10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
Commission File Number: 001 31524
BROOKFIELD HOMES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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37-1446709 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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8500 Executive Park Avenue |
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Suite 300 |
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Fairfax, Virginia
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22031 |
(Address of Principal Executive Offices)
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(Zip Code) |
(703) 270-1700
(Registrants Telephone Number, Including Area Code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of November 1, 2008 the registrant had outstanding 26,768,732 shares of its common stock, $0.01
par value per share.
INDEX
BROOKFIELD HOMES CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROOKFIELD HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS
(all dollar amounts are in thousands of U.S. dollars)
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|
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(Unaudited) |
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September 30, |
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December 31, |
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Note |
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2008 |
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2007 |
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Assets |
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Housing and land inventory |
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2 |
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$ |
1,093,415 |
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$ |
1,078,229 |
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Investments in housing and land joint ventures |
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3 |
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95,778 |
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130,546 |
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Consolidated land inventory not owned |
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2 |
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9,448 |
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26,748 |
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Receivables and other assets |
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60,310 |
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50,066 |
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Cash and cash equivalents |
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9,132 |
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Deferred income taxes |
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7 |
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61,123 |
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55,943 |
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$ |
1,320,074 |
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$ |
1,350,664 |
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Liabilities and Equity |
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Project specific financings |
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4 |
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$ |
511,321 |
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$ |
644,572 |
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Other revolving financings |
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4 |
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272,000 |
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90,000 |
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Accounts payable and other liabilities |
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5 |
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142,409 |
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159,956 |
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Minority interest |
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2 |
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66,629 |
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76,486 |
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Preferred stock 10,000,000 shares authorized, no shares issued |
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Common stock 65,000,000 shares authorized, 32,073,781 shares
issued (December 31, 2007 32,073,781 shares issued) |
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321 |
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321 |
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Additional paid-in-capital |
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145,101 |
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145,101 |
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Treasury stock, at cost 5,410,368 shares (December 31, 2007
5,410,368 shares) |
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(243,701 |
) |
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(243,701 |
) |
Retained earnings |
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425,994 |
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477,929 |
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$ |
1,320,074 |
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$ |
1,350,664 |
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See accompanying notes to financial statements
1
BROOKFIELD HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(all dollar amounts are in thousands of U.S. dollars, except per share amounts)
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(Unaudited) |
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(Unaudited) |
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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Note |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue |
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Housing |
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$ |
106,378 |
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$ |
117,405 |
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$ |
288,019 |
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$ |
376,077 |
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Land |
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3,312 |
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3,359 |
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11,123 |
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9,598 |
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109,690 |
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120,764 |
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299,142 |
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385,675 |
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Direct cost of sales |
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2 |
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(97,501 |
) |
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(99,498 |
) |
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(262,145 |
) |
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(315,141 |
) |
Impairment of housing and land inventory and write-off
of option deposits |
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2 |
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(31,787 |
) |
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(34,413 |
) |
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(54,588 |
) |
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(34,413 |
) |
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(19,598 |
) |
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(13,147 |
) |
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(17,591 |
) |
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36,121 |
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Selling, general and administrative expense |
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(15,924 |
) |
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(16,007 |
) |
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(47,616 |
) |
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(50,037 |
) |
Equity in (loss) / earnings from housing and land
joint ventures |
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3 |
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(41 |
) |
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408 |
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2,383 |
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|
788 |
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Impairment of investments in housing and land joint
ventures |
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3 |
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(8,525 |
) |
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(7,135 |
) |
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(18,525 |
) |
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(7,135 |
) |
Other (expense) / income |
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9 |
(c) |
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(699 |
) |
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(5,519 |
) |
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(1,116 |
) |
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174 |
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Operating Loss |
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(44,787 |
) |
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(41,400 |
) |
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(82,465 |
) |
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(20,089 |
) |
Minority interest |
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3,994 |
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3,691 |
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7,300 |
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2,763 |
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Loss Before Taxes |
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(40,793 |
) |
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(37,709 |
) |
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(75,165 |
) |
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(17,326 |
) |
Income tax recovery |
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|
15,502 |
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39,328 |
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28,563 |
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57,135 |
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Net (Loss) / Income |
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$ |
(25,291 |
) |
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$ |
1,619 |
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$ |
(46,602 |
) |
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$ |
39,809 |
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(Loss) / Earnings Per Share |
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Basic |
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6 |
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$ |
(0.95 |
) |
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$ |
0.06 |
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$ |
(1.75 |
) |
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$ |
1.50 |
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Diluted |
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6 |
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|
$ |
(0.95 |
) |
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$ |
0.06 |
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$ |
(1.75 |
) |
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$ |
1.48 |
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Weighted Average Common Shares Outstanding (in thousands) |
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Basic |
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6 |
|
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|
26,663 |
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|
26,628 |
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|
26,663 |
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|
26,623 |
|
Diluted |
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6 |
|
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|
26,663 |
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|
26,816 |
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|
|
26,663 |
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|
26,865 |
|
See accompanying notes to financial statements
2
BROOKFIELD HOMES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(all dollar amounts are in thousands of U.S. dollars)
|
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(Unaudited) |
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|
Nine Months Ended |
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|
September 30, |
|
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|
2008 |
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|
2007 |
|
Common Stock |
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$ |
321 |
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|
$ |
321 |
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|
|
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Additional Paid-in Capital |
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|
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|
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|
Opening balance |
|
|
145,101 |
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|
146,730 |
|
Stock option exercises |
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(670 |
) |
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|
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|
Ending balance |
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|
145,101 |
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|
146,060 |
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Treasury Stock |
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Opening balance |
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|
(243,701 |
) |
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|
(248,606 |
) |
Stock option exercises |
|
|
|
|
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|
3,319 |
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|
Ending balance |
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|
(243,701 |
) |
|
|
(245,287 |
) |
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|
|
|
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|
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Retained Earnings |
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|
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|
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|
Opening balance |
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|
477,929 |
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|
472,961 |
|
Net (loss) / income |
|
|
(46,602 |
) |
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|
39,809 |
|
Dividends |
|
|
(5,333 |
) |
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|
(5,326 |
) |
|
|
|
|
|
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|
Ending balance |
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|
425,994 |
|
|
|
507,444 |
|
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Total stockholders equity |
|
$ |
327,715 |
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|
$ |
408,538 |
|
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|
See accompanying notes to financial statements
3
BROOKFIELD HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all dollar amounts are in thousands of U.S. dollars)
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|
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|
|
|
|
|
|
|
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|
|
(Unaudited) |
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(Unaudited) |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Cash Flows From / (Used in) Operating Activities |
|
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|
|
|
|
|
|
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|
|
|
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|
Net (loss) / income |
|
$ |
(25,291 |
) |
|
$ |
1,619 |
|
|
$ |
(46,602 |
) |
|
$ |
39,809 |
|
Adjustments to reconcile net (loss) / income to net cash used in operating activities:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Undistributed) / distributed income from housing and land joint ventures |
|
|
41 |
|
|
|
11 |
|
|
|
(1,364 |
) |
|
|
277 |
|
Minority interest |
|
|
(3,994 |
) |
|
|
(3,691 |
) |
|
|
(7,300 |
) |
|
|
(2,763 |
) |
Deferred income taxes |
|
|
(10,238 |
) |
|
|
(10,798 |
) |
|
|
(5,180 |
) |
|
|
(4,342 |
) |
Impairment of housing and land inventory and write-off of option deposits |
|
|
31,787 |
|
|
|
34,413 |
|
|
|
54,588 |
|
|
|
34,413 |
|
Impairment of investments in housing and land joint ventures |
|
|
8,525 |
|
|
|
7,135 |
|
|
|
18,525 |
|
|
|
7,135 |
|
Other changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) / decrease in receivables and other assets |
|
|
(8,684 |
) |
|
|
1,529 |
|
|
|
(10,244 |
) |
|
|
517 |
|
Decrease / (increase) in housing and land inventory |
|
|
17,085 |
|
|
|
(22,685 |
) |
|
|
36,317 |
|
|
|
(73,232 |
) |
Increase / (decrease) in accounts payable and other liabilities |
|
|
3,145 |
|
|
|
(38,909 |
) |
|
|
(9,098 |
) |
|
|
(132,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by / (used in) operating activities |
|
|
12,376 |
|
|
|
(31,376 |
) |
|
|
29,642 |
|
|
|
(130,594 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From / (Used in) Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in housing and land joint ventures |
|
|
(5,078 |
) |
|
|
(12,006 |
) |
|
|
(17,432 |
) |
|
|
(33,063 |
) |
Distribution from housing and land joint ventures |
|
|
684 |
|
|
|
4,185 |
|
|
|
1,079 |
|
|
|
7,864 |
|
Acquisition of additional interest in housing and land joint ventures |
|
|
|
|
|
|
|
|
|
|
(6,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(4,394 |
) |
|
|
(7,821 |
) |
|
|
(23,197 |
) |
|
|
(25,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From / (Used in) Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayments) / borrowings under revolving project specific financing |
|
|
(37,542 |
) |
|
|
5,106 |
|
|
|
(193,978 |
) |
|
|
17,637 |
|
Net borrowings under other revolving financings |
|
|
29,000 |
|
|
|
30,000 |
|
|
|
182,000 |
|
|
|
55,000 |
|
Distributions to minority interest |
|
|
(110 |
) |
|
|
|
|
|
|
(503 |
) |
|
|
(1,750 |
) |
Contributions from minority interest |
|
|
670 |
|
|
|
1,537 |
|
|
|
2,237 |
|
|
|
4,503 |
|
Exercise of stock options |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
84 |
|
Dividends paid in cash |
|
|
|
|
|
|
|
|
|
|
(5,333 |
) |
|
|
(5,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) / provided by financing activities |
|
|
(7,982 |
) |
|
|
36,654 |
|
|
|
(15,577 |
) |
|
|
70,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
|
|
|
|
(2,543 |
) |
|
|
(9,132 |
) |
|
|
(85,645 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
3,707 |
|
|
|
9,132 |
|
|
|
86,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
1,164 |
|
|
$ |
|
|
|
$ |
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
11,612 |
|
|
$ |
16,386 |
|
|
$ |
41,932 |
|
|
$ |
48,531 |
|
Income taxes recovered / (paid) |
|
$ |
|
|
|
$ |
|
|
|
$ |
18,049 |
|
|
$ |
(22,154 |
) |
Non-cash (decrease) / increase in consolidated land inventory not owned |
|
$ |
(44 |
) |
|
$ |
139 |
|
|
$ |
(15,881 |
) |
|
$ |
5,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of Additional Interest in Joint Ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in housing and land inventory |
|
$ |
|
|
|
$ |
|
|
|
$ |
97,828 |
|
|
$ |
|
|
Reduction in investment in housing and land joint ventures |
|
$ |
|
|
|
$ |
|
|
|
$ |
33,960 |
|
|
$ |
|
|
Liabilities assumed |
|
$ |
|
|
|
$ |
|
|
|
$ |
63,868 |
|
|
$ |
|
|
See accompanying notes to financial statements
4
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
Note 1. Significant Accounting Policies
(a) Basis of Presentation
Brookfield Homes Corporation (the Company or Brookfield Homes) was incorporated on August 28,
2002 as a wholly-owned subsidiary of Brookfield Properties Corporation (Brookfield Properties) to
acquire as of October 1, 2002 all of the California and Washington D.C. Area homebuilding and land
development operations (the Land and Housing Operations) of Brookfield Properties pursuant to a
reorganization of its business (the Spin-off). On January 6, 2003, Brookfield Properties
completed the Spin-off by distributing all of the issued and outstanding common stock it owned in
the Company to its common stockholders. Brookfield Homes began trading as a separate company on
the New York Stock Exchange on January 7, 2003.
