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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from N/A
_____________________ to ____________________
Commission file number 1-10959
STANDARD PACIFIC CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0475989
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1565 W. MACARTHUR BLVD., 92626
COSTA MESA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code (714) 668-4300
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
COMMON STOCK, $.01 PAR VALUE
(AND ACCOMPANYING PREFERRED SHARE NEW YORK STOCK EXCHANGE AND
PURCHASE RIGHTS) PACIFIC STOCK EXCHANGE
10 1/2% SENIOR NOTES DUE 2000 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THE FORM 10-K. [_]
As of March 5, 1997, the aggregate market value of voting stock held by non-
affiliates of the registrant was $197,528,333.
Documents incorporated by reference:
Portions of the Company's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Company's 1997 Annual Meeting
of Stockholders are incorporated by reference into Part III hereof.
As of March 5, 1997, there were 29,495,181 shares of common stock
outstanding.
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STANDARD PACIFIC CORP.
PART I
ITEM 1. BUSINESS
Standard Pacific Corp. was incorporated in the State of Delaware in 1991.
Through its predecessors, Standard Pacific Corp. commenced its homebuilding
operations in 1966 with a single tract of land in Orange County, California.
As used herein, "Company" refers to Standard Pacific Corp. and its
predecessors.
HOMEBUILDING
The Company operates primarily as a geographically diversified builder of
medium-priced, single-family homes for use as primary residences with
operations throughout the major metropolitan markets in California and Texas.
For the year ended December 31, 1996, approximately 79 percent and 21 percent
of the Company's home deliveries (including unconsolidated joint ventures)
were in California and Texas, respectively. Approximately 91 percent, 89
percent and 90 percent of the total sales and revenues for the years ended
December 31, 1996, 1995 and 1994, respectively, were derived from homebuilding
activities. The Company also owns a savings and loan subsidiary, Standard
Pacific Savings, F.A. ("Savings"). In addition, the Company manufactures and
markets high quality office furniture systems through its subsidiary, Panel
Concepts, Inc.
STRATEGY-HOMEBUILDING
The principal components of the Company's long-term homebuilding strategy
include:
(1) Concentration on the Development and Construction of High Quality,
Medium-Priced, Single-Family Homes for Use as Primary Residences. The
Company has historically concentrated, and at present concentrates, on the
construction of high quality, medium-priced, single-family homes for use as
primary residences. The Company believes that the market for primary
residences is more resistant to economic downturns than the market for
second or vacation homes. The average selling price of the Company's homes
decreased in 1996 to approximately $262,000 from $272,000 in 1995.
Currently, the Company expects to concentrate its efforts on acquiring land
which is suitable for the construction and sale of homes generally in the
price range of $150,000 to $350,000, which represents a broad market
segment in the Company's market areas. However, the Company has and is
currently constructing and selling homes in the $400,000 to $800,000 price
range in certain of its California markets.
(2) Keeping Construction in Line with Anticipated Demand. The Company
customarily acquires unimproved land zoned for residential use which
appears suitable for the construction of 50 to 300 homes in increments of
10 to 30 homes. The number of homes built in the first increment of a
project is based upon market studies. The timing and size of subsequent
increments depends to a large extent upon sales rates experienced in the
earlier increments. By developing projects in increments, the Company has
been able to respond to local market conditions to control the number of
its completed and unsold homes.
(3) Retention of an Inventory of Building Sites Sufficient for a Three to
Five Year Period. In order to ensure an adequate supply of land for future
homebuilding activities, the Company generally attempts to maintain an
inventory of building sites sufficient for construction of homes over a
period of approximately three to five years. The Company believes that its
6,527 owned or controlled building sites at December 31,
1
1996, in addition to any land sites for which the Company may enter into
negotiations, will be sufficient for its operations over this period.
Additionally, an increasing percentage of the Company's lots are
represented by lots controlled through its unconsolidated joint ventures.
(4) Geographic Diversification. The Company has concentrated its
California homebuilding activities in Orange, Riverside, San Bernardino,
San Diego and Ventura Counties in Southern California, and in the San
Francisco Bay region. Additionally, the Company has projects in the
Houston, Dallas and Austin markets in Texas. The Company's policy of
diversifying among different geographic areas has enabled it to reduce the
impact of adverse local economic conditions.
(5) Use of Local Managers for the Homebuilding Divisions. The Company
employs local managers who initiate land purchases, work with local
subcontractors and generally manage the Company's homebuilding divisions as
separate profit centers. The use of local managers enables the Company to
benefit from the advantages of in-depth local expertise.
(6) Continuing Emphasis on the Control of Overhead and Operating
Expenses. Throughout its history, the Company has sought to minimize
overhead expenses in an effort to control costs and to be more flexible in
responding to the cyclical nature of its business. In addition, the Company
controls its land acquisition expenses by generally completing a purchase
of a land only when it can reasonably project commencement of construction
within a specified time period. Additionally, the Company has been able to
reduce overhead and carrying costs related to large land inventories by
utilizing joint ventures and controlling certain lots through purchase
options. The closing of a land purchase is generally made contingent upon
satisfaction of certain conditions relating to the property and the
Company's ability to obtain requisite approvals from the appropriate
governmental agencies.
(7) Use of Extensive Marketing and Sales Efforts. The Company's homes are
generally sold by its own staff of sales personnel through the use of model
homes which are usually maintained at each project site. The Company also
makes extensive use of advertisements in local newspapers, illustrated
brochures, billboards and on-site displays.
2
The table below sets forth certain information for each homebuilding
division and for the Company as a whole for the periods indicated.
YEAR ENDED AS OF
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
------------------ ----------------------------------------------------
TOTAL NUMBER
NUMBER OF BUILDING
AVERAGE OF PROJECTS PROJECTS SITES
HOME HELD FOR IN SALES OWNED OR HOMES UNDER PRESOLD
HOMES SELLING DEVELOPMENT STAGE CONTROLLED CONSTRUCTION HOMES
DELIVERED PRICE (2) (3) (4) (5) (6)
--------- -------- ----------- -------- ---------- ------------ -------
Orange County........... 472 $303,679 17 14 679 195 145
San Diego County........ 109 336,293 9 3 723 21 21
Ventura County.......... 184 248,165 6 6 433 49 31
San Francisco Bay
Region................. 366 285,808 19 11 1,558 185 172
Houston................. 127 144,536 7 6 679 52 30
Dallas/Austin........... 211 210,351 12 10 1,133 70 62
----- -------- --- --- ----- --- ---
Total Consolidated...... 1,469 267,529 70 50 5,205 572 461
Unconsolidated Joint
Ventures-California.... 154 208,882 7 3 1,322 27 24
----- -------- --- --- ----- --- ---
Totals for and as of the
year ended December 31,
1996................... 1,623 $261,681 77 53 6,527 599 485
===== ======== === === ===== === ===
Totals for and as of the
year ended December 31,
1995................... 1,436 $271,936 69 49 6,091 486 312
===== ======== === === ===== === ===
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(1) Does not include: at December 31, 1996, 135 model homes and 206 completed
and unsold homes, and at December 31, 1995, 112 model homes and 239
completed and unsold homes.
(2) The total number of projects held for development as of the end of each
period shown includes projects with homes in the sales stage, under
construction and projects in various stages of planning.
(3) The number of projects in the sales stage includes projects where the
sales office has opened and/or the Company has begun to enter into sales
contracts for the sale of its homes.
(4) Includes homes reflected in Homes Under Construction and Presold Homes.
(5) Includes certain homes reflected in Presold Homes.
(6) See "Marketing and Sales" for information concerning cancellation rates
and contractual arrangements under which homes are presold.
OPERATIONS
The Company currently conducts homebuilding activities in California and
Texas through a total of six geographic divisions, which are currently
responsible for developing 77 projects.
Each homebuilding division is run by a local manager. One of the essential
criteria in the selection of a divisional manager is the person's in-depth
familiarity with the geographic areas within which the division operates. The
decisions regarding selection of parcels of land for purchase and development
are made in conjunction with the officers of the Company, and thereafter, each
manager conducts the operations of the division relatively autonomously as a
separate profit center.
Substantially all of the Company's homes sold are single-family detached
dwellings, although during the past few years approximately 5 percent to 10
percent have been townhouses or condominiums generally attached in varying
configurations of two, three, four and six dwelling units.
3
The Company's homes are designed to suit the particular area of the country
in which they are located and are available in a variety of models, exterior
styles and materials depending upon local preferences. Homes built by the
Company are targeted for occupancy as primary residences. While the homes
built by the Company typically range in size from approximately 1,800 to 2,800
square feet and typically include three or four bedrooms, two or three baths,
a living room, kitchen, dining room, family room and a two or three-car
garage, the Company also has built single-family attached and detached homes
ranging from 1,100 to 5,500 square feet. Gas fireplaces and built-in
appliances are usually included. For the years ended December 31, 1996, 1995
and 1994, the average selling prices of the Company's homes, including sales
of the unconsolidated joint ventures, were $261,681, $271,936, and $295,772,
respectively.
LAND ACQUISITION, DEVELOPMENT AND CONSTRUCTION
In considering the purchase of land for the development of a homebuilding
project, the Company reviews such factors as proximity to existing developed
areas; population growth patterns; availability of existing community services
such as water, gas, electricity and sewers; school districts; employment
growth rates; the expected absorption rate for new housing; environmental
condition of the land; transportation availability and the estimated costs of
development. Generally, if all requisite governmental agency approvals are not
in place, the Company enters into a conditional agreement to purchase a parcel
of land, making only a nominal deposit on the property. The general policy of
the Company is to complete a purchase of land only when it can reasonably
project commencement of construction within a specified period of time.
Closing of the land purchase is, therefore, generally made contingent upon
satisfaction of conditions relating to the property and to the Company's being
able to obtain all requisite approvals from governmental agencies within a
certain period of time. The Company customarily acquires unimproved or
improved land zoned for residential use which appears suitable for the
construction of 50 to 300 homes, which construction is accomplished in smaller
sized increments. The number of homes built in the first increment of a
project is based upon the Company's market studies. The timing and size of
subsequent increments depends on the sales rates of earlier increments. The
Company's development work on a homebuilding project includes obtaining any
necessary zoning, environmental and other regulatory approvals, and
constructing, as necessary, roads, sewer and drainage systems, recreational
facilities and other improvements.
The Company typically uses both its equity (internally generated funds) and
unsecured financing in the form of bank debt and other unsecured debt to fund
land acquisitions. The Company occasionally uses purchase money trust deeds to
finance the acquisition of land. Generally, with the exception of joint
ventures, specific project financing is not used.
The Company has entered into joint venture arrangements to develop certain
parcels of land. During 1993, the Company's Orange County division entered
into a joint venture agreement to develop and deliver 469 homes. For the years
ended December 31, 1996, 1995 and 1994, the Company delivered 151, 195 and 108
homes, respectively, through this unconsolidated joint venture. In 1995, the
Company's Orange County division entered into a new joint venture arrangement
to develop 209 lots in the city of Orange, California. Additionally, in 1996
the Company's Orange County division entered into another joint venture to
develop and deliver approximately 800 homes in Fullerton and Brea, California.
During 1996, the Company delivered three new homes in this unconsolidated
joint venture.
The Company essentially functions as a general contractor with its
supervisory employees coordinating all work on the project. The services of
independent architectural, design, engineering and other consulting firms are
engaged to assist in project planning, and subcontractors are employed to
perform all of the physical development and construction work on the project.
The Company does not have long-term contractual commitments with any of its
subcontractors, consultants or suppliers of materials. However, because of its
market presence and long-term relationships, the Company has generally been
able to obtain sufficient materials and commitments from subcontractors and
consultants during times of market shortages. These types of agreements are
generally entered into on an increment-by-increment basis at a fixed price
after competitive bidding. The Company believes that the low fixed labor
expense resulting from conducting its homebuilding
4
operations in this manner has been instrumental in enabling it to retain the
necessary flexibility to react to increases or decreases in demand for
housing.
Although the construction time for the Company's homes varies from project
to project depending on the time of year, local labor situations, certain
governmental approval processes, availability of materials and supplies and
other factors, the Company can typically complete the construction phase of an
increment within one of its projects in approximately four to six months.
MARKETING AND SALES
The Company's homes are generally sold by its own staff of sales personnel.
Furnished and landscaped model homes are usually maintained at each project
site. Changes in house design are generally not permitted, but homebuyers are
afforded the opportunity to select, at additional costs, various optional
amenities such as air conditioning, prewiring options, upgraded carpet
quality, varied interior and exterior color schemes, additional appliances and
occasionally some room configurations. The Company makes extensive use of
advertisements in local newspapers, illustrated brochures, billboards and on-
site displays.
The Company's homes are typically sold during construction using sales
contracts which are usually accompanied by a small cash deposit, although some
of the Company's homes are sold after completion of construction. In some
cases, purchasers are permitted to cancel these contracts if they are unable
to sell their existing homes or fail to qualify for financing and under
certain other circumstances. During each of the years ended December 31, 1996,
1995 and 1994, the Company experienced cancellation rates of 24 percent, 25
percent and 29 percent, respectively. Although cancellations can delay the
delivery of the Company's homes, they have not, during the last few years, had
a material negative impact on sales, operations or liquidity because of the
Company's policy of closely monitoring the progress of prospective buyers in
obtaining financing and monitoring and adjusting its start plan to better
match the level of demand for its homes. Sales are recorded after construction
is completed, required down payments are received and title passes. At
December 31, 1996, 1995 and 1994, the Company had an inventory of completed
and unsold homes of 206, 239 and 260, respectively.
FINANCING
Until July 1994, the Company offered assistance to a limited number of its
homebuyers in obtaining financing for home purchases by arranging mortgage
financing through its wholly owned subsidiary, Standard Pacific Savings, F.A.
("Savings"). Such financing was at rates and on terms comparable to other
similar mortgage loans originated by Savings for other customers. During 1994,
in response to extremely competitive market forces, Savings eliminated its
mortgage banking operations and, as a result, has generally not originated any
loans for its portfolio for Standard Pacific homebuyers since 1994.
