To all the Cal Coastal and Hearthside homes employees, who did not change screen names and make ridiculous comments on the forums here, I am sincerely sorry to bring you the bad news from Q1. But, the company is toast, done, over, and in waaaaaaay too much debt. <a href="http://sec.gov/Archives/edgar/data/840216/000110465908031321/a08-11259_110q.htm">From the Q1 one 10-Q</a>...
On September 15, 2006, the Company entered into a three-year, $100 Million Senior Secured Revolving Credit Agreement with KeyBank National Association, as a lender and agent for several other lenders (the ?Revolving Loan?). The Revolving Loan is secured by a first trust deed on the Brightwater project, and stock pledges of the Company?s material subsidiaries. The Revolving Loan will fund the first $100 million of development and construction costs for the project.
As of March 31, 2008 and December 31, 2007, $67.0 million and $76.0 million, respectively, was outstanding under the Revolving Loan at weighted average rates of 5.10% and 6.90%, respectively, based upon the Company?s elected rates. Outstanding advances bear interest at the Company?s option at either (i) the Alternate Base rate (?Prime?) minus 25 basis points or (ii) LIBOR plus 200 basis points. As of March 31, 2008, the undrawn availability was $30.4 million. Interest on the facility is calculated on the average, outstanding daily balance and is paid monthly. <strong>Interest incurred on the Revolving Loan for the three months ended March 31, 2008 and 2007 was $900,000 and $500,000</strong>, respectively, at weighted-average interest rates of 5.64% and 7.32%, respectively. As of May 5, 2008, the RevolviLoan weighted average interest rate is 5.10%.
Beginning December 31, 2008 and at the end of each subsequent quarter, the commitment amount is scheduled to decrease by $25.0 million until the commitment under the Revolving Loan is reduced to zero by the final maturity date on September 15, 2009. The Revolving Loan is also subject to mandatory repayments and commitment reductions based on <strong>40% of the $600,000 release price on the first 50 units closed at the Brightwater project</strong>, and 40% of the $1 million release price per unit thereafter. These mandatory repayments are applicable to the commitment reductions set forth above. <strong>During the three months ended March 31, 2008, the Company delivered two homes at Brightwater and made mandatory repayments of $480,000. As of March 31, 2008, the Company has delivered 11 homes at Brightwater and made cumulative mandatory repayments of $240,000 per home, or $2.6 million.</strong>
The Company?s credit facilities currently require the Company to make $33.4 million in aggregate principal amortization payments by December 31, 2008, including $22.4 million for the Revolving Loan (assuming the Company draws the remaining $30.4 million which is available as of March 31, 2008) and $11.0 million for the Term Loan discussed in Note 5 below. <strong>In order to make these payments out of cash flow from operations, the Company would need to deliver approximately 50 homes at Brightwater during 2008, which appears unlikely based on sales orders to date, the number of homes currently under construction and the approximately eight months it takes to build the larger homes (The Cliffs and The Breakers). Therefore, the Company has initiated discussions with its lenders regarding potential amendments to the Revolving Loan that would defer a portion of its currently scheduled payments to future periods and modify certain covenants to accommodate the slower projected pace of sales. Amendments to the payment schedule will require the unanimous consent of the Revolving Loan bank syndicate. The Company is also evaluating alternatives for raising additional capital, if necessary. <u>There can be no assurance that the Company will be successful in these endeavors, or that requested amendments to the Revolving Loan will be agreed to by the Company?s lenders. Current credit market conditions present uncertainty as to the ability of the Company to secure additional financing, if needed, and the terms of such financing if it is available, or as to the ability of the Company to achieve positive cash flow from operations to satisfy its obligations.</u></strong>
Under the Revolving Loan, the Company is required to comply with a number of covenants, including the following financial covenants which the Company considers to be the most restrictive of all of the debt covenants:
? a leverage covenant that prohibits the Company?s ratio of consolidated total liabilities to consolidated tangible net worth from exceeding the following:
Reporting Period Maximum Leverage Ratio
March 31, 2008 through June 30, 2008 2.50 to 1.0
September 30, 2008 and thereafter 2.25 to 1.0
? a minimum consolidated tangible net worth covenant of $80 million.
