate G&A) for the 2007 third quarter increased 130 basis points to 14.7% of homebuilding revenues compared to 13.4% for the same period last year. The higher level of SG&A expenses as a percentage of homebuilding revenues was due primarily to a higher level of sales and marketing costs as a percentage of revenues, particularly advertising expenses and co-broker commissions, as a result of our focus on generating sales in these challenging market conditions. These increases were partially offset by an absolute decrease in our G&A expenses. The decrease in our G&A expenses was principally due to a reduction in staff to better align our overhead with the weaker housing market combined with a decrease in incentive-based compensation.

Unconsolidated Joint Ventures

We recognized a $38.7 million loss from unconsolidated joint ventures during the 2007 third quarter compared to income of $5.2 million in the year earlier period. The loss in the 2007 third quarter reflected a $41.8 million pretax charge related to our share of joint venture inventory impairments related to 12 projects located primarily in California. Excluding the impairment charges, we generated joint venture income of $3.1 million for the 2007 third quarter of which approximately $0.6 million was generated from profits related to land sales while approximately $2.5 million was generated from new home deliveries. Deliveries from our unconsolidated homebuilding joint ventures totaled 118 new homes in the 2007 third quarter versus 40 last year. The operating results of our unconsolidated joint ventures were also adversely impacted by lower gross margins driven by increased incentives and discounts as a result of the weaker housing market conditions described above.

Other Expense

Included in other expense for the three months ended September 30, 2007 and 2006 are pretax charges of approximately $6.5 million and $10.0 million, respectively, related to the write-off of option deposits and capitalized preacquisition costs for abandoned projects. For the nine months ended September 30, 2007 and 2006, other expense included $11.2 million and $26.3 million, respectively, related to the write-off of land option deposits and preacquisition costs. We continue to carefully evaluate each land purchase in our acquisition pipeline in light of weakened market conditions and any decision to abandon additional land purchase transactions could lead to further deposit and capitalized preacquisition cost write-offs.

 

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In addition, other expense also includes $29.4 million in goodwill impairment charges related to our Jacksonville and San Antonio operations. We performed a detailed review of these two reporting units as there were indicators of impairments such as a general deterioration in the local housing markets in which they operate and a significant reduction in their projected delivery volume and operating income levels. For the twelve month period ended September 30, 2007, a total of $48.9 million (related to five reporting units) of goodwill impairments had been recorded, resulting in the complete write-off of goodwill for five reporting units. At September 30, 2007, we had a remaining goodwill balance of $71.9 million related to seven other reporting units.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007    2006    % Change     2007    2006    % Change  

Net new orders(1):

                

Southern California

   356    190    87 %   1,134    953    19 %

Northern California

   164    62    165 %   587    293    100 %
                                

Total California

   520    252    106 %   1,721    1,246    38 %
                                

Arizona

   196    128    53 %   659    799    (18 %)

Texas

   274    321    (15 %)   988    1,418    (30 %)

Colorado

   79    60    32 %   314    332    (5 %)

Nevada

   30    4    650 %   71    4    1,675 %
                                

Total Southwest

   579    513    13 %   2,032    2,553    (20 %)
                                

Florida

   174    203    (14 %)   664    999    (34 %)

Carolinas

   201    232    (13 %)   714    756    (6 %)
                                

Total Southeast

   375    435    (14 %)   1,378    1,755    (21 %)
                                

Consolidated total

   1,474    1,200    23 %   5,131    5,554    (8 %)
                                

Unconsolidated joint ventures(2):

                

Southern California

   108    6    1,700 %   334    62    439 %

Northern California

   22    24    (8 %)   101    78    29 %

Arizona

   3    —      —       2    —      —    

Illinois

   3    10    (70 %)   16    25    (36 %)
                                

Total unconsolidated joint ventures

   136    40    240 %   453    165    175 %
                                

Total (including joint ventures)(2)

   1,610    1,240    30 %   5,584    5,719    (2 %)
                                

Average number of selling communities during the period:

                

Southern California

   41    37    11 %   38    35    9 %

Northern California

   26    20