During the year ended December 31, 1994, approximately one percent of the
homes delivered by the Company were financed with funds provided through
Savings. The Company's decision to cease its mortgage origination business has
not had a significant impact on the sales of its homes.
Home purchase financing from local lending institutions generally averages
80 percent or more of the purchase price of the homes. During periods of high
mortgage rates or difficult economic times, the Company may assist its
homebuyers by "buying-down" the interest rates on mortgage loans or
subsidizing all or a part of the homebuyers' up front financing fees. The
amounts of such "buy-downs" or subsidies is dependent upon prevailing market
conditions and interest rate levels.
COMPETITION, BUSINESS RISKS AND REGULATION
Homebuilding. The homebuilding industry is highly cyclical and competitive,
with homebuilders competing for customers, desirable properties, financing,
raw materials and skilled labor. In each of the areas in which it operates,
the Company competes in terms of location, design, quality, price and
available mortgage financing
5
with numerous other residential construction firms, including large national
and regional firms, some of which have greater financial resources than the
Company. In addition, the Company competes with resales of existing
residential housing by individuals, financial institutions and others.
Competition is particularly intense when the Company enters a new market area
until its reputation becomes firmly established in that area.
The development, construction and sale of homes are subject to various risks
including, among others, the continued availability of suitable undeveloped
land at reasonable prices and adverse local market conditions resulting from
changes in economic conditions or competitive over-building. As a result of
the national and California recessions which began in 1990, the Company
recorded in the fourth quarter of 1991 aggregate writedowns of approximately
$3 million on several of the Company's California projects to value the
remaining homes in these projects at estimated net realizable value.
Additionally, during the third quarter of 1992 and the fourth quarter of 1993
adjustments totaling approximately $2.5 million and $3.1 million,
respectively, were recorded to reduce the carrying value of certain California
projects to the lower of cost or market and to provide for reserves to cover
potential price concessions. At December 31, 1995, and as a result of
continued adverse trends experienced in some of the Company's markets,
particularly in San Diego, coupled with the adoption of Financial Accounting
Standards No. 121 (FAS 121), the Company recorded a $46.5 million noncash
pretax charge against operations. FAS 121 required a change in method of
valuing long-lived assets, including in particular assets such as the
Company's real estate holdings (See Note 2 of Notes to Consolidated Financial
Statements).
Other risks include changing governmental regulations; increases in
prevailing interest rates; the level of real estate taxes and energy costs;
the cost of materials and labor; the availability of construction financing
and home mortgage financing attractive to the purchasers of the Company's
homes; and inclement weather. See "Financing" above and "Economic Conditions
and Interest Rates" below for further discussions of the adverse effects of
high interest rates.
In addition, the housing industry is subject to environmental, building,
worker health and safety, zoning and real estate regulations by various
Federal, state and local authorities. The environmental laws that apply to a
given homebuilding site depend upon the site's location, its environmental
condition and the present and former uses of the site, as well as adjoining
properties. Environmental laws and conditions may result in delays, may cause
the Company to incur substantial compliance and other costs, and can prohibit
or severely restrict homebuilding activity in certain environmentally
sensitive regions or areas. In addition, certain new developments,
particularly in Southern California, are subject to various assessments for
schools, parks, streets and highways and other public improvements, the costs
of which can be substantial. By raising the cost of the Company's homes to its
customers, an increase in such assessments could have a negative impact on the
Company's sales.
In developing a project, the Company must obtain the approval of numerous
governmental authorities regulating such matters as permitted land uses and
levels of density, the installation of utility services, such as water and
waste disposal, and the dedication of acreage for open space, parks, schools
and other community purposes. Furthermore, changes in prevailing local
circumstances or applicable law may require additional approvals or
modifications of approvals previously obtained, including environmental,
zoning and other entitlement issues. Prior to acquiring a parcel of land, the
Company may utilize deposit arrangements which allow the Company ample time to
perform proper diligence and investigate and resolve necessary issues.
Although the Company believes that it has acquired a sufficient number of lots
to provide for its home construction activities for the near term, no
assurances can be given that the Company will be able to sell the homes it
produces on a profitable basis.
The Company is not presently experiencing any serious material or labor
shortages; however, the residential construction industry in the past has,
from time to time, experienced serious material and labor shortages with
shortages in insulation, drywall, certain carpentry work and cement and
fluctuating lumber prices and supply. Delays in construction of homes due to
these shortages could have an adverse effect upon the Company's homebuilding
operations.
6
PROPOSED LEGISLATION
In past years, several cities and counties in which the Company has
delivered a significant number of homes have approved the inclusion of "slow
growth" initiatives and other election ballot measures which could impact the
affordability and availability of homes and land within those localities.
Although some of these initiatives have been defeated, the Company believes
that if, in the future, similar initiatives are introduced and approved,
future residential construction by the Company could be negatively impacted.
ECONOMIC CONDITIONS AND INTEREST RATES
The Company's business is affected by national, world and local economic
conditions and events and the effect such conditions and events have on the
markets it serves in California and Texas and in particular by the level of
mortgage interest rates and consumer confidence in those regions. The Company
cannot predict whether interest rates will be at levels attractive to
prospective homebuyers. If interest rates increase, and in particular mortgage
interest rates, the Company's operating results could be adversely impacted.
OTHER CONSIDERATIONS
Dependence on California Economy and Housing Markets. The Company presently
conducts most of its business in California. There have been periods of time
in California where economic growth has slowed and the average sales price of
homes in certain areas in California in which the Company does business have
declined. There can be no assurance that home sales prices will not decline
further in the future.
Unexpected climatic conditions, such as unusually heavy or prolonged rain or
other natural disasters such as earthquakes or fires, may affect operations in
certain areas. Periodically, the state of California has experienced drought
conditions resulting in water conservation measures and in some cases
rationing by local municipalities in which the Company does business.
Restrictions by governmental agencies on future construction activity could
have an adverse effect upon the Company's operations.
7
STANDARD PACIFIC SAVINGS, F.A.
In March 1987, the Company acquired certain assets and assumed certain
liabilities of a then troubled savings and loan association from the Federal
Savings and Loan Insurance Corporation (the "FSLIC"), by contributing cash and
all of the common stock of the Company's former mortgage banking subsidiary to
Savings. To facilitate the acquisition, the FSLIC created Savings and
transferred certain assets and liabilities of the predecessor association to
Savings. In connection with the acquisition of Savings, the FSLIC and the
Company entered into, among other agreements, an assistance agreement with the
FSLIC (the "Assistance Agreement"). At December 31, 1996, Savings, operating
out of one branch location, had total assets of $265 million, including
approximately $199 million of loans receivable and accrued interest and
savings deposits of $133 million.
In connection with the acquisition, Savings obtained regulatory approval to
purchase from the Company loans made by the Company to finance the purchase of
its homes. Beginning January 1, 1990, in lieu of purchasing loans from the
Company, Savings commenced originating loans directly to buyers of the
Company's homes based on Savings' position, which was based on the advice of
counsel, that such loans to home buyers should not be treated as loans by
Savings to the Company for purposes of applicable affiliate transaction
limitations, primarily Section 23A of the Federal Reserve Act. Such loans were
made in accordance with Savings' standard loan underwriting and pricing
guidelines. Savings has not originated any Standard Pacific loans for its
portfolio since 1994.
Prior to commencing direct loans to buyers of homes from the Company,
Savings advised the Office of Thrift Supervision ("OTS") of its intention to
directly fund such loans. In addition, in April 1990, the Company and Savings
made a formal submission to the General Counsel of the Board of Governors of
the Federal Reserve System ("FRB") requesting concurrence with Savings'
interpretation of Section 23A. Until October, 1995 neither the FRB nor the OTS
responded to the Company's and Savings' request for advice. In October 1995,
the Company was notified by the OTS (the "Notice") that in its opinion Section
23A of the Federal Reserve Act applies to loan transactions between Standard
Pacific Savings and unaffiliated purchasers of homes constructed by the
Company. Under the OTS's interpretation of Section 23A, Savings may not make
loans to unaffiliated purchasers of the Company's homes if the aggregate
amount of such transactions in Savings' portfolio at any point in time would
exceed 10% of Savings' unimpaired capital and unimpaired surplus, or
approximately $2.1 million. As of December 31, 1996, Savings had in its
portfolio, from prior years' transactions, an aggregate principal balance of
loans made to unaffiliated purchasers of the Company's homes of $4.4 million.
The OTS granted Savings until September 30, 1997 to dispose of a sufficient
quantity of those loans to come into compliance with this 10% limitation. As a
result of the effect of complying with the Notice, the Company has determined
that Savings no longer provides synergy to the ongoing operations of the
Company and accordingly, the Company is evaluating its options with respect to
Savings.
COMPETITION
Savings experiences intense competition in both attracting and retaining
deposits. The competition for deposits comes from other savings and loan
associations, commercial banks, credit unions, thrift and loan associations
and money market mutual funds. Most of the nation's largest savings and loan
associations and many large commercial banks are headquartered and have a
significant number of branch offices in the area in which Savings operates.
Additional competition for consumer savings comes from issuers of corporate
and government securities. In addition to offering competitive interest rates,
the principal methods used to attract deposits include the additional services
offered by Savings, the quality of service rendered and the hours of service
that Savings' office is open to the public.
8
REGULATION AND SUPERVISION OF SAVINGS
GENERAL
Savings is a federally-chartered savings association, a member of the
Federal Home Loan Bank of San Francisco, and is subject to regulation by the
OTS and the FDIC. Savings' deposits are insured by the FDIC through the
Savings Association Insurance Fund ("SAIF"). As a result of its ownership of
Savings, the Company is a savings and loan holding company subject to
regulation and examination by the OTS. As described in more detail below,
statutes and regulations applicable to Savings govern such matters as the
amount of capital Savings must hold; dividends, mergers and changes of
control; establishment and closing of branch offices; and the investments and
activities in which Savings can engage. Statutes and regulations applicable to
the Company govern such matters as changes of control of the Company and
transactions between Savings and the Company and affiliates of the Company.
The Company and Savings are subject to the examination, supervision and
reporting requirements of the OTS, their primary federal regulator, including
a requirement for Savings of at least one full scope, on-site examination
every year. The Director of the OTS imposes assessments on Savings to fund OTS
operations, including the cost of examinations. Savings is also subject to
examination and supervision by the FDIC, and the FDIC has "back-up" authority
to take enforcement action against Savings if the OTS fails to take such
action after a recommendation by the FDIC. The FDIC may impose assessments on
Savings to cover the cost of FDIC examinations. In addition, Savings is
subject to regulation by the Board of Governors of the Federal Reserve System
("FRB") with respect to certain aspects of its business.
FIRREA CAPITAL REQUIREMENTS
The OTS's capital regulations, as required by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), include three
separate minimum capital requirements for savings associations--a "tangible
capital requirement," a "leverage limit" and a "risk-based capital
requirement." These capital standards must be no less stringent than the
capital standards applicable to national banks. The OTS also has the
authority, after giving the affected institution notice and an opportunity to
respond, to establish individual minimum capital requirements ("IMCR") for a
savings institution which are higher than the regulatory requirements, upon a
determination that an IMCR is necessary or appropriate in light of the
institution's particular circumstances. An IMCR may be appropriate, for
example, to the extent that a savings association has a high degree of
exposure to interest-rate risk, prepayment risk, credit risk, concentration of
credit risk, certain risks arising from nontraditional activities or a high
proportion of off-balance sheet risk.
A savings association that fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and
sanctions, including a prohibition on growth and the issuance of a capital
directive by the OTS Director requiring one or more of the following: an
increase in capital; a reduction of rates paid on savings accounts; cessation
of or limitations on operational expenditures; an increase in liquidity; and
such other actions as may be deemed necessary or appropriate by the OTS
Director. In addition, a conservator or receiver may be appointed under
appropriate circumstances.
The regulatory capital requirements are as follows:
Tangible capital of at least 1.5% of adjusted total assets. Tangible capital
is composed of (1) an institution's common stock, perpetual non-cumulative
preferred stock, and retained earnings, and (2) the amount, if any, of equity
investment by others in the institution's subsidiaries, after deducting (a)
intangible assets other than purchased mortgage servicing rights, (b) certain
of the institution's investments in subsidiaries engaged as principal in
activities not permissible for national banks, and (c) certain deferred tax
assets. In general, adjusted total assets equal the institution's consolidated
total assets, minus any assets that are deducted in calculating capital. At
December 31, 1996, Savings' tangible capital ratio was 7.9 percent.
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Core capital of at least 3% of adjusted total assets (the "leverage limit").
Core capital consists of tangible capital plus certain purchased credit card
relationships and core deposit premium (the premium paid for acquisition of
deposits from other institutions). At December 31, 1996, Savings' core capital
ratio was 7.9 percent.
Total capital of at least 8% of risk-weighted assets (the "risk-based
capital requirement"). Total capital includes both core capital and
"supplementary" capital items deemed less permanent than core capital, such as
subordinated debt and general loan loss allowances (subject to certain
limits). Effective September 30, 1994, institutions with above-normal exposure
to interest rate risk may be required to take deductions from total capital to
perfect such risk. At least half of total capital must consist of core
capital. Risk-weighted assets are determined by multiplying each category of
an institution's assets, including off balance sheet asset equivalents, by an
assigned risk weight based on the credit risk associated with those assets,
and adding the resulting sums. The four risk weight categories range from zero
percent for cash and government securities to 100% for assets (including past-
due loans and real estate owned) that do not qualify for preferential risk-
weighting. At December 31, 1996, Savings' risk-based capital ratio was 18.2
percent, and accordingly Savings exceeded all three regulatory capital
requirements.