These consolidated financial statements include the accounts of Brookfield Homes and its
subsidiaries and investments in joint ventures and variable interests in which the Company is the
primary beneficiary.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information.
Since they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements, they should
be read in conjunction with the Companys consolidated financial statements and footnotes thereto
included in the Companys annual report on Form 10-K/A for the year ended December 31, 2007. In
the opinion of management, all adjustments necessary for fair presentation of the accompanying
consolidated
financial statements have been made.
The Company historically has experienced, and expects to continue to experience, variability in
quarterly results. The consolidated statements of operations for the three months and nine months
ended September 30, 2008 are not necessarily indicative of the results to be expected for the full
year.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
(b) Recent Accounting Pronouncements
In December 2007, the United States Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 160 Non-controlling Interests in Consolidated Financial
Statements. SFAS 160 clarifies the accounting for non-controlling interests and establishes
accounting and reporting standards for the non-controlling interest in a subsidiary, including
classification as a component of stockholders equity. This statement is effective for fiscal years
beginning on or after December 15, 2008 (the Companys fiscal year beginning January 1, 2009). The
Company is currently reviewing the impact, if any, that SFAS 160 may have on its consolidated
financial statements.
In December 2007, FASB issued SFAS 141R, Business Combinations which replaces the previous
version of SFAS 141. SFAS 141R provides revised guidance for recognizing and measuring
identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interests
in the acquiree as a result of business combinations. The revised standard also provides
disclosure requirements to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141R is effective for fiscal years beginning
on or after December 15, 2008 (the Companys fiscal year beginning January 1, 2009). The Company
is currently reviewing the impact, if any, that SFAS 141R may have on its consolidated financial
statements.
In February 2007, FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 allows companies to choose to measure certain financial instruments and
other items at fair value. Companies electing the fair value option are required to report
subsequent changes in fair value in earnings. This Statement was effective for the Companys fiscal
year beginning January 1, 2008. The Company did not elect the fair value option for any of its
financial assets or financial liabilities under FAS 159 and the standard has had no impact on the
Companys
5
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
consolidated financial statements.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. Effective January 1, 2008, the
Company adopted SFAS 157. SFAS 157 specifies a hierarchy of valuation techniques that are based on
observable and unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect our market assumptions. The three levels of
the hierarchy are as follows: level 1 inputs are derived from quoted prices for identical
instruments in active markets; level 2 inputs are derived from quoted prices for similar
instruments in active markets, quoted prices for identical or similar instruments in markets that
are not active, and model-derived valuations whose inputs are observable or whose significant value
drivers are observable; and level 3 inputs which are derived from instruments with primarily
unobservable value drivers. See Notes 2 and 8 for fair value disclosure.
(c) Reclassifications
Certain prior period amounts in the consolidated balance sheet have been reclassified to conform
with the September 30, 2008 presentation. Specifically, other revolving financings which had
previously been shown as a component of project specific and other financings is shown separately.
This reclassification had no impact on the Companys results from operations.
Note 2. Housing and Land Inventory
Housing and land inventory includes homes completed and under construction and lots ready for
construction, model homes and land under and held for development which will be used in the
Companys homebuilding operations or sold as building lots to other homebuilders. The following
summarizes the components of housing and land inventory:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Housing inventory |
|
$ |
582,450 |
|
|
$ |
600,241 |
|
Model homes |
|
|
55,638 |
|
|
|
58,042 |
|
Land and land under development |
|
|
455,327 |
|
|
|
419,946 |
|
|
|
|
|
|
|
|
|
|
$ |
1,093,415 |
|
|
$ |
1,078,229 |
|
|
|
|
|
|
|
|
The Company capitalizes interest which is expensed as housing units and building lots are sold.
For the three months ended September 30, 2008 and 2007, and for the nine months ended September 30,
2008 and 2007, interest incurred and capitalized by the Company was $11.6 million and $16.4
million, and $41.9 million and $48.5 million, respectively. Capitalized interest expensed as direct
cost of sales for the same periods was $7.7 million and $6.0 million, and
$20.6 million and $20.9 million, respectively.
Capitalized costs are expensed as costs of sales on a specific identification basis or on a
relative value basis in proportion to revenue. Before impairment charges, included in direct cost
of sales is $95.0 million and $252.5 million
of costs related to housing revenue for the three months and nine months ended September 30, 2008
(September 30, 2007 $96.1 million and $306.5 million) and $2.5 million and $9.6 million of costs
related to land sales (September, 2007
$3.4 million and $8.6 million), respectively.
For the three months and nine months ended September 30, 2008, the continued challenging housing
market conditions resulted in a reduction of average selling prices along with an increase in sales
incentives and additionally, the Company recognized $27.0 million and $48.2 million, respectively,
of impairment charges on the housing and land inventory the Company directly owns (2007 $31.4
million and $31.4 million, respectively). The $48.2 million in impairment charges is on 1,512 lots
primarily located in the San Diego / Riverside and the Washington D.C. Areas. The table below sets
forth information regarding the Companys fair value measurement method and values basis used to
determine fair value for the housing and land inventory impaired during the quarter:
6
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Using Significant |
|
|
|
Unobservable Inputs (Level 3) |
|
Estimated fair value of housing and land inventory impaired during the third quarter |
|
$ |
56,445 |
|
|
|
|
|
In accordance with the provisions of SFAS 144 and SFAS 157, housing and land inventory with a
carrying amount of $83.4 million was written down to its fair value of $56.4 million, resulting in
an impairment charge of $27.0 million, which was included in earnings for the three months ending
September 30, 2008 (September 30, 2007 $31.4 million).
The fair value measurements for housing and land inventory were determined by comparing the
carrying amount of an asset to cash flows expected to be generated by the asset. To arrive at the
estimated fair value of housing and land inventory impaired during the third quarter, the Company
estimated the cash flow for the life of each project. These projections take into account the
specific business plans for each project and managements best estimate of the most probable set of
economic conditions anticipated to prevail in the market area. Such projections generally assume
current home selling prices, with cost estimates and sales rates for short-term projects consistent
with recent sales activity. For longer-term projects, planned sales rates for the remainder of
2008 and 2009 assume recent sales activity and normalized sales rates beyond 2009. If the future
undiscounted cash flows are less than the carrying amount, the asset is considered to be impaired.
If the assets are considered to be impaired, they are then written down to fair value less
estimated selling
costs. In addition, when assessing fair value, the Company also calculates a static residual value
analysis, which is assessed in conjunction with the discounted cash flow analysis to validate
results from the fair value assessment.