As of March 31, 2008, the Company?s consolidated total liabilities are $252.6 million, tangible net worth is $100.9 million and leverage ratio is 2.50. The Company is in compliance with the covenants of the Revolving Loan as of March 31, 2008.
As a result of the sustained downturn in the homebuilding industry and the $28.0 million of impairment charges the Company recorded during the third quarter of 2007, the Revolving Loan was amended, effective as of September 30, 2007, to reduce the tangible net worth covenant from $100 million to $80 million. In connection with the amendment, which was approved by 95% of the lenders, the Company paid a fee of $142,500 (.15%) and there was no change to the Company?s borrowing rate.
Availability under the $100 million Revolving Loan is subject to the applicable borrowing base limitations. The borrowing base limits lender advances to 50% of asset value. The borrowing base value is the appraised value of the Brightwater project, increased for costs incurred subsequent to the most recent lender appraisal and reduced by 72% of the sales value of homes delivered. As of March 31, 2008 and December 31, 2007, the borrowing base was $191.2 million and $186.1 million, respectively. Certain subsidiaries of the Company provided full unconditional guarantees.
As of March 31, 2008 and December 31, 2007, approximately $500,000 and $600,000, respectively, of deferred loan fees and closing costs related to the Revolving Loan are included in other assets and amortized over the life of the loan. Amortization of these costs is included in the capitalization of interest allocated to real estate inventories when incurred, and charged to cost of sales when the related homes are delivered.
On September 15, 2006, the Company entered into a five-year, $125 Million Senior Secured Term Loan Agreement with KeyBank National Association, as a lender and agent for several other lenders (the ?Term Loan?), and on September 15, 2006, the Company borrowed the maximum loan amount of $125 million. The proceeds were used to fund a ?special dividend? of $12.50 per share, totaling $135.7 million, to common stockholders paid on September 28, 2006.
As of March 31, 2008 and December 31, 2007, $121.0 million and $121.8 million, respectively, was outstanding under the Term Loan at rates of 5.81% and 7.5%, respectively, based upon the Company?s elected rates. The outstanding balance bears interest at the Company?s option at either (i) the prime interest rate plus 25 basis points, or (ii) LIBOR plus 275 basis points. Interest on the Term Loan is calculated on the average, outstanding daily balance and is paid monthly. <strong>Interest incurred on the Term Loan for the three months ended March 31, 2008 and 2007 was $2.0 million and $2.6 million,</strong> respectively, at weighted-average interest rates of 6.46% and 8.07%, respectively. As of May 5, 2008, the Term Loan interest rate is 5.5%.
On December 31, 2008, September 30, 2009 and September 30, 2010, the commitment amount will decrease by $15 million, $25 million, and $35 million, respectively. Thereafter, at the end of each subsequent quarter, the Term Loan commitment amount will decrease in four equal installments of $12.5 million, until the commitment under the agreement is reduced to zero by the final maturity date on September 15, 2011. The Term Loan is also subject to mandatory repayments based on 60% of the $600,000 release price on the first 50 units closed at the Brightwater project, and 60% of the $1 million release price per unit thereafter. These mandatory repayments are applicable to the commitment reductions set forth above. During the three months ended March 31, 2008, the Company delivered two homes at Brightwater and made mandatory repayments of $720,000. As of March 31, 2008, the Company has delivered 11 homes at Brightwater and made cumulative mandatory repayments of $4.0 million, or $360,000 per home.
As a result of the sustained downturn in the homebuilding industry and the $28.0 million of impairment charges the Company recorded during the third quarter of 2007, the Term Loan was amended, effective as of September 30, 2007, to reduce the tangible net worth covenant from $100 million to $80 million. The Term Loan was also amended to defer the phase-in of the minimum ratio of EBITDA to interest covenant from the first quarter of 2008 to the third quarter of 2008 to provide greater operating flexibility and accommodate the Company?s currently anticipated operating results for 2008. In connection with the amendment, which was approved by 100% of the lenders,<strong> the Company paid a fee of $187,500</strong>, and there was no change to the Company?s borrowing rate.
Cont...