The OTS has adopted regulations that, upon implementation, will require the
maintenance of additional risk-based capital equal to half of the amount by
which the decline in its "net portfolio value" that would result from the
impact of a hypothetical 200 basis point change in interest rates on its
assets and liabilities exceeds 2 percent of the estimated "economic value" of
its assets. In computing its compliance with the risk-based capital standards,
that dollar amount is subtracted from the institution's total capital. An
institution's "net portfolio value" is defined for this purpose as the
difference between the aggregate expected future cash inflows from an
institution's assets and the aggregate expected future cash outflows on its
liabilities, plus the net expected cash inflows from existing off-balance
sheet contracts, each discounted to present value. The estimated "economic
value" of an institution's assets is defined as the discounted present value
of the estimated future cash flows from its assets. The OTS has deferred
implementation of the interest rate risk regulations. Had they been in effect
at December 31, 1996, this provision would not have resulted in any required
adjustment to Savings' regulatory capital at that date.
PROMPT CORRECTIVE ACTION REQUIREMENTS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the OTS to implement a system of regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe the lower the institution's capital. The OTS was required to and
has established specific capital ratios for five separate capital categories:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." An
institution that is undercapitalized or lower must submit a capital
restoration plan to the OTS within 45 days after becoming undercapitalized,
and the plan can be accepted only if the institution's performance under the
plan is guaranteed by every company that controls the institution. An
institution that is undercapitalized is also subject to mandatory limits on
expansion, on the ability to make capital distributions, and on the ability to
accept brokered deposits and certain benefit plan deposits. In addition, an
undercapitalized institution is subject to numerous other restrictions which
the OTS may impose in its discretion, including restrictions on transactions
with affiliates and interest rates, and to the ability of the OTS to order a
sale of the institution, the replacement of directors and management, and the
appointment of a conservator or receiver.
Under the OTS regulations implementing FDICIA, an institution is treated as
well capitalized if its ratio of total capital to risk-weighted assets is at
least 10.0 percent, its ratio of core capital to total assets is at least
6.0 percent, its ratio of tangible capital to total assets is at least 5.0
percent, and it is not subject to any order or directive by the OTS to meet a
specific capital level. An institution will be adequately capitalized if its
ratio of total capital to risk-weighted assets is at least 8.0 percent, its
ratio of core capital to total assets is at least 4.0 percent, and its ratio
of tangible capital to total assets (leverage ratio) is at least 4.0 percent
(3.0 percent for
10
certain highly-rated institutions). An institution is "undercapitalized" if
its ratio of total capital to risk-weighted assets is less than 8.0 percent or
has either a core capital or leverage ratio that is less than 4.0 percent. An
institution is "significantly undercapitalized" if the ratio of total capital
to risk-weighted assets is less than 6.0 percent or has either a core capital
or leverage ratio that is less than 3.0 percent. An institution is "critically
undercapitalized" if its "tangible equity" is equal to or less than 2.0
percent of its total assets. The OTS also has authority, after an opportunity
for a hearing, to downgrade an institution from "well capitalized" to
"adequately capitalized," or to subject an "adequately capitalized" or
"undercapitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. At December 31, 1996, Savings'
capital qualified it for the well-capitalized category.
ACTIVITIES RESTRICTIONS NOT RELATED TO CAPITAL COMPLIANCE
Qualified Thrift Lender Test. The qualified thrift lender ("QTL") test
requires that, in at least nine out of every twelve months on an averaging
"look-back" basis, at least 65 percent of a savings institution's "portfolio
assets" must be invested in a limited list of "qualified thrift investments,"
primarily investments related to housing loans. If Savings fails to satisfy
the QTL test and does not requalify as a QTL within one year, the Company must
register and be regulated as a bank holding company, and Savings must either
convert to a commercial bank charter or become subject to restrictions on
branching, business activities and dividends as if it were a national bank. At
December 31, 1996, Savings was a qualified thrift lender, and approximately
96.9 percent of Savings' portfolio assets constituted qualified thrift
investments.
Investments and Loans. In general, federal savings institutions, such as
Savings, may not invest directly in equity securities or debt securities that
are not rated investment grade, or real estate, other than real estate used
for the institution's offices and related facilities. Indirect equity
investment in real estate through a subsidiary is permissible, but subject to
limitations based on the amount of the institution's assets, and the
institution's investment in such a subsidiary must be deducted from regulatory
capital.
Loans by a savings institution to a single borrower (including certain
related persons or entities of such borrower) are generally limited to 15
percent of the institution's "unimpaired capital and unimpaired surplus," plus
an additional 10 percent for loans fully secured by readily marketable
collateral. Real estate is not included in the definition of "readily
marketable collateral" for this purpose. The OTS has amended its loan to one
borrower limitation, among other things, to define the term "unimpaired
capital and unimpaired surplus" by reference to an institution's regulatory
capital, and also to include in the basic 15 percent of capital lending limit
that portion of an institution's general valuation allowances that is not
includable in the institution's regulatory capital. At December 31, 1996, the
maximum amount that Savings could lend to any one borrower (including related
persons and entities) under the current loan to one borrower limit was $3.2
million. At December 31, 1996, the largest aggregate amount of loans which
Savings had outstanding to any one borrower consisted of two loans in the
amount of $1.9 million. All loans to this borrower were current.
Aggregate loans secured by nonresidential real property are generally
limited to 400 percent of the institution's total capital. Commercial loans
may not exceed 10 percent of Savings' total assets, and consumer loans may not
exceed 35 percent of Savings' total assets. At December 31, 1996, Savings was
in compliance with the above investment limits.
Activities of Subsidiaries. A savings institution seeking to establish a new
subsidiary, acquire control of an existing company or conduct a new activity
through an existing subsidiary must provide 30 days prior notice to the FDIC
and OTS. Federal regulations permit federal savings institutions to invest in
the capital stock, obligations or other securities of certain types of
subsidiaries (referred to as "service corporations") that engage in certain
prescribed activities and to make loans to these corporations (and the
projects in which they participate) in an aggregate amount not to exceed 2
percent of the institution's assets, plus an additional 1 percent of assets if
such investment is used for community development or inner city purposes.
Additionally, federal regulations permit an institution having regulatory
capital in an amount at least equal to the minimum requirements set forth in
the applicable OTS regulations to make additional loans to such subsidiaries
in an aggregate amount which,
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generally, may not exceed 100 percent of regulatory capital in the case of
subsidiaries of which the institution owns or controls not more than 10
percent of the capital stock of certain limited partnership joint ventures and
50 percent of regulatory capital in the case of certain other subsidiaries or
joint ventures. Federal savings institutions also are permitted to invest in
and maintain so-called "operating subsidiaries" (generally, subsidiaries that
are engaged solely in activities the parent institution could conduct directly
and meeting certain other criteria) free of such investment limitations. The
OTS has the power to require a savings institution to divest any subsidiary or
terminate any activity conducted by a subsidiary that the OTS determines to be
a serious threat to the financial safety, soundness or stability of such
savings institution or to be otherwise inconsistent with sound banking
practices.
Real Estate Lending Standards. The OTS and the other federal banking
agencies have adopted regulations which require institutions to adopt and at
least annually review written real estate lending policies. The lending
policies must include diversification standards, underwriting standards
(including loan-to-value limits), loan administration procedures, and
procedures for monitoring compliance with the policies. The policies must
reflect consideration of guidelines adopted by the banking agencies. Among the
guidelines adopted by the agencies are maximum loan-to-value ratios for land
loans (65 percent); development loans (75 percent); construction loans (80
percent-85 percent); loans on owner-occupied 1-4 family property, including
home equity loans (no limit, but loans at or above 90 percent require private
mortgage insurance or readily marketable collateral); and loans on other
improved property (85 percent).
The guidelines permit institutions to make loans in excess of the
supervisory loan-to-value limits if such loans are supported by other credit
factors, but the aggregate of such nonconforming loans should not exceed the
institution's total risk-based capital, and the aggregate of nonconforming
loans secured by real estate other than 1-4 family property should not exceed
30 percent of total risk-based capital. Savings believes that its current
lending policies and practices are consistent with the guidelines, although
Savings generally has not originated any new loans since June 1995.
DEPOSIT INSURANCE
General. Savings' deposits are insured by the FDIC to a maximum of $100,000
for each insured depositor. Under FIRREA, the FDIC administers two separate
deposit insurance funds: the Bank Insurance Fund (the "BIF") which insures the
deposits of commercial banks and institutions that were insured by the FDIC
prior to FIRREA, and the SAIF which maintains a fund to insure the deposits of
institutions, such as Savings, that were insured by the Federal Savings and
Loan Insurance Corporation ("FSLIC") prior to FIRREA. Savings is a member of
the SAIF.
The FDIC has the authority to set the respective deposit insurance premiums
of the SAIF and of the BIF at levels it determines to be appropriate to
maintain the SAIF or BIF reserves at their designated reserve ratios or to
fund the administration of the FDIC. In addition, FDICIA authorizes emergency
special assessments applicable to BIF and SAIF members. The OTS Director also
is authorized to impose assessments on savings institutions to fund certain of
the costs of administration of the OTS.
Insurance Premium Assessments. FDICIA directed the FDIC to establish by
January 1, 1994 a risk-based system for setting deposit insurance assessments.
The FDIC has implemented such a system, under which an institution's insurance
assessments will vary depending on capital ratios, supervisory evaluations by
the institution's primary federal regulatory agency and other information
determined by the FDIC to be relevant to the institution's financial condition
and the risk posed to the insurance funds. Under the FDIC's system, the
assessment rate for SAIF deposits varies from 0.23 percent of covered deposits
for well-capitalized institutions that are deemed to have no more than a few
minor weaknesses, to 0.31 percent of covered deposits for less than adequately
capitalized institutions that pose substantial supervisory concern. The FDIC
can act by regulation to change the assessment rates, or the parity of BIF and
SAIF rates, based on the condition of the BIF and the SAIF, provided that SAIF
rates are not less than BIF rates.
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The Deposit Insurance Funds Act of 1996 (the "Funds Act"), enacted on
September 30, 1996, required the FDIC to take immediate steps to recapitalize
the SAIF and to change the basis on which funds are raised to make the
scheduled payments on the FICO bonds issued in 1987 to replenish the FSLIC.
The new legislation, combined with regulations issued by the FDIC immediately
after enactment of the Funds Act provides for the following:
(i) A special assessment in the amount of 65.7 basis points on SAIF-insured
deposits held by depository institutions on March 31, 1995. The special
assessment was required by the Funds Act to recapitalize the SAIF to the
designated reserve ratio of 1.25 percent of the deposits insured by
SAIF. Payments of this assessment were made in November 1996, but were
accrued by financial institutions in the third calendar quarter of 1996.
Savings recorded a charge in the third quarter of 1996 in the amount of
a pproximately $1.3 million to cover this special one-time assessment.
(ii) As a result of the Funds Act, the assessment rate for SAIF deposits,
effective January 1, 1997, will range from 0.0 percent to 0.27 percent,
a reduction from the prior assessment rate as discussed above.
(iii) Commencing January 1, 1997, BIF-insured institutions will be responsible
for a portion of the annual carrying costs of the FICO bonds. Such
institutions will be assessed at 20 percent of the rate applicable to
SAIF-insured institutions until December 31, 1999. As of January 1997
BIF-insured institutions will pay 1.29 basis points versus the SAIF-
insured institutions' rate of 6.44 basis points. Additionally, pursuant
to the Funds Act, if the reserves in BIF at the end of any semiannual
assessment period exceed 1.25 percent of insured deposits, the FDIC is
required to refund the excess to the BIF-insured institutions.
(iv) The merger of the BIF and the SAIF on January 1, 1999 to create the
Deposit Insurance Fund, but only if no more savings associations are in
existence at that time. The Funds Act also directs the Secretary of the
Treasury to conduct a study and submit recommendations to Congress
regarding the establishment of a common charter for depository
institutions.
LEGISLATIVE MATTERS
Substantial alterations in the current banking regulatory structure and the
deposit insurance system are contemplated by several bills introduced in the
Congress. Generally, the bills would eliminate the federal savings association
charter and convert all federal savings associations to either national banks
or state-chartered banks or savings associations. As a consequence, the Home
Owners' Loan Act, the primary body of laws governing the incorporation and
operation of Federal savings associations, would be repealed and the Office of
Thrift Supervision (the "OTS"), the primary regulator of Federal and state
savings associations, would be eliminated and its responsibilities transferred
to the Office of the Comptroller of the Currency (the "OCC"), the Federal
Deposit Insurance Corporation (the "FDIC"), and the Federal Reserve Board (the
"FRB").
Savings cannot predict whether or when any of the proposed legislation will
be enacted or what provisions any enacted legislation may contain.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
Affiliate and Insider Transactions. The ability of the Company and its non-
depository subsidiaries to engage in transactions with Savings is limited by
the affiliate transaction rules, including Sections 23A and 23B of the Federal
Reserve Act which also govern BIF-insured banks. These rules generally require
that all transactions between Savings and an affiliate must be on arms length
terms. The term "affiliate" covers any company that controls or is under
common control with Savings, but generally does not include individuals or
Savings' subsidiaries.
Under Section 23A and Section 11 of the Home Owners' Loan Act, specific
restrictions apply to transactions in which Savings provides funding to its
affiliates: Savings may not purchase the securities of an affiliate, make a
loan to any affiliate that is engaged in activities not permissible for a bank
holding company, or
13
acquire from an affiliate any "low-quality asset," defined as any asset that
has been classified, a nonaccrual loan, a restructured loan, or a loan that is
more than 30 days past due, among others. As to affiliates engaged in bank
holding company-permissible activities, the aggregate of "covered
transactions," including loans, guarantees, and letters of credit provided by
the savings association for the benefit of any one affiliate, and purchases of
assets by the savings association from the affiliate, may not exceed 10
percent of the savings association capital stock and surplus (20 percent for
the aggregate of permissible transactions with all affiliates). All loans to
affiliates must be secured by collateral equal to at least 100 percent of the
amount of the loan (130 percent if the collateral consists of equity
securities, leases or real property).
Loans by Savings to its directors, executive officers, and 10 percent
shareholders of Savings, the Company, or the Company's subsidiaries
(collectively, "insiders"), or to a corporation or partnership that is at
least 10 percent owned by an insider (a "related interest") are subject to
limits in addition to the affiliate transaction rules. However, a company
(such as the Company) that controls a savings institution is excluded from the
coverage of the insider lending rules even if it owns 10 percent or more of
the stock of the institution, and is subject only to the affiliate transaction
rules. All loans to executive officers, insiders and their related interests
must be underwritten and made on non-preferential terms and are subject to
stringent limitations and Board approval requirements. At December 31, 1996,
Savings did not have any loans outstanding to any of its directors or
officers.