In the ordinary course of business, the Company has entered into a number of option contracts to
acquire lots in the
future in accordance with specific terms and conditions. Under these option agreements, the Company
will advance deposits to secure the right to purchase land or lots at a future point in time. The
Company has evaluated its option contracts and determined that for those entities considered to be
variable interest entities (VIEs), it is the primary beneficiary of options for 25 lots with an
aggregate exercise price of $9.4 million (December 31, 2007 204 lots with an aggregate exercise
price of $26.7 million), which are required to be consolidated. In these cases, the only asset
recorded is the Companys exercise price for the option to purchase, with an increase in minority
interest of $5.9 million (December 31, 2007 $21.8 million) for the assumed third party investment
in the VIE. Where the land sellers are not required to provide the Company financial information
related to the VIE, certain assumptions by the Company were required in its assessment as to
whether or not it is the primary beneficiary.
Housing and land inventory includes non-refundable deposits and other entitlement costs totaling
$58.2 million (December 31, 2007 $55.6 million) in connection with options that are not required
to be consolidated under the provisions of FASB Interpretation No. 46 (Revised 2003) (FIN 46R).
The total exercise price of these options is $290.7 million (December 31, 2007 $409.4 million)
including the non-refundable deposits identified above. The number of lots for which the Company
has obtained an option to purchase, excluding those already consolidated, and the respective dates
of expiry and exercise price for these options is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Total |
|
|
|
of |
|
|
Exercise |
|
Year of Expiry |
|
Lots |
|
|
Price |
|
2008 |
|
|
77 |
|
|
$ |
12,405 |
|
2009 |
|
|
58 |
|
|
|
21,173 |
|
2010 |
|
|
1,713 |
|
|
|
18,927 |
|
Thereafter |
|
|
7,315 |
|
|
|
238,226 |
|
|
|
|
|
|
|
|
|
|
|
9,163 |
|
|
$ |
290,731 |
|
|
|
|
|
|
|
|
7
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
During the three months and nine months ended September 30, 2008, the Company wrote-off $4.8
million and
$6.4 million, respectively (September 30, 2007 $3.0 million and $3.0 million). The $6.4 million
of option write-offs primarily related to unentitled lot option agreements on 714 lots which the
Company is no longer pursuing.
Investments in housing and land joint ventures includes $24.0 million of the Companys share of
non-refundable deposits
and other entitlement costs in connection with 1,784 lots under option. The Companys share of the
total exercise price of these options is $93.7 million.
The Company holds agreements for a further 5,608 acres of longer term land, with non-refundable
deposits and other entitlement costs of $10.3 million which is included in housing and land
inventory that may provide additional lots upon obtaining entitlements with an aggregate exercise
price of $112.0 million. However, given that the Company is in the initial stage of land
entitlement, the Company has concluded at this time that the level of uncertainty in entitling
these properties does not warrant including them in the above totals.
In the ordinary course of business, the Company selectively acquires land that it anticipates will
provide a minimum
return on invested capital. In the first quarter of 2008, the Company acquired its former partners
50% interest in one of its joint ventures for cash consideration of $5.4 million and assumed
project specific and other financings of $9.0 million. As a result, the Company now owns 100% of
this venture and as of January 15, 2008, it is included in the Companys consolidated financial
statements. This acquisition resulted in an increase to the Companys housing and land inventory of
$29.2 million, an increase to project specific and other financings of $18.0 million and a decrease
in investments in housing and land joint ventures of $11.2 million. In the second quarter of 2008,
the Company acquired its former partners 50% interest in another joint venture for cash
consideration of $1.4 million and assumed project specific and other financings of $21.3 million.
As a result, the Company now owns 100% of this venture and as of April 11, 2008, it is included in
the Companys consolidated financial statements. This acquisition resulted in an increase to
the Companys housing and land inventory of $68.6 million, an increase to project specific and
other financings of $42.7 million, an increase to accounts payable and other liabilities of $3.1
million, and a decrease in investments in housing
and land joint ventures of $22.7 million.
Note 3. Investments in Housing and Land Joint Ventures
The Company participates in a number of joint ventures in which it has less than a controlling
interest. Summarized condensed financial information on a combined 100% basis of the joint ventures
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Housing and land inventory |
|
$ |
379,457 |
|
|
$ |
476,250 |
|
Other assets |
|
|
8,748 |
|
|
|
11,526 |
|
|
|
|
|
|
|
|
|
|
$ |
388,205 |
|
|
$ |
487,776 |
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Project specific financings |
|
$ |
135,157 |
|
|
$ |
193,259 |
|
Accounts payable and other liabilities |
|
|
23,604 |
|
|
|
26,497 |
|
Investment and advances |
|
|
|
|
|
|
|
|
Brookfield Homes |
|
|
95,778 |
|
|
|
130,546 |
|
Others |
|
|
133,666 |
|
|
|
137,474 |
|
|
|
|
|
|
|
|
|
|
$ |
388,205 |
|
|
$ |
487,776 |
|
|
|
|
|
|
|
|
8
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,398 |
|
|
$ |
8,186 |
|
|
$ |
19,212 |
|
|
$ |
47,994 |
|
Expenses |
|
|
(3,039 |
) |
|
|
(6,906 |
) |
|
|
(16,238 |
) |
|
|
(87,628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) / income |
|
$ |
(1,641 |
) |
|
$ |
(1,280 |
) |
|
$ |
2,974 |
|
|
$ |
(39,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of net (loss)/ income |
|
$ |
(41 |
) |
|
$ |
408 |
|
|
$ |
2,383 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of investments in housing and landjoint ventures |
|
$ |
(8,525 |
) |
|
$ |
(7,135 |
) |
|
$ |
(18,525 |
) |
|
$ |
(7,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In reporting the Companys share of net income, all inter-company profits or losses from housing
and land joint ventures are eliminated on lots purchased by the Company from the joint ventures.
Joint ventures in which the Company has a non-controlling interest are accounted for using the
equity method. In addition, the Company has performed an evaluation of its existing joint venture
relationships by applying the provisions of FIN 46R.
During the three months and nine months ended September 30, 2008 in accordance with Accounting
Principles Board Opinion No. 18 (APB 18) the Equity Method of Accounting for Investments in
Common Stock, the Company recognized impairment charges of $8.5 million and $18.5 million,
respectively, related to a joint venture in the Inland Empire of California in the San Diego /
Riverside reportable segment as a result of continued deterioration in this project which resulted
in the carrying value of the Companys investment in this joint venture exceeding the estimated
fair value. Additionally, this joint venture has received notice from its lender that it is in
default on its $71.6 million loan. The Company has provided the lender a several guarantee for
fifty percent of the amount outstanding. The lender is currently proceeding to foreclose on the
property. The Companys remaining investment in this venture is $ nil.
The Company and/or its joint venture partners have provided varying levels of guarantees of debt in
its joint ventures. At September 30, 2008, the Company had recourse guarantees of $35.8 million
(December 31, 2007 $8.5 million) and limited maintenance guarantees of $23.0 million (December
31, 2007 $76.1 million) with respect to debt in its joint ventures.
Note 4. Project Specific Financings and Other Revolving Financings
Project specific financings are revolving in nature, bear interest at floating rates with a
weighted average rate of 6.0% as at September 30, 2008 (December 31, 2007 7.0%) and are secured
by housing and land inventory. The weighted average rate was calculated as of the end of each
period, based upon the amount of debt outstanding and the related interest rates applicable on the
date. During the nine months ended September 30, 2008, two joint ventures were acquired on which
$60.7 million of debt was assumed and remains outstanding at September 30, 2008.
The Companys project specific financings require Brookfield Homes Holdings Inc., a wholly-owned
subsidiary of the Company, to maintain a tangible net worth of at least $250.0 million, a net debt
to capitalization ratio of no greater than 65% and a net debt to tangible net worth of no greater
than 2.50 to 1. As of September 30, 2008, the Company was in compliance with all its covenants.
Project specific financings mature as follows: 2008 $86.3 million; 2009 $291.5 million; 2010
$101.6 million; and 2011 $31.9 million.
9
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
Other revolving financings consists of amounts drawn on an unsecured revolving credit facility due
to a subsidiary of the Companys largest stockholder, Brookfield Asset Management Inc. This
facility bears interest at LIBOR plus 3.0% per annum and matures in September 2009. This facility
was increased in October 2008 to an aggregate principal amount not to exceed $300.0 million. During the three months and nine months ended September 30, 2008,
interest of $3.5 million and $8.2 million, respectively, was paid related to this facility (2007
$1.3 million and $3.2 million, respectively). This facility requires the Company to maintain
minimum stockholders equity of $300.0 million and a consolidated net debt to book capitalization
of no greater than 70%. At September 30, 2008 the Company was in compliance with all its covenants.