Payment of Dividends and Other Capital Distributions. The payment of
dividends, stock repurchases, and other capital distributions by Savings to
the Company is subject to regulation by the OTS. Currently, 30 days prior
notice to the OTS of any proposed capital distribution is required. Any
dividend declared within the notice period, or without giving the prescribed
notice, is invalid. The OTS has promulgated a regulation that measures a
savings institution's ability to make a capital distribution according to the
institution's capital position. The rule establishes "safe-harbor" amounts of
capital distributions that institutions can make after providing notice to the
OTS, but without needing prior approval. Institutions can distribute amounts
in excess of the safe harbor only with the prior approval of the OTS.
For an institution that meets its capital requirements, the safe harbor
amount is the greater of (a) 75 percent of net income for the prior four
quarters, or (b) the sum of (1) the current year's net income and (2) the
amount that causes the excess of the institution's total capital-to-risk-
weighted assets ratio over 8 percent to be only one-half of such excess at the
beginning of the current year. Institutions that do not meet their current
capital requirements prior to, or on a pro forma basis after giving effect to,
a proposed capital distribution, may not make any capital distributions, with
the exception of repurchases or redemption's of the institution's shares that
are made in connection with the issuance of additional shares and that will
improve the institution's financial condition. The OTS retains the authority
to prohibit any capital distribution otherwise authorized under the regulation
if the OTS determines that the distribution would constitute an unsafe or
unsound practice.
The OTS has proposed to amend its regulation on capital distributions to
eliminate the three-tiered system. Under the OTS's proposal, savings
institutions that are owned by a holding company, such as Savings, would still
have to provide at least 30 days' advance notice of the declaration of a
dividend. However, Savings would not be required to obtain advance approval
from the OTS in order to make a distribution in excess of the safe harbor
amount, unless such distribution would cause Savings to fail to meet the OTS's
prompt corrective action "adequately capitalized" category. The OTS would
retain the authority to prohibit any capital distribution upon a determination
that the making of such distribution would constitute an unsafe or unsound
practice, and would use the safe harbor amount as a "rule of thumb" in making
such a determination. The Company does not anticipate that adoption of the
proposed regulation would have a material impact on its dividend policies.
Enforcement. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings institution and is inconsistent with the
sound operation of the savings institution, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such
14
noninsured subsidiary. FIRREA also empowers the OTS, in such a situation, to
issue a directive without any notice or opportunity for a hearing, which
directive may (i) limit the payment of dividends by the savings institution,
(ii) limit transactions between the savings institution and its holding
company or its affiliates, and (iii) limit any activity of the association
that creates a serious risk that the liabilities of the holding company and
its affiliates may be imposed on the savings institution.
In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or
loss of voting rights in the event such party took any action for or toward
causing, bringing about, participating in, counseling, or aiding and abetting
a violation of law or unsafe or unsound practice by a savings institution.
Limits on Change of Control. Subject to certain limited exceptions, control
of Savings or the Company may only be obtained with the approval (or in the
case of an acquisition of control by an individual, the non-disapproval) of
the OTS, after a public comment and application review process. Under OTS
regulations defining "control," a rebuttable presumption of control arises if
an acquiring party acquires more than 10 percent of any class of Savings or
the Company (or more than 25 percent of any class of stock, whether voting or
non-voting) and is subject to any "control factors" as defined in the
regulation. Control is conclusively deemed to exist if an acquirer holds more
than 25 percent of any class of voting stock of Savings or the Company, or has
the power to control in any manner the election of a majority of directors.
Any company acquiring control of Savings or the Company becomes a savings
and loan holding company, must register and file periodic reports with the
OTS, and is subject to OTS examination. With limited exceptions, a savings and
loan holding company may not directly or indirectly acquire more than 5
percent of the voting stock of another savings and loan holding company or
savings institution without prior OTS approval.
CLASSIFICATION OF ASSETS
Savings institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses or charge-offs and
report the results of such classification quarterly to the OTS. A savings
institution is also required to set aside adequate valuation allowances to the
extent that an affiliate possesses assets posing a risk to the institution,
and to establish liabilities for off-balance sheet items, such as letters of
credit, when loss becomes probable and estimable. The OTS has the authority to
review the institution's classification of its assets and to determine whether
and to what extent (a) additional assets must be classified, and (b) the
institution's valuation allowances must be increased.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as other lenders, to identify the communities served by the institution's
offices and to identify the types of credit the institution is prepared to
extend within such communities. The CRA also requires the OTS to assess the
performance of the institution in meeting the credit needs of its community
and to take such assessment into consideration in reviewing applications for
mergers, acquisitions, and other transactions. An unsatisfactory CRA rating
may be the basis for denying such an application.
In connection with its assessment of CRA performance, the OTS assigns a
rating of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." Based on Savings' last compliance examination conducted during
1995, Savings was rated "needs to improve".
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Banks provide a credit facility for member
institutions. As a member of the FHLB of San Francisco, Savings is required to
own capital stock in the FHLB of San Francisco in an amount at least equal to
the greater of 1 percent of the aggregate principal amount of its unpaid home
loans, home purchase
15
contracts and similar obligations at the end of each calendar year, assuming
for such purposes that at least 30 percent of its assets were home mortgage
loans, or 5 percent of its outstanding advances are from the FHLB of San
Francisco. At December 31, 1996 Savings was in compliance with this
requirement. Long-term FHLB advances may be obtained only for the purpose of
providing funds for residential housing finance and all FHLB advances must be
secured by specific types of collateral.
Each FHLB is required to transfer a certain amount of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"), the
government entity established to raise funds to resolve troubled savings
institution cases, to fund the principal and a portion of the interest on the
REFCORP bonds and certain other obligations. In addition, each FHLB must
transfer a percentage of its annual net earnings to a federal affordable
housing program. That amount increased from 5 percent of the annual net
earnings of the FHLB in 1990 to at least 10 percent of its annual net earnings
in 1995 and subsequent years. As a result of these requirements, the earnings
of the FHLB of San Francisco were reduced and Savings received reduced
dividends on its FHLB of San Francisco stock as compared with prior periods.
Savings recorded dividend income on its FHLB of San Francisco stock in the
amounts of approximately $467,000 and $460,000 for the years ended December
31, 1996 and 1995, respectively. If dividends are further reduced, or interest
on future FHLB advances increased, Savings' net interest income would likely
be reduced.
LIQUIDITY
Federal regulations currently require savings institutions to maintain, for
each calendar month, an average daily balance of liquid assets (including
cash, certain time deposits, bankers' acceptances and specified United States
government, state or Federal agency obligations) equal to at least 5 percent
of the average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. This liquidity requirement may
be changed from time to time by the OTS Director to an amount within a range
of 4 percent to 10 percent of such accounts and borrowings depending upon
economic conditions and the deposit flows of savings institutions. Federal
regulations also require each savings institution to maintain, for each
calendar month, an average daily balance of short-term liquid assets
(generally those having maturities of 12 months or less) equal to at least 1
percent of the average daily balance of its net withdrawable accounts plus
short-term borrowings during the preceding calendar month. Monetary penalties
may be imposed for failure to meet liquidity ratio requirements. For the
calculation period including December 31, 1996, the total liquidity and short-
term liquidity ratios of Savings were 17 percent and 9.8 percent,
respectively, which exceeded the total requirements.
FEDERAL RESERVE SYSTEM
The FRB requires savings institutions to maintain noninterest-earning
reserves against certain of their transaction accounts (primarily deposit
accounts that may be accessed by writing unlimited checks) if these
transaction accounts exceed certain dollar levels. For the calculation period
including December 31, 1996, Savings was not required to maintain any
noninterest-earning reserves and, accordingly, was in compliance with this
requirement. The balances maintained, if any, to meet the reserve requirements
imposed by the FRB may be used to satisfy Savings' liquidity requirements
discussed above.
As a creditor and a financial institution, Savings is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation
B (Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (limits on exposure to any one
correspondent depository institution), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth in
Savings Act). As creditors of loans secured by real property and as owners of
real property, financial institutions, including Savings, may be subject to
potential liability under various statutes and regulations applicable to
property owners, generally including statutes and regulations relating to the
environmental condition of the property.
16
TAXATION
For Federal income tax purposes, Savings filed a consolidated return with
its subsidiaries through 1991. Since 1992, Savings has been included in the
consolidated Federal income tax return of the Company.
For California franchise tax purposes, savings and loan associations are
taxed as "financial corporations". Financial corporations are taxed at the
general corporate franchise tax rate plus an "in lieu" rate based on their
exemption from personal property and local taxes.
Savings has executed a tax allocation agreement (the "Agreement") with the
Company. The Agreement states that Savings will file a consolidated Federal
income tax return with the Company. The Agreement requires the parties to
allocate their total tax liability based on each parties separate return tax
liability. Moreover, the parties agree to reimburse each other for tax losses
or credits in an amount equal to 100 percent of the tax benefits realized by
the consolidated group. Savings makes payments to the Company at the time that
such tax amounts are actually paid to the respective taxing authority by the
Company. Any tax related funds paid by Savings to the Company prior to the
estimated tax due dates or filing dates are to be held in trust.
17
PANEL CONCEPTS, INC.
Panel Concepts manufactures and sells moveable and acoustical office
furniture systems, office partitions and seating. Panel Concepts' acoustical
panels are made of lightweight, sound absorbing material designed to be
utilized as an interconnecting office panel system. The panels are covered
with fabric in numerous colors and sizes which are used to create readily
moveable office work station systems and partitions. To a lesser extent, Panel
Concepts also manufactures or supplies furniture components, such as shelves,
work surfaces and drawer pedestals, which can be attached to the panels as
part of an overall office system. Panel Concepts' products are sold on a
nationwide basis to a broad variety of customers primarily through independent
sales representatives and office furniture dealers. In addition, Panel
Concepts' products are sold to the government on GSA contract.
Panel Concepts' competitors in the office systems market include large
national and regional firms, many of which are better established and have
greater resources than Panel Concepts. The manufacture and sale of office
furniture is subject to various risks including, among others, changes in
overall economic conditions, the cost of materials and labor, environmental
regulations affecting manufacturing operations, foreign competition and the
ability to successfully market Panel Concepts' products in the face of strong
competition.
EMPLOYEES
At December 31, 1996, the Company had approximately 449 employees.
During the past five years, the Company has not directly experienced a work
stoppage in its operations caused by labor disputes. Construction of homes in
projects developed by the Company has, from time to time, been delayed due to
strikes by certain construction unions against subcontractors retained by the
Company or strikes against suppliers of materials used in the construction of
homes. Such delays have not had a significant adverse effect on the Company's
homebuilding operations. The Company believes that its relations with its
homebuilding employees and subcontractors are satisfactory.
ITEM 2. PROPERTIES
In addition to real estate held for development and sale, which is either
owned or under option to be purchased by the Company, the Company leases
approximately 4.8 acres of land in Costa Mesa, California under leases
expiring in 2002 on which the Company's executive office, the offices of the
Orange County housing division and a manufacturing facility (which is leased
to an unrelated party) are located. The Company's other real estate housing
divisions occupy various facilities under leases which expire from 1998
through 2000. The offices and manufacturing facilities of Panel Concepts are
located in Santa Ana, California in an 80,000 square foot building leased
through 1999. Panel Concepts owns a plant and land in Greensboro, North
Carolina which was previously used for furniture manufacturing and is
currently held for sale. Additionally, Panel Concepts leases showrooms in New
York and Chicago whose facilities are each in excess of 6,000 square feet with
the leases expiring in 1999 and 2000, respectively. The administrative office
and branch location for Savings is located in Newport Beach, California. A
total of 5,072 square feet is leased under a lease which expires in 2003.
As of December 31, 1996, the Company was subleasing approximately 29,000
square feet of manufacturing facilities to unrelated parties under leases
expiring through 1998.
The Company believes that all of its properties are well suited for the
purposes for which they are used and they can generally support additional
capacity.
ITEM 3. LEGAL PROCEEDINGS
Various claims and actions, considered normal to the Company's business,
have been asserted and are pending against the Company and its subsidiaries.
The Company believes that such claims and actions should not have a material
adverse effect upon the financial position of the Company.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Company's shares of common stock are listed on the New York Stock
Exchange. The following table sets forth, for the fiscal quarters indicated,
the reported high and low closing prices of the common shares as reported on
the New York Stock Exchange Composite Tape and the amount of common dividends
paid.
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995
---------------------- ----------------------
QUARTER ENDED HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------------- ------ ------ -------- ------ ------ --------
March 31.................... $7 1/4 $5 7/8 $.03 $6 7/8 $5 1/4 $.03
June 30..................... 7 3/8 6 3/8 .03 8 3/8 5 1/8 .03
September 30................ 7 1/8 5 3/4 .03 7 5/8 6 3/8 .03
December 31................. 6 1/4 5 1/4 .03 7 1/8 5 5/8 .03
As of March 5, 1997, the approximate number of record holders of common
stock of the Company was 2,033.
19
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Homebuilding Operations:
Revenues.............. $ 399,863 $ 346,263 $ 374,783 $ 249,884 $ 248,130
Income (loss) before
taxes (1)............ 12,948 (37,247) 11,200 (1,617) 3,892
Manufacturing
Operations:
Net product sales..... $ 19,311 $ 15,177 $ 17,225 $ 13,722 $ 18,149
Income (loss) before
taxes (2)............ 2,087 (42) 969 608 (2,331)
Savings and Loan
Operations:
Interest income....... $ 20,072 $ 25,805 $ 25,863 $ 25,707 $ 29,279
Income (loss) before
taxes (3)............ (1,037) (8,600) (2,179) 3,977 4,935
Consolidated results:
Revenues.............. $ 439,246 $ 387,245 $ 417,871 $ 289,313 $ 295,558
========== ========== ========== ========== ==========
Income (loss) before
taxes and cumulative
effect of change in
accounting principle
..................... 13,998 (45,889) 9,990 2,968 6,496
(Provision) benefit
for income taxes..... (5,605) 18,526 (4,103) (1,149) (1,973)
---------- ---------- ---------- ---------- ----------
Income (loss) before
cumulative effect of
change in accounting
principle............ 8,393 (27,363) 5,887 1,819 4,523
Cumulative effect of
change in accounting
for income taxes..... -- -- -- 858 --
---------- ---------- ---------- ---------- ----------
Net Income (loss)..... $ 8,393 $ (27,363) $ 5,887 $ 2,677 $ 4,523
========== ========== ========== ========== ==========
Income (loss) per
share before
cumulative effect of
change in accounting
principle ........... $ 0.28 $ (0.90) $ 0.19 $ 0.06 $ 0.15
Cumulative effect of
change in accounting
for income taxes..... -- -- -- 0.03 --
---------- ---------- ---------- ---------- ----------
Net Income (loss) per
share................ $ 0.28 $ (0.90) $ 0.19 $ 0.09 $ 0.15
========== ========== ========== ========== ==========
Stockholders' equity
per share............ $ 8.79 $ 8.58 $ 9.51 $ 9.49 $ 9.52
Cash dividends paid
per share............ $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.09
Weighted average
common and equivalent
shares outstanding... 30,011,595 30,488,676 30,674,349 30,633,471 29,810,974
Total assets.......... $ 695,379 $ 773,178 $ 922,870 $ 857,915 $ 920,634
Long-term debt:
residential housing
and corporate........ $ 80,000 $ 129,062 $ 134,360 $ 147,273 $ 93,957
Stockholders' equity.. $ 260,350 $ 257,846 $ 291,127 $ 290,395 $ 291,182
- - --------
(1) The 1995 homebuilding operations' pretax loss of $37.2 million reflects the
adoption of FAS 121 which resulted in a $46.5 million noncash pretax charge
to operations (see Note 2 of Notes to Consolidated Financial Statements).
(2) Excludes intercompany interest income of $274, $241, $270, $247 and $211,
respectively, for the five years in the period ended December 31, 1996.
(3) The 1996 savings and loan operations' pretax loss of $1.0 million includes
a $1.3 million nonrecurring charge for the recapitalization of the Savings
Association Insurance Fund.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF OPERATIONS BY SEGMENT
Set forth below is a discussion of the Company's operations by segment. The
Company's principal business segments are Residential Housing, including the
Corporate segment, Manufacturing and Savings and Loan.
RESIDENTIAL HOUSING AND CORPORATE SEGMENT
SELECTED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Revenues........................................ $399,863 $346,263 $374,783
Cost of sales................................... 371,554 330,498 354,463
Noncash charge for impairment of long-lived
assets.......................................... -- 46,491 --
-------- -------- --------
Gross margin.................................. 28,309 (30,726) 20,320
-------- -------- --------
Gross margin percentage....................... 7.1% (8.9)% 5.4%
-------- -------- --------
General and administrative expenses............. 13,863 12,169 13,950
Income from unconsolidated joint ventures....... 4,708 6,953 4,234
Interest expense................................ 7,142 1,860 --
Other income.................................... 936 555 596
-------- -------- --------
Pretax income (loss)........................ $ 12,948 $(37,247) $ 11,200
======== ======== ========
The Residential Housing and Corporate segment information shown above is
after the elimination of intercompany transactions.
OPERATING DATA
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- --------- ---------
New homes delivered:
California..................................... 1,131 942 949
Texas.......................................... 338 299 311
Joint ventures (California).................... 154 195 108
--------- --------- ---------
Total.......................................... 1,623 1,436 1,368
========= ========= =========
Average selling price-California deliveries
(excluding joint ventures)...................... $ 292,007 $ 308,383 $ 333,797
Average selling price-Texas deliveries........... $ 185,622 $ 180,058 $ 184,194
Combined average selling price (excluding joint
ventures)........................................ $ 267,529 $ 277,465 $ 296,871
Combined average selling price (including joint
ventures)........................................ $ 261,681 $ 271,936 $ 295,772
Net new orders................................... 1,798 1,480 1,341
Backlog at year end.............................. 485 312 272
SELECTED BALANCE SHEET INFORMATION
AT DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Identifiable assets, total.......................... $391,580 $384,373 $470,789
Real estate inventories........................... 372,645 367,676 456,655
Other............................................. 18,935 16,697 14,134
21
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
During the year ended December 31, 1996, the Company delivered 1,623 new
homes (including 154 homes delivered by the Company's unconsolidated joint
ventures) at an average selling price of $261,681 compared to 1,436 new homes
(including 195 homes delivered by the Company's unconsolidated joint venture)
at an average selling price of $271,936 during 1995.
Excluding the Company's unconsolidated joint ventures, residential housing
revenues increased by 15.5 percent from the prior year, while cost of sales
(before the impairment charge in 1995) increased by 12.4 percent. The increase
in residential housing revenues from the prior year of approximately $53.6
million resulted primarily from an increase of $63.3 million attributable to
228 more homes delivered and a $4.9 million increase in revenues attributable
to land sales, which were partially offset by a decrease of $14.6 million due
to a 3.6 percent lower average selling price of new homes delivered. The
increase in unit deliveries was primarily attributable to a 46 percent
increase in deliveries from the Northern California division to 366 homes, a
19 percent increase in deliveries from the Ventura division to 184 homes and a
13 percent increase in Texas deliveries to 338 homes. The increase in
deliveries can be attributed to, among other things, improved market
conditions in the geographic markets the Company serves, particularly in
California, as well as lower mortgage interest rates during most of 1996 as
compared to fiscal 1995.
The average selling price of the Company's homes is impacted by product mix,
geographic mix and changing prices on homes sold. The decrease in the average
selling price from 1995 to 1996 was due primarily to a reduction in deliveries
of higher priced homes from the Company's Orange County division. The Company
expects its average selling price in the next few quarters to increase as the
Company begins to deliver a greater percentage of homes in the $400,000 to
$800,000 price range from certain of its newer projects in Orange County and
the San Francisco Bay area.
The $41.1 million increase in residential housing cost of sales (before the
impairment charge in 1995) included $60.4 million attributable to an increased
number of new home deliveries and a $5.8 million increase in cost of sales
attributable to undeveloped lots sold, which were partially offset by a
decrease of $25.1 million due to a decrease in the average cost of new homes
delivered. The decrease in the average cost of new homes delivered was
primarily due to the changing product mix discussed above.
Excluding the Company's unconsolidated joint ventures, the gross margin
percentage for 1996 was 7.1 percent compared to 4.6 percent (before the
impairment charge) in 1995. The increase in the gross margin percentage was
primarily due to improved market conditions in the California markets, higher
absorption rates, as well as proportionately more deliveries from newer
projects in 1996 as compared to 1995. The newer projects generally carry
higher margins than older projects, which include land acquired in prior years
at higher prices.
General and administrative expenses for the residential housing and
corporate segment increased by approximately 13.9 percent from 1995. This
increase is primarily attributable to increases in construction activity,
deliveries and incentive compensation due to increased profitability. These
expenses remained fairly constant at 3.5 percent of revenues for both years.
Income from the unconsolidated joint ventures decreased from approximately
$7.0 million in 1995 to $4.7 million in 1996 as a result of fewer unit
deliveries as well as more deliveries of lower priced product from one of the
joint ventures. This joint venture delivered 151 new homes in 1996 compared to
195 new homes in 1995 and will deliver the remaining 15 homes during 1997. The
Company delivered three homes from a new joint venture during the fourth
quarter. This new joint venture could deliver up to several hundred homes over
the next five to seven years.
22
The following selected operating information has been adjusted on a proforma
basis to include the operating results of the Company's unconsolidated joint
ventures (dollars in thousands):
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
Revenues........................................... $ 432,031 $ 392,429
Cost of sales...................................... 399,014 369,711
----------- -----------
Gross margin..................................... $ 33,017 $ 22,718
=========== ===========
Gross margin percentage............................ 7.6% 5.8%
Interest incurred for 1996 was $16.7 million of which $9.5 million was
capitalized to real estate inventories and $7.1 million was expensed compared
to $19.2 million incurred in 1995 of which $17.3 million was capitalized and
$1.9 million expensed.
Net new home orders for the year totaled 1,798, a 21 percent increase from
1995 and the second highest level in Company history. During the year, the
Company's Orange County division recorded 686 net new orders (including the
joint ventures), up 10 percent from 1995, and the Northern California division
generated 474 net new home orders, a 67 percent increase over the 1995 total.
Net new home orders for the 1996 fourth quarter totaled a record 343 homes, an
11 percent increase from the 1995 fourth quarter. The improving order trend
has resulted in a backlog of presold homes of 485 at December 31, 1996, a 55
percent increase over the prior year and the highest fourth quarter backlog
since 1989. These positive trends can be attributed, in part, to a favorable
mortgage interest rate environment during 1996, an improving economy in many
parts of California in which the Company operates and the opening of 13 new
projects in California.
1995 COMPARED TO 1994
During the year ended December 31, 1995, the Company delivered 1,436 new
homes (including 195 homes delivered by the Company's unconsolidated joint
venture) at an average selling price of $271,936 compared to 1,368 new homes
(including 108 homes delivered by the Company's unconsolidated joint venture)
at an average selling price of $295,772 during 1994.
Excluding the Company's unconsolidated joint venture, residential housing
revenues for 1995 decreased by 7.6 percent from 1994, while cost of sales for
1995 (before the impairment charge) decreased by 6.8 percent. The decrease in
residential housing revenues from the prior year of approximately $28.5
million resulted primarily from a decrease of $5.6 million attributable to 19
fewer homes delivered and a decrease of $24.1 million due to a 6.5 percent
lower average selling price of new homes delivered. The slight decline in unit
deliveries was a result of reduced deliveries by all of the Company's
homebuilding divisions except for the San Diego and Houston divisions. The
decrease in deliveries was attributed to, among other things, extremely
competitive market conditions in the geographic markets the Company serves as
well as rising interest rates during most of 1995 which resulted in higher
mortgage rates for the Company's products. The decrease in the average selling
price from 1994 to 1995 was primarily due to increased deliveries of homes in
the $150,000 to $300,000 price range. During 1994, proportionately more homes
were delivered which sold in excess of $600,000.
The $24.0 million decrease in residential housing cost of sales (before the
impairment charge) in 1995 included $5.3 million attributable to a reduced
number of new home deliveries and $19.7 million from a decrease in the average
cost of new homes delivered. The decrease in the average cost of new homes
delivered was primarily due to the changing product mix discussed above
whereby more homes were sold in the general price range of $150,000 to
$300,000 during 1995.
During the fourth quarter of 1995, the Company adopted FAS 121, "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed
of". The new rule changed the method of valuing long-
23
lived assets, including the Company's real estate holdings. The fourth quarter
charge, which approximated $46.5 million, affected various assets held by the
Company's residential homebuilding divisions, however, a substantial portion
of the charge related to certain assets held in the San Diego area.
Excluding the Company's unconsolidated joint venture, the gross margin
percentage for 1995 was 4.6 percent (before the impairment charge) compared to
5.4 percent in 1994. The decline in the gross margin percentage was primarily
due to increased competition in many of the Company's homebuilding markets
resulting in increased use of sales and marketing incentives and price
concessions. Additionally, the Company expensed through cost of sales certain
costs due to lower sales absorption rates that would have otherwise been
capitalized into real estate inventories.
General and administrative expenses for the residential housing and
corporate segments decreased by approximately 12.8 percent from 1994. General
and administrative expenses also decreased as a percentage of residential
housing sales from 3.7 percent in 1994 to 3.5 percent in 1995. This decrease
is attributable to a reduction in several categories of overhead expense,
including a reduction in incentive compensation based upon the reduced
profitability of the residential housing and corporate segment.
Income from the unconsolidated joint venture increased from $4.2 million in
1994 to $7.0 million in 1995 as a result of increased deliveries. The joint
venture delivered 195 new homes in 1995 compared to 108 new homes in 1994. The
joint venture delivered its first home in June 1994.
CARRYING COSTS, REAL ESTATE
INVENTORIES AND COST OF SALES
AT DECEMBER 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------
(DOLLARS IN MILLIONS)
Carrying costs in inventory and the
percentage of
total real estate inventory:
Interest................................. $25.1 6.7% $32.5 8.8% $54.4 11.9%
Taxes.................................... 8.0 2.1 8.8 2.4 15.2 3.3
----- --- ----- ---- ----- ----
$33.1 8.8% $41.3 11.2% $69.6 15.2%
===== === ===== ==== ===== ====
Total real estate inventories.............. $373 $368 $457
Cost of sales for the year then ended
(before FAS 121 adjustment)............... 372 330 354
Ratio of cost of sales to ending inventory
(Inventory turn ratio).................... 1.00 .90 .77
The increase in the inventory turn ratio is due to a 12 percent increase in
cost of sales while real estate inventories only increased slightly more than
one percent. This positive trend is primarily due to an 18 percent increase in
unit deliveries resulting from improved market conditions in California. The
increase in unit deliveries is principally a result of higher sales absorption
rates at many of the Company's California locations. Additionally, the Company
continues to deliver homes from its older projects which have been in the
Company's inventory balances for several years and which generally have higher
land and interest costs than more recent acquisitions. This in turn creates a
more favorable mix of newer projects to the total inventory balance. The newer
projects generally develop and deliver more quickly than the older projects.
Capitalized interest in real estate inventory at December 31, 1996,
decreased approximately $7.4 million from December 31, 1995, a decrease of
approximately 23 percent. This decrease can be attributed to (1) the sale of
homes from older projects which generally include higher carry costs than new
projects and (2) improving market conditions which have resulted in shorter
holding periods and a higher inventory turnover rate.