Note 5. Accounts Payable and Other Liabilities
The components of accounts payable and other liabilities included in the Companys balance sheet
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Trade payables and cost to complete accruals |
|
$ |
50,914 |
|
|
$ |
46,017 |
|
Warranty costs (Note 9 (b)) |
|
|
17,047 |
|
|
|
17,844 |
|
Customer deposits |
|
|
2,826 |
|
|
|
2,495 |
|
Stock-based compensation |
|
|
14,234 |
|
|
|
13,164 |
|
Due to minority interest |
|
|
11,983 |
|
|
|
23,573 |
|
Accrued and deferred compensation |
|
|
29,700 |
|
|
|
46,304 |
|
Swap contracts (Note 9 (c) and (d)) |
|
|
8,178 |
|
|
|
6,523 |
|
Other |
|
|
7,527 |
|
|
|
4,036 |
|
|
|
|
|
|
|
|
|
|
$ |
142,409 |
|
|
$ |
159,956 |
|
|
|
|
|
|
|
|
Note 6. (Loss) / Earnings Per Share
Basic and diluted (loss) / earnings per share for the three months and nine months ended September
30, 2008 and 2007 were calculated as follows (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) / income |
|
$ |
(25,291 |
) |
|
$ |
1,619 |
|
|
$ |
(46,602 |
) |
|
$ |
39,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic average shares outstanding |
|
|
26,663 |
|
|
|
26,628 |
|
|
|
26,663 |
|
|
|
26,623 |
|
Net effect of stock options
assumed to be exercised |
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average shares outstanding |
|
|
26,663 |
|
|
|
26,816 |
|
|
|
26,663 |
|
|
|
26,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) / earnings per share |
|
$ |
(0.95 |
) |
|
$ |
0.06 |
|
|
$ |
(1.75 |
) |
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) / earnings per share |
|
$ |
(0.95 |
) |
|
$ |
0.06 |
|
|
$ |
(1.75 |
) |
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2008 and 2007, options to purchase 1.0 million shares and
0.3 million shares, respectively, were outstanding and anti-dilutive and were excluded from the
computation of diluted earnings per share.
10
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
Note 7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of the assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The differences that give rise to the net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Compensation deductible for tax purposes when paid |
|
$ |
15,291 |
|
|
$ |
20,434 |
|
Differences relating to housing and land inventory |
|
|
43,255 |
|
|
|
32,927 |
|
Other |
|
|
2,577 |
|
|
|
2,582 |
|
|
|
|
|
|
|
|
|
|
$ |
61,123 |
|
|
$ |
55,943 |
|
|
|
|
|
|
|
|
As at September 30, 2008, the Company had no unrecognized tax asset or liability (2007 nil).
Note 8. Stock Based Compensation
Option Plan
Pursuant to the Companys stock option plan, Brookfield Homes grants options to purchase shares of
the Companys common stock at the market price of the shares on the day the options are granted. A
maximum of two million shares are authorized for issuance under the plan.
The total compensation costs recognized in income related to the Companys stock options during the
three months and nine months ended September 30, 2008 was expense of $0.9 million and $0.4 million,
respectively (2007 income of $2.9 million and $5.3 million, respectively).
The fair value of each of the Companys stock option awards is estimated at each reporting date
using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The
fair value of the Companys stock option awards, which are subject to graded vesting, is expensed
over the vesting period of the stock options. Expected volatility is based on historical volatility
of the Companys stock. The risk-free rate for periods within the contractual life of the stock
option award is based on the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal
to the expected term of the stock option award granted. The Company uses historical data to
estimate stock option exercises and forfeitures within its valuation model. The expected term of
stock option awards granted for some participants is derived from historical exercise experience
under the Companys share-based payment plan and represents the period of time that stock option
awards granted are expected to be outstanding. The expected term of stock options granted for the
remaining participants is derived by using the simplified method.
The significant weighted average assumptions relating to the valuation of the Companys stock
options for the three months and nine months ended September 30, 2008 were as follows:
|
|
|
|
|
|
|
2008 |
|
Dividend yield |
|
|
0.0%5.50% |
|
Volatility rate |
|
|
70% |
|
Risk-free interest rate |
|
|
0.0%4.2% |
|
Expected option life (years) |
|
|
0.0 7.0 |
|
|
|
|
|
11
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
The following table sets out the number of common shares that employees of the Company may acquire
under options granted under the Companys stock option plan:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average per |
|
|
|
|
|
|
|
Share Exercise |
|
|
|
Shares |
|
|
Price |
|
Outstanding, January 1, 2008 |
|
|
782,319 |
|
|
$ |
30.11 |
|
Granted |
|
|
210,000 |
|
|
$ |
15.90 |
|
Exercised |
|
|
(12,000 |
) |
|
$ |
1.74 |
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2008 |
|
|
980,319 |
|
|
$ |
27.41 |
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2008 |
|
|
409,719 |
|
|
$ |
22.89 |
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the nine months ended
September 30, 2008 was $6.65 per option compared to $12.17 per option during the nine months ended
September 30, 2007. The intrinsic value of options exercised during the nine months ended September
30, 2008 and 2007 was $0.2 and $3.9 million, respectively. At September 30, 2008, the aggregate
intrinsic value of options currently exercisable is $2.0 million and the aggregate intrinsic value
of options outstanding is $2.0 million.
At September 30, 2008, there was $1.2 million of unrecognized expense related to unvested options,
which is expected to be recognized over the remaining weighted average period of 2.6 years.
Deferred Share Unit Plan
The Company has adopted a Deferred Share Unit Plan (DSUP) under which certain of its executive
officers and directors may, at their option, receive all or a portion of their annual bonus awards
or retainers, respectively, in the form of deferred share units. The Company may also make
additional grants of units to its executives and directors pursuant to the DSUP. As of September
30, 2008, the Company had granted 925,999 units under the DSUP, all of which were outstanding at
September 30, 2008, and of which 565,391 units are currently vested and 360,608 vest over the next
five years.
In addition, the Company has adopted a Senior Operating Management Deferred Share Unit Plan,
(MDSUP) under which certain senior operating management employees receive a portion of their
annual compensation in the form of deferred share units. As of September 30, 2008, the Company had
granted 73,375 units under the MDSUP, all of which were outstanding at September 30, 2008.
The financial statement impact relating to the DSUP and MDSUP for the three months and nine months
ended September 30, 2008 were expense of $2.0 million and $0.6 million, respectively (2007
income of $6.7 million and $11.1 million, respectively).
The following table sets out the number of deferred share units that executive officers, directors
and senior operating management employees of the Company may redeem under the Companys DSUP and
MDSUP:
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
Outstanding, January 1, 2008 |
|
|
677,902 |
|
Granted |
|
|
325,701 |
|
Exercised |
|
|
|
|
Cancelled |
|
|
(4,229 |
) |
|
|
|
|
Outstanding, September 30, 2008 |
|
|
999,374 |
|
|
|
|
|
Deferred share units vested at September 30, 2008 |
|
|
638,766 |
|
|
|
|
|
12
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
Note 9. Commitments, Contingent Liabilities and Other
(a) The Company is party to various legal actions arising in the ordinary course of business.
Management believes that none of these actions, either individually or in the aggregate, will have
a material adverse effect on the financial condition or results of operations of the Company.
(b) When selling a home, the Companys subsidiaries provide customers with a limited warranty. The
Company estimates the costs that may be incurred under each limited warranty and records a
liability in the amount of such costs
at the time the revenue associated with the sale of each home is recognized. In addition, the
Company has insurance in place where its subsidiaries are subject to the respective warranty
statutes in the State where the Company conducts business which range up to ten years for latent
construction defects. Factors that affect the Companys warranty liability include the number of
homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary. The
following table reflects the changes in the Companys warranty liability for the nine months ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Balance, at beginning of period |
|
$ |
17,844 |
|
|
$ |
19,569 |
|
Payments and other adjustments made during the period |
|
|
(3,034 |
) |
|
|
(4,148 |
) |
Warranties issued during the period |
|
|
2,237 |
|
|
|
3,625 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
17,047 |
|
|
$ |
19,046 |
|
|
|
|
|
|
|
|
(c) The Company is exposed to financial risk that arises from fluctuations in interest rates. The
interest bearing assets and liabilities of the Company are mainly at floating rates and,
accordingly, their fair values approximate cost. The Company would be negatively impacted on
balance, if interest rates were to increase. From time to time, the Company enters into interest
rate swap contracts. As at September 30, 2008, the Company had seven interest rate swap contracts
outstanding which effectively fixed $260.0 million of the Companys variable rate debt at an
average rate of 6.9% per annum. The contracts expire between 2009 and 2017. At September 30, 2008,
the fair market value of the contracts was a liability of $8.2 million (December 31, 2007
liability of $6.2 million) and was included in accounts payable and other liabilities. Expense of
$1.1 million and $2.0 million was recognized during the three months and nine months ended
September 30, 2008, respectively (2007 expense of $5.7 million and $1.9 million, respectively)
and was included in other (expense) / income. All interest rate swaps are recorded at fair market
value and hedge accounting has not been applied.
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Using Significant |
|
|
|
Observable Inputs (Level 2) |
|
Interest rate swap contracts at September 30, 2008 |
|
$ |
(8,178 |
) |
|
|
|
|
The fair value measurements for the interest rate swap contracts are determined based on notional
amounts, terms to maturity, and the USD LIBOR rates. The LIBOR rates vary depending on the term to
maturity and the conditions set out in the underlying swap agreements.
(d) In July 2007, the Companys equity swap transaction was amended to mature during July 2008 at
an average cost per share of $28.41, and effectively fixed the stock compensation liability on
1,003,302 shares. This agreement, as subsequently amended, matured with a notional equity swap
amount at an average cost of $12.63 per share on 1,022,987 shares. During July 2008, a new equity
swap transaction was entered into at an average cost of $12.31 per share on 1,022,987 shares which
matures during July 2009. At September 30, 2008, the fair market value of the equity swap was an
asset of $1.7 million (December 31, 2007 liability of $0.3 million) and was included in
receivables and other assets. Income of $1.9 million and expense of $1.3 million was recognized
during the three months and nine months ended September 30, 2008, respectively (2007 expense of
$10.4 million and $16.9 million) and was included in selling and general and administrative
expense. The equity swap is recorded at fair market value and hedge accounting has not been
13
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
applied. The basis used to determine the fair value of the equity swap contract is as follows:
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Using Significant |
|
|
|
Unobservable Inputs (Level 3) |
|
Equity swap contract at September 30, 2008 |
|
$ |
1,669 |
|
|
|
|
|
(e) The Company offers mortgage brokerage services to its homebuying customers in each of its
markets. The Company has agreements with various lenders to receive a fee on loans made by the
lenders to customers that the Company introduces to the lenders. The Company provides mortgage
origination services to its customers in the Washington D.C. Area and does not retain or service
the mortgages it originates. The Company customarily sells all of the loans and loan servicing
rights that it originates in the secondary market within a month of origination and on a limited
recourse basis, generally limited to early payment defaults, or fraud and misrepresentation.
Note 10. Segment Information
As defined in SFAS 131, Disclosures About Segments of an Enterprise and Related Information, the
Company has
five operating segments. The Company has four reportable segments: Northern California, Southland /
Los Angeles,
San Diego / Riverside, and the Washington D.C. Area.
The Company is a land developer and residential homebuilder. The Company is organized and manages
its business based on the geographical areas in which it operates. Each of the Companys segments
specialize in lot entitlement and development and the construction of single-family and
multi-family homes. The Company evaluates performance and allocates capital based primarily on
return on assets together with a number of other risk factors. Earnings performance is measured
using segment operating income. The accounting policies of the segments are the same as those
described in Note 1, Significant Accounting Policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
35,146 |
|
|
$ |
24,023 |
|
|
$ |
81,914 |
|
|
$ |
64,043 |
|
Southland / Los Angeles |
|
|
11,673 |
|
|
|
27,536 |
|
|
|
67,960 |
|
|
|
132,407 |
|
San Diego / Riverside |
|
|
18,133 |
|
|
|
20,224 |
|
|
|
50,368 |
|
|
|
70,064 |
|
Washington, D.C. Area |
|
|
44,006 |
|
|
|
48,231 |
|
|
|
95,454 |
|
|
|
107,526 |
|
Corporate and Other |
|
|
732 |
|
|
|
750 |
|
|
|
3,446 |
|
|
|
11,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
109,690 |
|
|
$ |
120,764 |
|
|
$ |
299,142 |
|
|
$ |
385,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating (Loss) / Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
(5,001 |
) |
|
$ |
(1,532 |
) |
|
$ |
(7,149 |
) |
|
$ |
566 |
|
Southland / Los Angeles |
|
|
(1,183 |
) |
|
|
(5,410 |
) |
|
|
(383 |
) |
|
|
6,611 |
|
San Diego / Riverside |
|
|
(28,660 |
) |
|
|
(27,980 |
) |
|
|
(34,366 |
) |
|
|
(21,362 |
) |
Washington D.C. Area |
|
|
(5,296 |
) |
|
|
2,380 |
|
|
|
(29,279 |
) |
|
|
3,566 |
|
Corporate and Other |
|
|
(4,647 |
) |
|
|
(8,858 |
) |
|
|
(11,288 |
) |
|
|
(9,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Loss |
|
|
(44,787 |
) |
|
|
(41,400 |
) |
|
|
(82,465 |
) |
|
|
(20,089 |
) |
Minority Interest |
|
|
3,994 |
|
|
|
3,691 |
|
|
|
7,300 |
|
|
|
2,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss before Taxes |
|
$ |
(40,793 |
) |
|
$ |
(37,709 |
) |
|
$ |
(75,165 |
) |
|
$ |
(17,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
BROOKFIELD HOMES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Housing and Land Assets 1) |
|
|
|
|
|
|
|
|
Northern California |
|
$ |
294,319 |
|
|
$ |
310,946 |
|
Southland / Los Angeles |
|
|
172,726 |
|
|
|
198,483 |
|
San Diego / Riverside |
|
|
420,137 |
|
|
|
387,575 |
|
Washington, D.C. Area |
|
|
255,505 |
|
|
|
287,994 |
|
Corporate and Other |
|
|
55,954 |
|
|
|
50,525 |
|
|
|
|
|
|
|
|
|
|
$ |
1,198,641 |
|
|
$ |
1,235,523 |
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Consists of housing and land inventory, investments in housing and land joint
ventures and consolidated land inventory not owned. |
The following tables set forth additional financial information relating to the Companys
reportable operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Equity in (loss) / earnings from Housing and Land Joint Ventures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Southland / Los Angeles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego / Riverside |
|
|
|
|
|
|
|
|
|
|
1,730 |
|
|
|
|
|
Washington, D.C. Area |
|
|
(35 |
) |
|
|
419 |
|
|
|
(452 |
) |
|
|
410 |
|
Corporate and Other |
|
|
(6 |
) |
|
|
(11 |
) |
|
|
1,105 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(41 |
) |
|
$ |
408 |
|
|
$ |
2,383 |
|
|
$ |
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Impairment of housing and land inventory and write-off of option deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
4,787 |
|
|
$ |
3,035 |
|
|
$ |
5,234 |
|
|
$ |
3,035 |
|
Southland / Los Angeles |
|
|
|
|
|
|
|
|
|
|
550 |
|
|
|
|
|
San Diego / Riverside |
|
|
20,000 |
|
|
|
31,378 |
|
|
|
20,000 |
|
|
|
31,378 |
|
Washington, D.C. Area |
|
|
7,000 |
|
|
|
|
|
|
|
28,804 |
|
|
|
|
|
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,787 |
|
|
$ |
34,413 |
|
|
$ |
54,588 |
|
|
$ |
34,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Investments in Housing and Land Joint Ventures |
|
|
|
|
|
|
|
|
Northern California |
|
$ |
|
|
|
$ |
|
|
Southland / Los Angeles |
|
|
36,911 |
|
|
|
32,541 |
|
San Diego / Riverside |
|
|
3,599 |
|
|
|
50,165 |
|
Washington, D.C. Area |
|
|
47,559 |
|
|
|
41,777 |
|
Corporate and Other |
|
|
7,709 |
|
|
|
6,063 |
|
|
|
|
|
|
|
|
Total |
|
$ |
95,778 |
|
|
$ |
130,546 |
|
|
|
|
|
|
|
|
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion includes forward-looking statements that reflect our current views with respect to
future events and financial performance and that involve risks and uncertainties. Our actual
results, performance or achievements could differ materially from those anticipated in the
forward-looking statements as a result of certain factors including risks discussed in
Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Item 1A Risk Factors elsewhere in this report and in our Annual
Report on Form 10-K/A for the year ended December 31, 2007.
Outlook
During the third quarter of 2008, we continued to experience challenging housing market conditions
as a result of a continuing excess supply of housing inventory and the ongoing disruption in credit
markets that began in 2007. Despite these challenging market conditions which are negatively
affecting our current housing operations, we continue to focus on the monetization of our lots
ready for house construction to generate cash flow to repay debt in the interim, and to redeploy to
assets with higher expected returns. In addition, we continue to focus on our core strategies,
including controlling land through option contracts and adding value by entitling raw land and
creating communities.
Overview
We entitle and develop land for our communities and sell lots to third parties. We also design,
construct and market single and multi-family homes primarily to move-up and luxury homebuyers.
We operate in the following geographic regions which are presented as our reportable segments:
Northern California (San Francisco Bay Area and Sacramento), Southland / Los Angeles, San Diego /
Riverside and Washington, D.C. Area. Our other operations that do not meet the quantitative
thresholds for separate disclosure in our financial statements
under US GAAP are included in Corporate and Other.
Our goal is to maximize the total return on our common stockholders equity over the long term. We
plan to achieve this by actively managing our assets and creating value on the lots we own or
control.
For the period 2003 through the third quarter of 2008, cash provided from operations was $444
million, which was used primarily to return cash to stockholders through the repurchase of shares
and the payment of dividends. Despite the continuing challenges of the United States housing
market, we believe our business is positioned to create further shareholder value over the long
term through the selective control of a number of strategic projects and the overall level of lots
controlled.
The 25,678 lots that we control, 14,706 of which we own directly or through joint ventures, provide
a strong foundation for our business and visibility on our future cash flow. We believe we add
value to the lots we control through entitlements, development and the construction of homes. In
allocating capital to our operations we generally limit our risk on unentitled land by optioning
such land positions in all our markets, thereby mitigating our capital at risk. Option contracts
for the purchase of land permit us to control lots for an extended period of time.
Homebuilding is our primary source of revenue and has represented approximately 90% of our total
revenue since 2002. Our average sales price for the nine months ended September 30, 2008 of
$565,000 was well in excess of the national average sales price as we operate in markets with
higher price points and cater to move-up and luxury buyers. We also sell serviced and unserviced
lots to other homebuilders generally on an opportunistic basis where we can redeploy capital to an
asset providing higher returns or reduce risk in a market.
Our housing and land inventory, investments in housing and land joint ventures, and consolidated
land inventory not owned together comprised 91% of our total assets as of September 30, 2008. In
addition, we had $121 million in other assets, which consisted of homebuyer receivables of $6
million, deferred income taxes and income taxes receivable of
$85 million and mortgages and other receivables of $30 million. Homebuyer receivables consist
primarily of proceeds due from homebuyers on the closing of homes.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates during the
three
months and nine months ended September 30, 2008 compared to those disclosed in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations included in our annual
report on Form 10-K/A for the
year ended December 31, 2007.