24
UTILIZATION OF DEBT AND EQUITY
IN FUNDING REAL ESTATE INVENTORIES
Sources of financing for the Company's real estate inventories were as
follows for the three years ended December 31, 1996:
AT DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
Purchase money deeds of trust........................ 1% 4% 4%
Unsecured debt....................................... 42 40 41
Equity............................................... 57 56 55
------- ------- -------
100% 100% 100%
======= ======= =======
MANUFACTURING SEGMENT
SELECTED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Net product sales.................................... $19,311 $15,177 $17,225
Cost of sales........................................ 12,011 9,856 10,896
------- ------- -------
Gross margin....................................... 7,300 5,321 6,329
------- ------- -------
Gross margin percentage............................ 37.8% 35.1% 36.7%
------- ------- -------
Selling, general and administrative expenses......... 5,304 5,527 5,481
Other income (1)..................................... 365 406 391
------- ------- -------
Pretax income........................................ $ 2,361 $ 200 $ 1,239
======= ======= =======
Identifiable assets.................................. $12,508 $ 9,485 $ 9,892
======= ======= =======
- - -------
(1) Includes intersegment income of $274, $241 and $270 for the years ended
December 31, 1996, 1995 and 1994, respectively. These intersegment
transactions are eliminated in consolidation with no effect on
consolidated earnings.
1996 COMPARED TO 1995
Net product sales for 1996 increased 27 percent to $19.3 million from $15.2
million in 1995. The increase in sales can be attributed to improvements in
the national economy and the resultant impact on the office furniture industry
and the introduction of new products during 1996 which have been positively
accepted in the market. The gross margin percentage increased in 1996 due to
product mix as well as favorable economies of scale and absorption of factory
overhead as a result of increased sales volume.
Although net sales volume increased during 1996, selling, general and
administrative expenses for 1996 decreased compared to 1995 amounts and as a
percent of sales from 36.4 percent in 1995 to 27.5 percent in 1996. This
reduction is primarily attributable to management's implementation of
aggressive cost cutting measures.
1995 COMPARED TO 1994
Net product sales for 1995 decreased almost 12 percent to $15.2 million from
$17.2 million in 1994. Sales in 1994 included a greater amount of foreign
orders, particularly from Mexico. The gross margin percentage was below 1994
levels due to product mix and lower sales volumes.
Selling, general and administrative expenses for 1995 were up slightly over
the 1994 amounts and increased as a percent of sales from 31.8 percent in 1994
to 36.4 percent in 1995 primarily as a result of additional selling and
marketing costs incurred in connection with the introduction of new products
during 1995 plus the somewhat fixed nature of the general and administrative
expenses overall.
25
SAVINGS AND LOAN SEGMENT
SELECTED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Interest income (1).............................. $ 20,072 $ 25,809 $ 25,867
Interest expense................................. 17,450 24,105 19,986
-------- -------- --------
Net interest margin............................ 2,622 1,704 5,881
-------- -------- --------
Provision for loan losses........................ 465 3,354 2,475
General and administrative expenses.............. 2,243 3,279 5,690
(Loss) gain on sale of investments and adjustment
for lower of cost or market on loans available
for sale........................................ (21) (1,966) (768)
SAIF recapitalization charge..................... 1,291 -- --
Other income (expense), including special charge
in 1995.......................................... 361 (1,701) 877
-------- -------- --------
(Loss) before income taxes....................... (1,037) (8,596) (2,175)
Benefit for income taxes......................... 429 3,620 890
-------- -------- --------
Net (loss)....................................... $ (608) $ (4,976) $ (1,285)
======== ======== ========
SELECTED BALANCE SHEET INFORMATION
AT DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Assets:
Cash and investments............................. $ 52,660 $ 65,337 $ 91,957
Mortgage notes receivable and accrued interest,
net.............................................. 199,135 269,128 316,969
Real estate owned, net........................... 2,079 2,704 2,339
Investment in FHLB stock......................... 7,958 7,500 9,013
Other assets..................................... 3,441 5,985 3,282
-------- -------- --------
Total assets................................... $265,273 $350,654 $423,560
======== ======== ========
Liabilities and Stockholder's Equity:
Savings accounts................................. $132,813 $157,542 $188,163
Securities sold subject to agreements to
repurchase....................................... -- 15,016 46,774
FHLB advances, secured by mortgage notes
receivable and other assets...................... 109,000 150,000 160,300
Other liabilities and intercompany account (1)... 2,458 6,527 3,315
-------- -------- --------
Total liabilities.............................. 244,271 329,085 398,552
Stockholder's equity............................. 21,002 21,569 25,008
-------- -------- --------
Total liabilities and stockholder's equity..... $265,273 $350,654 $423,560
======== ======== ========
Stockholder's equity as a percentage of total
assets........................................... 7.9% 6.2% 5.9%
======== ======== ========
- - --------
(1) Certain intersegment transactions and balances are eliminated in
consolidation with no effect on consolidated earnings or equity. Included
in net interest income is intersegment income for each of the three years
ended December 31, 1996 of $0, $4 and $4, respectively.
26
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Interest income in 1996 amounted to $20.1 million, a $5.7 million decrease
from the 1995 amount. This decrease was due primarily to the decrease in the
average balance of interest earning assets from $389.4 million in 1995 to
$239.9 million in 1996, which was partially offset by an increase in the
weighted average interest rate on interest earning assets from 6.63 percent in
1995 to 6.83 percent in 1996. The increase in the weighted average interest
rate was primarily due to the upward repricing on many of the adjustable rate
mortgages in Savings' portfolio as well as the sale of $22 million of lower
interest rate loans during 1996. The decrease in the average balance of
interest earning assets between years is due primarily to the Company's
decision to reduce Savings' asset level.
Interest expense for the year amounted to $17.5 million, a decrease of $6.7
million from 1995. The decrease in interest expense resulted from a decrease
in the average balance of interest bearing liabilities and by a decrease in
the weighted average cost of interest bearing liabilities. The decrease in the
cost of funds was primarily due to decreases during most of the year of the
cost of savings deposits and the effect of new borrowings at more favorable
interest rates.
Savings generated an after-tax loss of $608,000 for 1996 compared to an
after-tax loss of $5.0 million in 1995. The 1996 after-tax loss includes a one
time pretax charge of approximately $1.3 million incurred in connection with
the recapitalization of the Savings Association Insurance Fund (SAIF).
Excluding the SAIF recapitalization charge, Savings' net income would have
been approximately $150,000. The net interest margin increased to $2.6 million
in 1996 from $1.7 million in 1995. The increase in the net interest margin can
be attributed to the declining cost of borrowings during 1996 and the upward
repricing of many of the adjustable rate mortgages in Savings' portfolio.
General and administrative expenses declined by approximately $1.0 million
between 1996 and 1995 due to reductions associated with a lower level of
business activity.
1995 COMPARED TO 1994
Interest income in 1995 amounted to $25.8 million, a slight decrease from
the 1994 amount. The decrease in the average balance of interest earning
assets from $409.6 million in 1994 to $389.4 million in 1995 was substantially
offset by an increase in the weighted average interest rate on interest
earning assets from 6.31 percent in 1994 to 6.63 percent in 1995. The weighted
average interest rate increase was primarily due to the upward repricing of
many of the adjustable rate mortgages in Savings' portfolio. The decrease in
the average balance of interest earning assets between years is due primarily
to the Company's efforts to reduce Savings' asset levels.
Interest expense for the year amounted to $24.1 million, an increase of $4.1
million from 1994. The increase in interest expense resulted from an increase
in the weighted average cost of interest bearing liabilities, which was
partially offset by a decrease in the average balance of interest bearing
liabilities. The increase in the cost of funds was primarily due to increases
during most of the year of the cost of savings deposits and the effect of the
charges discussed below in connection with the balance sheet restructuring.
Savings generated an after tax loss of $5.0 million for 1995 compared to an
after tax loss of $1.3 million in 1994. The net interest margin declined to
$1.7 million in 1995 from $5.9 million in 1994. The increase in the after tax
loss was due, in part, to certain measures taken during 1995 to restructure
Savings' balance sheet in order to better manage its interest rate risk and
improve its net interest margin in 1996 and beyond. These measures consisted
of selling certain lower yielding investments and loans which resulted in a
loss of $2.2 million; prepaying $45 million of higher costing FHLB advances at
a cost of $1.2 million; buying down the fixed rate interest payment on
Savings' remaining swap agreement at a cost of $1.4 million, which cost will
be amortized over the remaining three year term of the swap agreement, and
establishing additional loan and other reserves of $2.4 million. The decrease
in the net interest margin can be attributed to two factors. First the rising
27
cost of borrowings during the first two quarters of 1995 and second, the
mortgage portfolio contains certain mortgages which by their terms did not
begin to reprice until the fourth quarter of 1995. General and administrative
expenses declined by $2.4 million between 1995 and 1994 due to reductions
associated with exiting the mortgage banking business.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
Savings' net interest income depends primarily upon its interest rate
spread, which is the difference between the combined weighted average yield it
earns from its net loans, mortgage-backed securities and investment portfolio
(together, the "interest earning assets") and the combined weighted average
rate it pays on its deposits and borrowings (together the "interest bearing
liabilities"). When the balance of the interest earning assets equals or
exceeds the balance of the interest bearing liabilities, any positive interest
rate spread will generate net interest income. When the balance of the
interest earning assets is less than the balance of the interest bearing
liabilities, net interest expense can result even when the spread is positive.
The greater the excess of the interest bearing liabilities over the interest
earning assets, the greater the positive interest rate spread must be to
create a break-even point between interest income and interest expense.
28
The following table shows consolidated average balance sheets of Savings for
the years indicated as well as interest income and expense and average rates
earned and paid on each major category of interest earning assets and interest
bearing liabilities. Average balances are predominantly calculated on a daily
basis. When information is not available for calculations to be made on a
daily basis, average balances are calculated on a weekly or monthly basis from
the best available data. The interest rate spread is calculated as the
difference between the average rate received on total interest earning assets
minus the average rate paid on total interest bearing liabilities. The
interest rate spread on investable funds is calculated by dividing net
interest income by interest earning assets.
AT DECEMBER 31,
------------------------------------------------------
1996 1995
-------------------------- ---------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE (EXPENSE) RATE% BALANCE (EXPENSE) RATE%
-------- -------- ------- -------- --------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest Earning Assets:
Cash and equivalents..... $ 14,126 $ 766 5.42% $ 17,546 $ 1,028 5.86%
Investment securities
available for sale....... 34,924 2,290 6.56 33,539 1,872 5.58
Investment securities
held to maturity......... -- -- -- 39,390 2,383 6.05
Loans:
Real estate,
residential........... 234,903 16,396 6.98 287,270 19,886 6.92
Real estate, other..... 1,899 146 7.69 2,337 179 7.66
Other.................. 55 6 10.91 212 1 8.47
-------- -------- ----- -------- -------- ----
Total Loans.......... 236,857 16,548 6.99 289,819 20,066 6.92
-------- -------- ----- -------- -------- ----
FHLB stock............... 8,002 468 5.85 9,120 460 5.04
-------- -------- ----- -------- -------- ----
Total Interest Earning
Assets................... 293,909 $ 20,072 6.83% 389,414 $ 25,809 6.63%
-------- -------- ----- -------- -------- ----
All Other Assets......... 1,686 2,309
-------- --------
Total Assets......... $295,595 $391,723
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest Bearing
Liabilities:
Deposits:
Passbook............... $ 2,219 $ (84) 3.79% $ 1,426 $ (47) 3.30%
Money market and NOW
accounts.............. 3,363 (68) 2.02 6,933 (199) 2.87
Certificates........... 134,056 (9,106) 6.79 175,645 (12,666) 7.21
-------- -------- ----- -------- -------- ----
Total Deposits....... 139,638 (9,258) 6.63 184,004 (12,912) 7.02
-------- -------- ----- -------- -------- ----
Borrowings:
FHLB advances.......... 126,916 (7,797) 6.14 157,285 (9,651) 6.14
Other borrowings....... 7,041 (395) 5.61 24,943 (1,542) 6.18
-------- -------- ----- -------- -------- ----
Total Borrowings..... 133,957 (8,192) 6.11 182,228 (11,193) 6.14
-------- -------- ----- -------- -------- ----
Total Interest Bearing
Liabilities.............. 273,595 $(17,450) 6.37% 366,232 $(24,105) 6.58%
-------- -------- ----- -------- -------- ----
All Other Liabilities.... 633 1,183
Stockholder's Equity..... 21,367 24,308
-------- --------
Total Liabilities and
Stockholder's
Equity.............. $295,595 $391,723
======== ========
Net Interest Income...... $ 2,622 $ 1,704
======== ========
Interest Rate Spread..... 0.46% 0.05%
===== ====
Spread on Investable
Funds.................... 0.89% 0.44%
===== ====
29
The table below presents a breakdown of the overall change in net interest
income between 1996 and 1995 for certain categories of assets and liabilities
by showing how much of such change is attributable to the change in the
average balance outstanding and how much is attributable to the change in the
average rate earned or paid. The amount of the change due to an increase or
decrease in average balance equals the change in the average balance between
1996 and 1995 multiplied by the average rate for 1995. The amount of the
change due to an increase or decrease in average rate equals the change in
average rate between 1996 and 1995 multiplied by the average balance for 1995.
Any remaining change is allocated to the above two categories on a pro-rata
basis.