16
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
Selected
Financial Information (Unaudited) |
|
September 30, |
|
September 30, |
($US millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing |
|
$ |
107 |
|
|
$ |
117 |
|
|
$ |
288 |
|
|
$ |
376 |
|
Land |
|
|
3 |
|
|
|
4 |
|
|
|
11 |
|
|
|
10 |
|
|
|
|
|
|
Total revenues |
|
|
110 |
|
|
|
121 |
|
|
|
299 |
|
|
|
386 |
|
Direct cost of sales |
|
|
(98 |
) |
|
|
(99 |
) |
|
|
(262 |
) |
|
|
(315 |
) |
Impairment of housing and land inventory and write-off of
option deposits |
|
|
(32 |
) |
|
|
(35 |
) |
|
|
(55 |
) |
|
|
(35 |
) |
|
|
|
|
|
Gross margin / (loss) |
|
|
(20 |
) |
|
|
(13 |
) |
|
|
(18 |
) |
|
|
36 |
|
Selling, general and administrative expense |
|
|
(16 |
) |
|
|
(16 |
) |
|
|
(47 |
) |
|
|
(50 |
) |
Equity in earnings from housing and land joint ventures |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Impairment of investments in housing and land joint ventures |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(18 |
) |
|
|
(7 |
) |
Other (expense) / income |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(45 |
) |
|
|
(41 |
) |
|
|
(82 |
) |
|
|
(20 |
) |
Minority interest |
|
|
4 |
|
|
|
4 |
|
|
|
7 |
|
|
|
3 |
|
|
|
|
|
|
Loss before taxes |
|
|
(41 |
) |
|
|
(37 |
) |
|
|
(75 |
) |
|
|
(17 |
) |
Income tax recovery |
|
|
16 |
|
|
|
39 |
|
|
|
29 |
|
|
|
57 |
|
|
|
|
|
|
Net (loss) / income |
|
$ |
(25 |
) |
|
$ |
2 |
|
|
$ |
(46 |
) |
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing revenue ($US millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
35 |
|
|
$ |
24 |
|
|
$ |
82 |
|
|
$ |
64 |
|
Southland / Los Angeles |
|
|
12 |
|
|
|
27 |
|
|
|
68 |
|
|
|
132 |
|
San Diego / Riverside |
|
|
18 |
|
|
|
20 |
|
|
|
50 |
|
|
|
70 |
|
Washington D.C. Area |
|
|
41 |
|
|
|
45 |
|
|
|
84 |
|
|
|
98 |
|
Corporate and Other |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
12 |
|
|
|
|
|
|
Total |
|
$ |
107 |
|
|
$ |
117 |
|
|
$ |
288 |
|
|
$ |
376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land revenues ($US millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Southland / Los Angeles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego / Riverside |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington D.C. Area |
|
|
3 |
|
|
|
4 |
|
|
|
11 |
|
|
|
10 |
|
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
11 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of housing and land inventory and write-off of
option deposits ($US millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
5 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
3 |
|
Southland / Los Angeles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego / Riverside |
|
|
20 |
|
|
|
32 |
|
|
|
20 |
|
|
|
32 |
|
Washington D.C. Area |
|
|
7 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32 |
|
|
$ |
35 |
|
|
$ |
55 |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin / (loss) ($US millions)(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
(2 |
) |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
8 |
|
Southland / Los Angeles |
|
|
1 |
|
|
|
5 |
|
|
|
9 |
|
|
|
25 |
|
San Diego / Riverside |
|
|
(17 |
) |
|
|
(25 |
) |
|
|
(9 |
) |
|
|
(14 |
) |
Washington D.C. Area |
|
|
(1 |
) |
|
|
6 |
|
|
|
(17 |
) |
|
|
15 |
|
Corporate and Other |
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
|
Total |
|
$ |
(20 |
) |
|
$ |
(13 |
) |
|
$ |
(18 |
) |
|
$ |
36 |
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Home closings (units): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
|
38 |
|
|
|
26 |
|
|
|
88 |
|
|
|
69 |
|
Southland / Los Angeles |
|
|
31 |
|
|
|
35 |
|
|
|
162 |
|
|
|
177 |
|
San Diego / Riverside |
|
|
33 |
|
|
|
34 |
|
|
|
94 |
|
|
|
118 |
|
Washington D.C. Area |
|
|
81 |
|
|
|
81 |
|
|
|
166 |
|
|
|
183 |
|
Corporate and Other |
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
|
|
14 |
|
|
|
|
|
|
Consolidated total |
|
|
184 |
|
|
|
177 |
|
|
|
515 |
|
|
|
561 |
|
Joint ventures |
|
|
|
|
|
|
2 |
|
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
Total |
|
|
184 |
|
|
|
179 |
|
|
|
520 |
|
|
|
567 |
|
|
|
|
|
|
Average selling price ($US): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
$ |
925,000 |
|
|
$ |
924,000 |
|
|
$ |
931,000 |
|
|
$ |
928,000 |
|
Southland / Los Angeles |
|
|
377,000 |
|
|
|
787,000 |
|
|
|
420,000 |
|
|
|
748,000 |
|
San Diego / Riverside |
|
|
549,000 |
|
|
|
595,000 |
|
|
|
536,000 |
|
|
|
594,000 |
|
Washington D.C. Area |
|
|
502,000 |
|
|
|
554,000 |
|
|
|
508,000 |
|
|
|
535,000 |
|
Corporate and Other |
|
|
732,000 |
|
|
|
750,000 |
|
|
|
689,000 |
|
|
|
831,000 |
|
|
|
|
|
|
Consolidated average |
|
|
578,000 |
|
|
|
663,000 |
|
|
|
559,000 |
|
|
|
670,000 |
|
Joint ventures |
|
|
|
|
|
|
1,102,000 |
|
|
|
1,236,000 |
|
|
|
989,000 |
|
|
|
|
|
|
Average |
|
$ |
578,000 |
|
|
$ |
667,000 |
|
|
$ |
565,000 |
|
|
$ |
673,000 |
|
|
|
|
|
|
Net new orders (units): (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
|
37 |
|
|
|
39 |
|
|
|
107 |
|
|
|
102 |
|
Southland / Los Angeles |
|
|
48 |
|
|
|
25 |
|
|
|
207 |
|
|
|
159 |
|
San Diego / Riverside |
|
|
27 |
|
|
|
18 |
|
|
|
116 |
|
|
|
107 |
|
Washington D.C. Area |
|
|
49 |
|
|
|
33 |
|
|
|
194 |
|
|
|
220 |
|
Corporate and Other |
|
|
2 |
|
|
|
4 |
|
|
|
6 |
|
|
|
14 |
|
|
|
|
|
|
Consolidated total |
|
|
163 |
|
|
|
119 |
|
|
|
630 |
|
|
|
602 |
|
Joint ventures |
|
|
|
|
|
|
11 |
|
|
|
1 |
|
|
|
29 |
|
|
|
|
|
|
Total |
|
|
163 |
|
|
|
130 |
|
|
|
631 |
|
|
|
631 |
|
|
|
|
|
|
|
Backlog (units at end of period): (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
50 |
|
Southland / Los Angeles |
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
82 |
|
San Diego / Riverside |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
24 |
|
Washington D.C. Area |
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
112 |
|
Corporate and other |
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
288 |
|
Joint ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
Lots controlled (units at end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lots owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California |
|
|
|
|
|
|
|
|
|
|
1,237 |
|
|
|
1,326 |
|
Southland / Los Angeles |
|
|
|
|
|
|
|
|
|
|
1,434 |
|
|
|
1,358 |
|
San Diego / Riverside |
|
|
|
|
|
|
|
|
|
|
7,997 |
|
|
|
6,096 |
|
Washington D.C. Area |
|
|
|
|
|
|
|
|
|
|
3,764 |
|
|
|
3,814 |
|
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
274 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,706 |
|
|
|
12,736 |
|
Lots under option (4) |
|
|
|
|
|
|
|
|
|
|
10,972 |
|
|
|
13,762 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
25,678 |
|
|
|
26,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross margin / (loss) includes impairment of housing and land inventory and write-off of option
deposits. |
|
(2) |
|
Net new orders for any period represent the aggregate of all homes ordered by customers, net of cancellations. |
|
(3) |
|
Backlog represents the number of new homes subject to pending sales contracts. |
|
(4) |
|
Includes proportionate share of lots under option related to joint ventures. |
18
Three Months and Nine Months Ended September 30, 2008 Compared with Three Months and Nine Months
Ended September 30, 2007
Net (Loss) / Income
Net loss was $25 million and $46 million for the three months and nine months ended September 30,
2008, a decrease in income of $27 million and $86 million, respectively, when compared to the same
periods in 2007. The decrease for the three months ended September 30, 2008 primarily relates to a
reversal of an uncertain tax position that contributed $25 million to net income during the three
months ended September 30, 2007. The decrease for the nine months ended September 30, 2008
primarily relates to higher impairment charges in 2008 when compared to 2007 and reversals of
uncertain tax positions that contributed $51 million to net income during the nine months ended
September 30, 2007.
Results of Operations
Company-wide: Housing revenue was $107 million and $288 million for the three months and nine
months ended September 30, 2008, a decrease of $10 million and $88 million, respectively, when
compared to the same periods in 2007. The decrease in housing revenue was primarily a result of a
decrease of 13% and 17% in the average selling price during the three months and nine months ended
September 30, 2008 when compared to the same periods in 2007. The gross margin on housing revenue
for the three months ended September 30, 2008 was $11 million or 11% compared with $22 million or
18% for the same period in 2007. The gross margin on housing revenue for the nine months ended
September 30, 2008 was $35 million or 12% compared with $70 million or 19% for the same period in
2007. The decrease in the gross margin was due to continued homebuyer incentives and/or reduced
average selling prices.
Land revenue totaled $3 million and $11 million for the three months and nine months ended
September 30, 2008, consistent with the same periods in 2007. Our land revenues may vary
significantly from period to period due to the timing and nature of land sales as they generally
occur on an opportunistic basis and such revenues are also affected by local market conditions
which continue to be weak.
During the three months and nine months ended September 30, 2008, we recognized $32 million and $55
million of impairment charges and write-offs of option deposits compared to $35 million for the
same periods in 2007. The impairment charges and write-offs for the three months ended September
30, 2008 relates to 709 lots primarily in the San Diego / Riverside and the Washington D.C. Area
and 606 optioned lots in Northern California. The impairment charges and write-offs for the nine
months ended September 30, 2008 relate to 1,512 lots and 714 optioned lots primarily in San Diego /
Riverside and the Washington D.C. Area.
A summary of our gross margin is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Housing |
|
$ |
11 |
|
|
$ |
22 |
|
|
$ |
35 |
|
|
$ |
70 |
|
Land |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
1 |
|
Impairment charges and write-offs |
|
|
(32 |
) |
|
|
(35 |
) |
|
|
(55 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(20 |
) |
|
$ |
(13 |
) |
|
$ |
(18 |
) |
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California: Housing revenue was $35 million and $82 million for the three months and nine
months ended September 30, 2008, an increase of $11 million and $18 million, respectively, when
compared to the same periods in 2007. The gross margin on housing revenue for the three months
ended September 30, 2008 was $3 million or 8% compared with $4 million or 17% for the same period
in 2007. The gross margin on housing revenue for the nine months ended September 30, 2008 was $6
million or 7% compared with $11 million or 18% for the same period in 2007. The decrease in the
gross margin percentage was a result of reduced average selling prices and/or an increase in
homebuyer incentives.
Southland / Los Angeles: Housing revenue was $12 million and $68 million for the three months and
nine months ended September 30, 2008, a decrease of $15 million and $64 million, respectively, when
compared to the same periods in 2007. The decrease in revenue was primarily attributable to a
decrease in average selling price. The gross margin on housing revenue for the three months ended
September 30, 2008 was $1 million or 12% compared with $5 million or 18% for the same period in
2007. The gross margin on housing revenue for the nine months ended September 30, 2008 was $9
million or 15% compared with $25 million or 19% for the same period in 2007. The decrease in the
gross margin percentage was primarily a result of an increase in homebuyer incentives and/or
reduced selling prices.
19
San Diego / Riverside: Housing revenue was $18 million and $50 million for the three months and
nine months ended September 30, 2008, a decrease of $2 million and $20 million, respectively when
compared to the same periods in 2007. The gross margin on housing revenue before impairment charges
for the three months ended September 30, 2008 was
$3 million or 14% compared with $6 million or 29% for the same period in 2007. The gross margin on
housing revenue before impairment charges for the nine months ended September 30, 2008 was $11
million or 21% compared with $17 million or 25% for the same period in 2007. While our gross margin
percentage is high relative to our other geographic areas, our current backlog of homes indicates
our margins will decrease in future periods.
Washington D.C. Area: Housing revenue was $41 million and $84 million for the three months and nine
months ended September 30, 2008, a decrease of $4 million and $14 million, respectively, when
compared to the same periods in 2007. The gross margin on housing revenue before impairment charges
for the three months ended September 30, 2008 was
$5 million or 13% compared with $6 million or 14% for the same period in 2007. The gross margin on
housing revenue before impairment charges for the nine months ended September 30, 2008 was $11
million or 12% compared with
$13 million or 14% for the same period in 2007.
Other Income and Expenses
Selling, general and administrative expenses were $16 million and $47 million for the three months
and nine months ended September 30, 2008, relatively consistent with the same periods in 2007.
Included in selling, general and administrative expense was net stock compensation expense of $2
million and $1 million for the nine months ended September 30, 2008 and 2007, respectively.
Equity in earnings from housing and land joint ventures for the three months and nine months ended
September 30, 2008 was $nil and $2 million respectively, a decrease of $1 million and an increase
of $1 million when compared to the same periods in 2007. The impairments of our investments in
housing and land joint ventures of $8 million and $18 million for the three months and nine months
ended September 30, 2008 primarily relates to 907 lots in the Inland Empire of California.
Other (expense) / income for the three months and nine months ended September 30, 2008 totaled
expense of $1 million, an increase of $5 million and a decrease of $1 million, respectively, when
compared to the same periods in 2007.
Sales Activity
Net new home orders for the three months and nine months ended September 30, 2008 totaled 163 and
631 units, an increase of 33 units or 25% and flat, respectively, compared to the same periods in
2007.
Liquidity and Capital Resources
Financial Position
Our assets as of September 30, 2008 totaled $1,320 million, a decrease of $31 million compared to
December 31, 2007. Our housing and land inventory and investments in housing and land joint
ventures are our most significant assets with a combined book value of $1,189 million or
approximately 90% of our total assets. Our housing and land assets have decreased by $20 million in
2008 when compared to December 31, 2007. The decrease was primarily due to impairments and
write-offs of option deposits of $73 million during 2008. This decrease was offset by the
acquisitions of our former partners 50% interests in two joint ventures for $39 million, of which
$7 million was paid in cash and $32 million was financed by project specific debt and other
liabilities. As at September 30, 2008, we have consolidated these two former joint venture entities
which resulted in an increase in our housing and land inventory of $32 million related to our share
of debt in these entities. Our housing and land assets include homes completed and under
construction and lots ready for construction, model homes and land under and held for development.
A summary of our lots owned and their stage of development at September 30, 2008 compared with
December 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Completed homes, including models |
|
|
280 |
|
|
|
477 |
|
Homes under construction |
|
|
175 |
|
|
|
91 |
|
Homes with foundations / slabs |
|
|
113 |
|
|
|
165 |
|
|
|
|
|
|
|
|
Total housing units |
|
|
568 |
|
|
|
733 |
|
Lots ready for house construction |
|
|
2,829 |
|
|
|
2,683 |
|
|
|
|
|
|
|
|
|
|
|
3,397 |
|
|
|
3,416 |
|
Graded lots and lots commenced grading |
|
|
1,411 |
|
|
|
1,552 |
|
Undeveloped land |
|
|
9,898 |
|
|
|
8,110 |
|
|
|
|
|
|
|
|
|
|
|
14,706 |
|
|
|
13,078 |
|
|
|
|
|
|
|
|
20
Our total debt as of September 30, 2008 was $783 million, an increase of $48 million from December
31, 2007. Total debt as of September 30, 2008 consisted of $511 million related to project specific
financings and $272 million related to amounts drawn on our unsecured revolving credit facility
with a subsidiary of our largest stockholder, Brookfield Asset Management Inc.
Our project specific financings consist primarily of construction and development loans that are
generally repaid from home and lot proceeds. As new homes are constructed, further loan facilities
are arranged. Each of our project loans have maturity dates and usually contain extension
provisions in the event a project does not meet its absorption targets. Our lenders periodically
require an independent appraisal of the project they finance and this may result in valuation
adjustments resulting in incremental draws or repayments.
Our project specific financings as of September 30, 2008 were $511 million, a decrease of $194
million from December 31, 2007 when the impact of the acquisition of our former partners joint
venture interests of $61 million referred to above are excluded.
As of September 30, 2008, the average interest rate on our project specific financings was 6.0%,
with maturities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities |
|
($ millions) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Post 2010 |
|
|
Total |
|
Northern California |
|
$ |
30 |
|
|
$ |
60 |
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
100 |
|
Southland / Los Angeles |
|
|
3 |
|
|
|
3 |
|
|
|
56 |
|
|
|
19 |
|
|
|
81 |
|
San Diego / Riverside |
|
|
23 |
|
|
|
154 |
|
|
|
18 |
|
|
|
|
|
|
|
195 |
|
Washington D.C. Area |
|
|
24 |
|
|
|
75 |
|
|
|
8 |
|
|
|
13 |
|
|
|
120 |
|
Corporate / Other |
|
|
6 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
86 |
|
|
$ |
292 |
|
|
$ |
101 |
|
|
$ |
32 |
|
|
$ |
511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, we had available project specific debt lines of $287 million that were
available to complete land development and construction activities.
Our major project specific lenders are Wells Fargo, Bank of America, Housing Capital Company, and
Union Bank of California.
The balance on our credit facility with a subsidiary of Brookfield Asset Management Inc. as of
September 30, 2008 was $272 million, an increase of $29 million during the quarter ended September
30, 2008. This facility has served as our main source of short term liquidity for our operations in
2008. In October 2008, this facility was increased by
$25 million to $300 million and it matures in September 2009.