1996 VERSUS 1995 AMOUNT OF
INCREASE (DECREASE)
IN NET INTEREST INCOME
DUE TO CHANGE IN:
---------------------------
AVERAGE AVERAGE
BALANCE RATE TOTAL
------- -------- --------
(DOLLARS IN THOUSANDS)
Interest Earning Assets:
Cash and equivalents................................ $ (189) $ (73) $ (262)
Investment securities available for sale............ 79 339 418
Investment securities held to maturity.............. (1,192) (1,191) (2,383)
Loans:
Real estate, residential.......................... (3,826) 336 (3,490)
Real estate, other................................ (34) 1 (33)
Other............................................. 7 (2) 5
------- ------ -------
Total Loans..................................... (3,853) 335 (3,518)
------- ------ -------
FHLB stock.......................................... (25) 33 8
------- ------ -------
Total Interest Earning Assets....................... $(5,180) $ (557) $(5,737)
======= ====== =======
Interest Bearing Liabilities:
Deposits:
Passbook.......................................... $ (29) $ (8) $ (37)
Money market and NOW accounts..................... 84 47 131
Certificates...................................... 2,055 1,505 3,560
------- ------ -------
Total Deposits.................................... 2,110 1,544 3,654
------- ------ -------
Borrowings:
FHLB advances..................................... 1,854 -- 1,854
Other borrowings.................................. 1,016 131 1,147
------- ------ -------
Total Borrowings................................ 2,870 131 3,001
------- ------ -------
Total Interest Bearing Liabilities.................. $ 4,980 $1,675 $ 6,655
======= ====== =======
Total Change in Net Interest Income................. $ 918
=======
30
BALANCE SHEET ANALYSIS
Savings' assets decreased to $265.3 million at December 31, 1996 from $350.7
million at December 31, 1995. The decrease in assets resulted primarily from
reductions in mortgage loans and investments. Proceeds from the decrease in
assets were used to reduce reverse repurchase agreement borrowings, FHLB
advances and the use of savings account deposits.
The composition of Savings' loan portfolio, excluding mortgage-backed
securities and accrued interest, is set forth in the following table at the
dates indicated.
AT DECEMBER 31,
------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Real Estate:
1-4 dwelling units....................................... $191,408 $264,295
5 or more dwelling units................................. 5,790 4,235
Non residential.......................................... 2,448 2,279
Other...................................................... 57 43
-------- --------
199,703 270,852
Less:
Discount on acquired loans............................... 213 135
Deferred loan (fees) costs............................... (97) (222)
Allowance for loan losses................................ 1,899 3,496
Other deferrals.......................................... 136 204
-------- --------
Net real estate loans.................................. $197,552 $267,239
======== ========
The table below shows total loan origination, sale and repayment activities
of Savings for the years indicated:
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
LOANS ORIGINATED:
Real Estate:
Residential 1-4:
Fixed-rate............................................. $ -- $ 10,324
Adjustable-rate........................................ 442 7,974
-------- --------
Total loans originated and net loans booked.......... 442 18,298
LOANS PURCHASED:
Real Estate:
Residential 1-4: Adjustable-rate......................... 895 --
Commercial: Fixed-rate................................... 1,350 --
-------- --------
Total loans purchased................................ 2,245 --
LOANS SOLD:
Real Estate:
Residential 1-4:
Fixed-rate............................................. -- (14,067)
Adjustable-rate........................................ (29,068) (4,360)
-------- --------
Total loans sold..................................... (29,068) (18,427)
REPAYMENTS AND OTHER CHANGES:
Principal payments......................................... (5,540) (5,647)
Principal payoffs.......................................... (33,538) (29,719)
Changes in discounts, deferred loan fees, loan losses, and
other...................................................... 1,237 (2,075)
Loans converted to investment securities................... (5,465) (10,178)
-------- --------
Net increase (decrease) in loans receivable.......... $(69,687) $(47,748)
======== ========
31
The following table represents the principal balances at December 31, 1996
of mortgage loans in their respective maturity categories. The entire
principal balance of a loan is shown in the category where the final
contractual payment is due.
OVER ONE
DUE BUT
WITHIN WITHIN
ONE FIVE OVER
YEAR YEARS FIVE YEARS TOTAL
------ -------- ---------- --------
(DOLLARS IN THOUSANDS)
Real Estate:
First Mortgage Loans:
Balloon & adjustable-rate (primarily
adjustable-rate)...................... $ 423 $1,143 $170,303 $171,869
Fixed-rate 1-4......................... 628 671 21,552 22,851
Fixed-rate 5 or more and non-
residential........................... -- 583 4,247 4,830
Second Mortgage Loans.................... -- 96 -- 96
------ ------ -------- --------
Total Real Estate.................... 1,051 2,493 196,102 199,646
Other...................................... 57 -- -- 57
------ ------ -------- --------
$1,108 $2,493 $196,102 $199,703
====== ====== ======== ========
It should be noted that actual maturities are typically substantially
shorter than contractual maturities because of prepayments and "due-on-sale"
provisions.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Potential credit losses are implicit in the function of Savings as a lender
of real estate loans. Accordingly, the management of Savings makes a
determination as to an appropriate provision from earnings necessary to
maintain an allowance for loan losses which would be adequate to absorb
potential future credit losses. The evaluation of the loan portfolio for
potential losses and for adequacy of the allowance includes, as appropriate, a
periodic review of certain borrowers' current financial status and credit
standing, an evaluation of available collateral, loss experience in relation
to outstanding loans and the overall loan portfolio quality, management's
judgment regarding prevailing and anticipated economic conditions, and other
relevant factors.
The following table sets forth the activity in the allowance for loan losses
for Savings for the years ended December 31, 1996 and 1995:
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................................. $ 3,496 $ 1,906
Provision charged to operations.............................. 465 3,354
Net charge-offs:
Real Estate:
Residential 1-4.......................................... (2,062) (1,764)
------- --------
Balance at end of year....................................... $ 1,899 $ 3,496
======= ========
Ratio of net charge-offs during the year
to average loans outstanding during the year................ 0.87% 0.61%
======= ========
INVESTMENT ACTIVITIES
Savings is required by Federal regulations to maintain a specified minimum
amount of liquid assets in the form of cash, deposits and certain debt
securities. Security investments in excess of regulatory requirements result
from management's comparison of prevailing money market rates to prevailing
mortgage rates and an
32
evaluation of general economic conditions. Management also considers its
objective of maintaining liquidity at a level to assure adequate funds, taking
into account anticipated cash flows and available sources of credit, and to
afford future flexibility to meet withdrawal requests and loan commitments or
to make other investments. Savings is required to maintain its liquidity
level, measured by the ratio of cash and eligible investments to the sum of
withdrawable savings and borrowings payable within one year, in excess of 5
percent or be subject to certain monetary penalties. At December 31, 1996,
Savings' liquidity ratio was 17.0 percent.
Savings also invests in FHLMC and FNMA mortgage-backed securities, which
represent an interest in pools of mortgage loans and are guaranteed as to
payment of principal and interest by each respective agency. Additionally,
Savings invests in high quality (A or better) corporate notes and bonds.
SOURCES OF FUNDS
Deposits. Savings has several types of programs designed to attract both
short-term and long-term deposits. The following table sets forth the amounts
of deposits in the various types of programs offered by Savings as of the
dates indicated:
AT DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Passbook..................................................... $ 509 $ 908
Money Market and NOW Accounts................................ 3,790 6,135
Certificates ($95,000 and under)............................. 33,253 52,584
Jumbo Certificates (over $95,000)............................ 95,261 97,915
-------- --------
$132,813 $157,542
======== ========
The table below sets forth information relating to Savings' deposit flows
during the periods indicated:
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
Deposits, New............................................ $ 274,382 $ 305,466
Withdrawals.............................................. (303,508) (340,144)
--------- ---------
Net (decrease) before interest credited................ (29,126) (34,678)
Interest credited........................................ 4,397 4,057
--------- ---------
Net (decrease) in deposits............................. $ (24,729) $ (30,621)
========= =========
At December 31, 1996, Savings' deposits had the following remaining
contractual maturities:
OVER
OVER OVER OVER 5 YEARS
6 MONTHS 1 YEAR 3 YEARS BUT
BUT BUT BUT WITHIN OVER
6 MONTHS WITHIN WITHIN WITHIN 10 10
OR LESS 1 YEAR 3 YEARS 5 YEARS YEARS YEARS TOTAL
-------- -------- ------- ------- ------- ----- --------
(DOLLARS IN THOUSANDS)
Passbook................ $ 509 $ -- $ -- $ -- $-- $-- $ 509
Money Market and NOW
Accounts............... 3,790 -- -- -- -- -- 3,790
Certificates ($95,000
and under)............. 19,601 8,696 3,220 1,728 8 -- 33,253
Certificates (over
$95,000)............... 58,317 19,612 13,327 3,705 300 -- 95,261
------- ------- ------- ------ ---- ---- --------
$82,217 $28,308 $16,547 $5,433 $308 $-- $132,813
======= ======= ======= ====== ==== ==== ========
Savings typically attracts deposits from individuals, pension funds,
corporations and state and local government agencies. This mix has resulted in
a proportionately larger share of jumbo certificates of deposit. Brokered
deposits were not significantly utilized in 1996.
33
Federal Home Loan Bank Advances. Savings periodically borrows funds from the
FHLB, pledging as security the capital stock of the FHLB owned by Savings as
well as certain of its mortgage loans. These borrowings are made pursuant to
several different credit programs with varying interest rates and maturities.
Securities Sold Subject to Agreements to Repurchase. Savings enters into
repurchase agreements whereby it sells marketable U.S. government securities,
Federal agency securities or mortgage-backed securities with a simultaneous
commitment to repurchase the securities at a specified price on a specified
later date. The interest rate to be earned by the investor, determined at the
time the agreement is negotiated, is based upon market conditions and does not
necessarily relate to the coupon rate on the securities which are sold under
the repurchase agreement.
The following table provides additional information on all borrowed funds
for Savings:
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
FHLB Advances:
Balance at year-end....................................... $109,000 $150,000
Average amount outstanding................................ 126,916 157,285
Maximum amount outstanding at any month-end............... 150,000 165,000
Average interest rate for the year........................ 6.14% 6.14%
Average interest rate on year-end balance................. 6.10% 6.07%
Securities Sold Subject to Agreements to Repurchase:
Balance at year-end....................................... $ -- $ 15,016
Average amount outstanding................................ 7,041 24,943
Maximum amount outstanding at any month-end............... 18,099 33,480
Average interest rate for the year........................ 5.61% 6.18%
Average interest rate on year-end balance................. -- 5.81%
INTEREST RATE SENSITIVITY
The ability of Savings to maintain a positive interest rate spread in a
changing economic environment is dependent primarily on the matching of the
repricing characteristics of its interest earning assets and its interest
paying liabilities. One indication of interest rate sensitivity is the gap
between assets that reprice within one year and liabilities that reprice
within one year as a percentage of total interest earning assets (the "one
year gap"). Savings' one year gap is higher than its historical average
primarily as a result of the impact of interest rate hedging activities,
principally an interest rate swap. It is anticipated that as the interest rate
swap approaches maturity the one year gap should improve.
The following table sets forth information based on the average of December
rates for each of the last two years on the rates earned, rates paid, and
interest rate spreads for Savings:
WEIGHTED AVERAGE RATE EARNED WEIGHTED AVERAGE RATE PAID
------------------------------------- ----------------------------------------
MORTGAGE- (1) INTEREST INTEREST INTEREST
NET BACKED INVESTMENT EARNINGS (2) BEARING RATE
LOANS SECURITIES SECURITIES ASSETS DEPOSITS BORROWINGS LIABILITIES SPREAD
----- ---------- ---------- -------- -------- ---------- ----------- --------
December:
1995.................... 6.92% 6.37% 5.67% 6.71% 6.74% 6.10% 6.39% 0.32%
1996.................... 7.43% 6.77% 6.25% 7.16% 6.78% 6.00% 6.47% 0.69%
- - --------
(1) Consists of certificates of deposit, Federal funds and investment
securities.
(2) Consists of FHLB advances and securities sold subject to agreements to
repurchase.
34
The following table summarizes interest-sensitive assets and liabilities for
Savings at December 31, 1996, categorized on the repricing characteristics of
variable-rate products and the contractual amortization for fixed-rate
products as adjusted for anticipated prepayments. Actual amortization of loan
balances may differ significantly from anticipated amortization.
INTEREST RATE SENSITIVITY PERIOD
------------------------------------------------------
WITHIN 1-3 3-5 5-10 OVER 10
DECEMBER 31, 1996 1 YEAR YEARS YEARS YEARS YEARS TOTAL
----------------- -------- -------- ------ ------- ------- --------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Cash and equivalents.. $ 10,259 $ -- $ -- $ -- $ -- $ 10,259
Investment securities:
Fixed-rate........... 1,284 4,092 3,473 2,920 743 12,512
Adjustable-rate...... 28,821 1,068 -- -- -- 29,889
Mortgage loans:
Adjustable-rate...... 133,837 36,654 905 530 -- 171,926
Fixed-rate........... 6,497 8,254 5,089 5,762 2,175 27,777
FHLB stock............ 7,958 -- -- -- -- 7,958
-------- -------- ------ ------- ------- --------
Total interest earning
assets............... 188,656 50,068 9,467 9,212 2,918 260,321
-------- -------- ------ ------- ------- --------
Interest bearing
liabilities:
Deposits:
Passbook............. 509 -- -- -- -- 509
Money market and NOW
accounts............ 3,790 -- -- -- -- 3,790
Certificates......... 106,321 16,452 5,733 8 -- 128,514
-------- -------- ------ ------- ------- --------
Total deposits...... 110,620 16,452 5,733 8 -- 132,813
-------- -------- ------ ------- ------- --------
Borrowings:
FHLB advances........ 32,000 77,000 -- -- -- 109,000
Other borrowings..... -- -- -- -- -- --
-------- -------- ------ ------- ------- --------
Total borrowings.... 32,000 77,000 -- -- -- 109,000
-------- -------- ------ ------- ------- --------
Total interest bearing
liabilities.......... 142,620 93,452 5,733 8 -- 241,813
-------- -------- ------ ------- ------- --------
Impact of hedging
activities............. (50,000) 50,000 -- -- -- --
-------- -------- ------ ------- ------- --------
Adjusted interest-
bearing liabilities.... 92,620 143,452 5,733 8 -- 241,813
-------- -------- ------ ------- ------- --------
Total interest earning
assets less interest
bearing liabilities.... $ 96,036 $(93,384) $3,734 $ 9,204 $ 2,918 $ 18,508
======== ======== ====== ======= ======= ========
Cumulative interest
earning assets less
interest bearing
liabilities............ $ 96,036 $ 2,652 $6,386 $15,590 $18,508
======== ======== ====== ======= =======
Cumulative total
interest earning assets
less interest bearing
liabilities as a
percent of total
interest earning
assets................. 36.89% 1.02% 2.45% 5.99% 7.11%
======== ======== ====== ======= =======
35
SELECTED RATIOS AND STATISTICS
Pursuant to the requirements of FIRREA, capital standards are required to be
maintained by Savings which include a tangible capital standard, a leverage
requirement based on "core capital" and a risk-based capital standard. The
thrust of the risk-based capital standard is to require savings and loans to
provide more capital against assets deemed to carry a greater risk of default
or diminution of carrying value. FIRREA also establishes requirements for
institutions that fail to comply with the capital standards. At December 31,
1996, Savings was in compliance with all three capital standards.