Cash Flow
Our principal uses of working capital include purchases of land, land development and home
construction. Cash flows for each of our communities depend upon the applicable stage of the
development cycle and can differ substantially from reported earnings. Early stages of development
require significant cash outlays for land acquisitions, site approvals and entitlements,
construction of model homes, roads, certain utilities and other amenities and general landscaping.
Because these costs are capitalized, income reported for financial statement purposes during such
early stages may significantly exceed cash flows. Later, cash flows can significantly exceed
earnings reported for financial statement purposes, as cost of sales include charges for
substantial amounts of previously expended costs.
Cash provided by our operating activities during the nine months ended September 30, 2008 totaled
$30 million compared with cash used of $131 million for the same period in 2007. We normally invest
capital in the first nine months of the year as we build out our backlog of homes. However, our
inventory levels continue to be elevated relative to current home deliveries and therefore we
invested significantly less in the first nine months of 2008 when compared to the first nine months
of 2007. During the nine months ended September 30, 2008, our operating cash flow was also
positively impacted by the receipt of a cash tax refund of $18 million.
Cash used in our investing activities in joint ventures for the nine months ended September 30,
2008 was $23 million, compared with $25 million for the same period in 2007.
Cash used in our financing activities for the nine months ended September 30, 2008 was $16 million
compared with
cash provided of $70 million for the same period in 2007.
21
Contractual Obligations and Other Commitments
Our contractual obligations and other commitments have not changed materially from those reported
in Managements Discussion and Analysis of Financial Conditions and Results of Operations in our
Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2007.
A total of $378 million of our project specific financings mature in 2008 and 2009. Although the
level of our maturing debt is high, we plan to generate sufficient cash flow from our assets in
2008 and 2009 to repay these obligations. Our net debt to total capitalization ratio as of
September 30, 2008, which we define as total interest-bearing debt less cash divided by total
interest-bearing debt less cash plus stockholders equity and minority interest, was 67% compared
to 61% at December 31, 2007. For a description of the specific risks facing us if, for any reason,
we are unable to meet these obligations, refer to the section of our Annual Report on Form 10-K/A
for the year ended December 31, 2007 entitled Risk Factors Our Debt and Leverage Could Adversely
Affect our Financial Condition.
Our project specific financings require Brookfield Homes Holdings Inc., a wholly-owned subsidiary
of our Company, to maintain a tangible net worth of at least $250 million, a net debt to
capitalization ratio of no greater than 65% and a net debt to tangible net worth ratio of no
greater than 2.50 to 1. Our revolving credit facility with a subsidiary of Brookfield Asset
Management Inc. requires us to maintain minimum stockholders equity of $300 million and a
consolidated net debt to book capitalization ratio of no greater than 70%. At September 30, 2008,
we were in compliance with all our covenants.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use lot option contracts to acquire control of land to
mitigate the risk of declining land values. Option contracts for the purchase of land permit us to
control the land for an extended period of time, until options expire and/or we are ready to
develop the land to construct homes or sell the land. This reduces our financial risk associated
with land holdings. As of September 30, 2008, we had $62 million of primarily applicable,
non-refundable option deposits and other advanced costs. The total exercise price of these options
was $300 million. Pursuant to FIN 46R, as described in Note 2 to our consolidated financial
statements included elsewhere in this Form 10-Q, we have consolidated $9 million of these option
contracts. Please see Note 2 to our consolidated financial statements included elsewhere in this
Form 10-Q for additional information about our lot options.
We also own 2,545 lots through our proportionate share of joint ventures. As of September 30, 2008,
our investment in housing and land joint ventures totaled $96 million. We have provided varying
levels of guarantees of debt in our joint ventures. As of September 30, 2008, we had recourse
guarantees of $36 million and limited capital maintenance guarantees of $23 million with respect to
debt in our joint ventures. During the nine months ending September 30, 2008, we did not make any
loan re-margin repayments on the debt in our joint ventures.
We obtain letters of credit, performance bonds and other bonds to support our obligations with
respect to the development of our projects. The amount of these obligations outstanding at any time
varies in accordance with our development activities. If these letters of credit or bonds are drawn
upon, we will be obligated to reimburse the issuer of the letter of credit or bonds. As of
September 30, 2008, we had $14 million in letters of credit outstanding and
$175 million in performance bonds for these purposes. The costs to complete related to our letters
of credit and performance bonds are $8 million and $75 million, respectively. We do not believe
that any of these letters of credit or bonds are likely to be drawn upon.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the
United States federal securities laws. The words may, believe, will, anticipate, expect,
estimate, project, future, and other expressions that are predictions of or indicate future
events and trends and that do not relate to historical matters identify forward-looking statements.
The forward-looking statements in this quarterly report on Form 10-Q include, among others,
statements with respect to:
|
|
ability to create shareholder value; |
|
|
|
strategies for shareholder value creation; |
|
|
|
cash flow generation and our ability to repay our debt obligations; |
|
|
|
the visibility on our future cash flow; |
|
|
|
future gross margins; |
|
|
|
the effect of interest rate changes on our cash flows; |
|
|
|
the effect on our business of existing lawsuits; and |
22
|
|
whether or not our letters of credit or performance bonds will be drawn upon. |
Reliance should not be placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which may cause the actual results to differ materially
from the anticipated future results expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those set forward in the
forward-looking statements include, but are not limited to:
|
|
changes in general economic, real estate and other conditions; |
|
|
|
mortgage rate and availability changes; |
|
|
|
availability of suitable undeveloped land at acceptable prices; |
|
|
|
adverse legislation or regulation; |
|
|
|
ability to obtain necessary permits and approvals for the development of our land; |
|
|
|
availability of labor or materials or increases in their costs; |
|
|
|
ability to develop and market our master-planned communities successfully; |
|
|
|
confidence levels of consumers; |
|
|
|
ability to raise capital on favorable terms; |
|
|
|
adverse weather conditions and natural disasters; |
|
|
|
relations with the residents of our communities; |
|
|
|
risks associated with increased insurance costs or unavailability of adequate coverage; |
|
|
|
ability to obtain surety bonds; |
|
|
|
competitive conditions in the homebuilding industry, including product and pricing pressures; and
|
|
|
|
additional risks and uncertainties, many of which are beyond our control, referred to in our Form
10-K/A for the year ended December 31, 2007 and our other SEC filings. |
|
We undertake no obligation to publicly update any forward-looking statements unless required by
law, whether as a result of new information, future events or otherwise. However, any further
disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be
consulted. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Exchange Rates
We conduct business in U.S. dollars only, so we are not exposed to currency risks.
Interest Rates
We are exposed to financial risks that arise from the fluctuations in interest rates. Our interest
bearing assets and liabilities are mainly at floating rates, so we would be negatively affected, on
balance, if interest rates increase. In addition, we have interest rate swap contracts which
effectively fix $260 million of our variable rate debt at an average rate of 6.9% per annum. Based
on our net debt levels as of September 30, 2008, a 1% change up or down in interest rates would
have either a negative or positive effect of approximately $5 million on our cash flows.
Our interest rate swaps are not designed as hedges under SFAS 133 Accounting for Derivative
Instruments and
Hedging Activities. We are exposed to market risk associated with changes in the fair values of
the swaps, and such changes must be reflected in our statements of operations. As of September 30,
2008, the fair value of the interest rate swaps totaled a liability of $8 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of our fiscal quarter ended
September 30, 2008, an evaluation of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a 15(e) and 15d 15(e) of the United States Securities Exchange Act of
1934, as amended (the Exchange Act)) was carried out under the supervision and with the
participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based
upon that evaluation, the CEO and CFO have concluded that as of the end of such fiscal quarter, our
disclosure controls and procedures are effective: (i) to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission
rules and forms; and (ii) to ensure that information required to be disclosed in the reports that
we file or submit under the Exchange Act is accumulated and communicated to our management,
including our CEO and CFO, to allow timely decisions regarding required disclosure.
23
It should be noted that while our management, including the CEO and CFO, believe our disclosure
controls and procedures provide a reasonable level of assurance that such controls and procedures
are effective, they do not expect that our disclosure controls and procedures or internal controls
will prevent all error and all fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are
met.
There was no change in our internal control over financial reporting during the quarter ended
September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are party to various legal actions arising in the ordinary course of our business. We believe
that none of these actions, either individually or in the aggregate, will have a material adverse
effect on our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in our Annual Report
on Form 10-K/A for the fiscal year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors approved a share repurchase program that allows us to repurchase in
aggregate up to $144 million of our outstanding common shares of which the remaining amount
approved for repurchase at September 30, 2008 was approximately $49 million.
During the nine months ended September 30, 2008, we did not repurchase any shares of our common
stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits.
|
|
|
31.1
|
|
Rule 13a 14(a) certification by Ian G. Cockwell, President and Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a 14(a) certification by Paul G. Kerrigan, Executive Vice President and Chief
Financial Officer. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350. |
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this
10th day
of November, 2008.
|
|
|
|
|
|
BROOKFIELD HOMES CORPORATION
|
|
|
By: |
/s/ PAUL G. KERRIGAN
|
|
|
|
Paul G. Kerrigan |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
25
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
|
|
|
31.1
|
|
Rule 13a 14(a) certification by Ian G. Cockwell, President and Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a) certification by Paul G. Kerrigan, Executive Vice President and Chief
Financial Officer |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 |