The following table shows certain ratios of Savings as of or for each of the
three years ended December 31, 1996:
YEAR ENDED
DECEMBER 31,
----------------------
1996 1995 1994
----- ------ -----
Return on average total
assets.................. (0.21)% (1.27)% (.31)%
Return on average
stockholder's equity.... (2.85) (20.42) (4.82)
Average equity to
average assets ratio.... 7.23 6.20 6.41
CORPORATE SEGMENT
The "Corporate Office" provides management services to the operating
entities. The Corporate Office generally provides the source of funds to all
segments, with the exception of Savings. Funds are provided primarily through
bank lines of credit or notes and debentures. Interest incurred in financing
real estate inventories is passed through to the operating divisions and
expensed or capitalized as a cost of real estate inventories, as appropriate,
in accordance with Statement of Financial Accounting Standards ("FAS") No. 34.
LIQUIDITY AND CAPITAL RESOURCES
Homebuilding, Manufacturing and Corporate Segments. These segments'
principal cash uses in 1996 were for operating expenses, land acquisitions and
construction expenditures, principal and interest payments on debt and
dividends to shareholders. Cash requirements were provided from internally
generated funds and outside borrowings, including bank revolving credit
facilities and term loans. Management believes that these sources of cash are
sufficient to finance its current working capital requirements and other
needs.
In December 1996, the Company completed a syndication of its principal
revolving credit facility whereby the total unsecured commitment was increased
to $200 million and additional lenders were added to the facility. In
connection with the syndication the Company combined its separate bank credit
facilities into a single larger facility which created additional borrowing
capacity of approximately $50 million. The facility has a current maturity
date of July 31, 1999. This agreement contains covenants, including certain
financial covenants. This agreement also contains provisions which may, in
certain circumstances, limit the amount the Company may borrow under the
credit facility. At December 31, 1996, the Company had borrowings of $57.3
million outstanding under this facility and had approximately $140 million of
additional borrowing capacity available under the provisions of the agreement.
In conjunction with the syndication discussed above, the Company repaid in
full the principal balances on two separate term loans during the fourth
quarter of 1996.
On March 1, 1997, the Company is required to make the first of three annual
$20 million sinking fund payments on the Company's 10 1/2 percent senior notes
due 2000. The Company presently intends to use its revolving credit facility
to fund the first payment in 1997.
To finance land purchases, the Company may utilize, among its other sources,
purchase money mortgage financing of which approximately $4.0 million was
outstanding for this purpose at December 31, 1996, a decrease of $10.1 million
from December 31, 1995.
36
Additionally, the Company has utilized joint ventures over the past few
years whereby these joint ventures have obtained secured construction
financing. This type of structure minimizes the use of funds from the
Company's revolving credit facility. The Company plans to continue using this
type of arrangement to finance the development of properties as opportunities
arise.
The Company paid approximately $3.6 million in dividends to its stockholders
in 1996. Payments of dividends on the Company's common stock is within the
discretion of the Company's Board of Directors and is dependent upon various
factors, including the earnings, cash flow, capital requirements and operating
and financial condition of the Company. Certain of the Company's senior credit
and debt agreements impose restrictions on the amount of dividends the Company
may pay.
During 1996, under the previously announced common stock repurchase program,
the Company repurchased 430,300 shares of its common stock for approximately
$2.3 million. In January 1997, the Company's Board of Directors authorized an
increase of an additional $10 million to repurchase the Company's common
stock, providing for an aggregate repurchase limit of $20 million. As of
December 31, 1996, the Company had repurchased an aggregate of 1,000,950
shares of its common stock for approximately $6.2 million, leaving a balance
of approximately $13.8 million available to be repurchased.
In January 1992, the Company filed a shelf registration statement with the
Securities and Exchange Commission which was declared effective in March 1992.
In connection therewith, the Company may, after issuing the $100 million 10
1/2 percent Senior Notes due in 2000, issue up to an additional $100 million
of either senior or subordinated debt securities from time to time, at prices
and terms acceptable to the Company.
The Company has no material commitments nor off balance sheet financing
arrangements that would tend to materially affect future liquidity.
Savings and Loan. Savings uses cash generated from operations, borrowing
arrangements such as FHLB advances, reverse repurchase agreements and savings
account deposits to finance its mortgage and investment portfolio. Funds from
operations include sales of loans and mortgage backed securities and principal
payments and payoffs on mortgage loans and mortgage-backed securities.
Scheduled payments on loans and mortgage-backed securities are a relatively
stable source of funds, while the sale of loans and mortgage-backed
securities, loan payoffs, and deposit inflows and outflows are influenced
significantly by interest rates and general economic conditions. Funds
generated from sales, payments and payoffs of loans aggregated $68.3 million
in 1996 compared to $48.1 million in 1995. The increase in funds from this
source was primarily due to an increase in loan sales. As a result of the
decrease in Savings' assets between years, its use of FHLB advances, savings
deposits and reverse repurchase agreements declined significantly.
FHLB advances represent short and medium-term borrowings that are secured by
investments in stock of the Federal Home Loan Banks and certain mortgage
loans. Savings had $109 million of FHLB advances outstanding at December 31,
1996, a decrease of $41 million from December 31, 1995. FHLB borrowings are a
consistent source of funds, and are used depending on prevailing interest
rates and availability of collateral.
Reverse repurchase agreements represent short-term borrowings that are
collateralized by mortgage-backed securities guaranteed by Federal agencies.
Savings did not have any reverse repurchase borrowings outstanding at December
31, 1996, a decrease of $15 million from December 31, 1995. For the last few
years, this source of funds has been consistently available, and is also used
depending on prevailing rates and availability of collateral.
Savings' principal source of funds has been through savings account
deposits. The availability of these funds is primarily a function of interest
rates offered on accounts, including certificates of deposit. Jumbo
certificates of deposit (certificates in excess of $95,000), which are
particularly sensitive to interest rate competition, accounted for
approximately 72 percent of Savings' deposits at December 31, 1996.
37
RECENT ACCOUNTING PRONOUNCEMENTS
None.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The foregoing "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning
future events, including, but not limited to, the following: statements
regarding the price range of future homes constructed by the Company;
statements regarding the margins on newer projects; statements regarding the
future home deliveries and income from the Company's unconsolidated joint
ventures; statements regarding a favorable mortgage interest rate environment
and an improving California economic climate; statements regarding the
homebuilding segment's backlog of homes; statements regarding the adequacy of
its inventory of building sites; statements regarding the time typically
required to complete the construction phase of an increment of a project; and
the sufficiency of the Company's cash provided by internally generated funds
and outside borrowings. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, without
limitation, the following: change in the demand for new homes attributable to
the cyclical and competitive nature of the homebuilding business; changes in
general economic conditions; uncertainty in or changes in the continued
availability of suitable undeveloped land at reasonable prices; adverse local
market conditions; existing and changing governmental regulations, including
regulations concerning environmental matters and the permitting process for
home construction; increases in prevailing interest rates; the level of real
estate taxes and energy costs; the cost of materials and labor; the
availability of construction financing and home mortgage financing attractive
to the purchasers of homes; and inclement weather and other natural disasters.
Results actually achieved thus may differ materially from expected results
included in these and any other forward looking statements contained herein.
38
(THIS PAGE INTENTIONALLY LEFT BLANK)
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Standard Pacific Corp.:
We have audited the accompanying consolidated balance sheets of STANDARD
PACIFIC CORP. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Standard Pacific Corp. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As explained in Note 2 of the financial statements, effective December 31,
1995, the Company changed its method of accounting for the impairment of long-
lived assets and for long-lived assets to be disposed of.
ARTHUR ANDERSEN LLP
Orange County, California
January 27, 1997
40
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Homebuilding and Corporate:
Revenues....................................... $399,863 $346,263 $374,783
Cost of sales.................................. 371,554 330,498 354,463
Noncash charge for impairment of long-lived
assets........................................ -- 46,491 --
-------- -------- --------
Gross margin................................. 28,309 (30,726) 20,320
-------- -------- --------
General and administrative expenses............ 13,863 12,169 13,950
Income from unconsolidated joint ventures...... 4,708 6,953 4,234
Interest expense............................... 7,142 1,860 --
Other income................................... 936 555 596
-------- -------- --------
Homebuilding and corporate pretax income (loss).. 12,948 (37,247) 11,200
-------- -------- --------
Manufacturing:
Sales.......................................... 19,311 15,177 17,225
Cost of sales.................................. 12,011 9,856 10,896
-------- -------- --------
Gross margin................................. 7,300 5,321 6,329
-------- -------- --------
Selling, general and administrative expenses..... 5,304 5,527 5,481
Other income..................................... 91 164 121
-------- -------- --------
Manufacturing pretax income (loss)............. 2,087 (42) 969
-------- -------- --------
Savings and Loan:
Interest income................................ 20,072 25,805 25,863
Interest expense............................... 17,450 24,105 19,986
-------- -------- --------
Net interest margin.......................... 2,622 1,700 5,877
-------- -------- --------
Provision for loan losses...................... 465 3,354 2,475
General and administrative expenses............ 2,243 3,279 5,690
(Loss) gain on sale of investments and
adjustment for
lower of cost or market on loans available for
sale.......................................... (21) (1,966) (768)
SAIF recapitalization charge................... 1,291 -- --
Other income (expense), including special
charge in 1995................................ 361 (1,701) 877
-------- -------- --------
Savings and loan pretax (loss)................. (1,037) (8,600) (2,179)
-------- -------- --------
Consolidated income (loss) before taxes........ 13,998 (45,889) 9,990
(Provision) benefit for income taxes........... (5,605) 18,526 (4,103)
-------- -------- --------
Net Income (Loss)................................ $ 8,393 $(27,363) $ 5,887
======== ======== ========
Net Income (Loss) Per Share...................... $ .28 $ (.90) $ .19
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
41
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
AT DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Homebuilding, corporate and manufacturing:
Cash and equivalents....................................... $ 5,975 $ 895
Investment securities held to maturity..................... 5,329 5,410
Mortgage notes receivable and accrued interest............. 3,741 3,203
Other notes and accounts receivable, net................... 11,073 8,821
Inventories:
Real estate in process of development and completed model
homes.................................................... 363,718 354,290
Real estate held for sale................................. 8,927 13,386
Manufacturing............................................. 1,432 1,332
Property and equipment, at cost, net of accumulated
depreciation
and amortization of $6,640 and $5,875, respectively....... 6,041 6,263
Investments in and advances to unconsolidated joint
ventures.................................................. 885 4,460
Deferred income taxes...................................... 16,481 17,605
Deferred charges and other assets.......................... 6,504 6,859
-------- --------
Total assets--homebuilding, corporate and manufacturing... 430,106 422,524
-------- --------
Savings and loan:
Cash and equivalents....................................... 10,259 36,702
Investment securities available for sale................... 42,401 28,635
Mortgage notes receivable and accrued interest, net........ 199,135 269,128
Property and equipment, at cost, net of accumulated
depreciation
of $869 and $976, respectively............................ 227 266
Real estate acquired in settlement of loans, net........... 2,079 2,704
Deferred income taxes...................................... 1,581 3,825
Investment in FHLB stock................................... 7,958 7,500
Other assets............................................... 1,633 1,894
-------- --------
Total assets--savings and loan............................ 265,273 350,654
-------- --------
Total Assets............................................. $695,379 $773,178
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
42
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
AT DECEMBER 31,
------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Homebuilding, corporate and manufacturing:
Unsecured notes payable.................................. $ 57,300 $ 48,500
Trust deed notes payable................................. 4,467 14,854
Accounts payable and accrued expenses.................... 28,991 24,547
10 1/2 percent senior notes due 2000..................... 100,000 100,000
-------- --------
Total liabilities---homebuilding, corporate and
manufacturing.......................................... 190,758 187,901
-------- --------
Savings and loan:
Savings accounts......................................... 132,813 157,542
FHLB advances............................................ 109,000 150,000
Securities sold subject to agreements to repurchase...... -- 15,016
Accounts payable and accrued expenses.................... 2,458 4,873
-------- --------
Total liabilities---savings and loan.................... 244,271 327,431
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued................................. -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 29,629,981 and 30,060,281 shares outstanding
in 1996 and 1995, respectively.......................... 296 301
Paid-in capital.......................................... 283,331 285,655
Investment securities valuation adjustment............... (39) (80)
Accumulated deficit...................................... (23,238) (28,030)
-------- --------
Total stockholders' equity.............................. 260,350 257,846
-------- --------
Total Liabilities and Stockholders' Equity............. $695,379 $773,178
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
43
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON INVESTMENT RETAINED
NUMBER OF STOCK SECURITIES EARNINGS
YEARS ENDED DECEMBER 31, COMMON PAR PAID-IN VALUATION (ACCUMULATED
1994, 1995 AND 1996 SHARES VALUE CAPITAL ADJUSTMENT DEFICIT)
------------------------ ---------- ------ -------- ---------- ------------
BALANCE, December 31,
1993..................... 30,605,921 $306 $289,311 $ -- $ 778
Exercise of stock options
and related income tax
benefit.................. 16,010 -- 136 -- --
Cash dividends declared
($.12 per share)......... -- -- -- -- (3,675)
Change in investment
securities valuation
adjustment............... -- -- -- (1,616) --
Net income................ -- -- -- -- 5,887
---------- ---- -------- ------ --------
BALANCE, December 31,
1994..................... 30,621,931 306 289,447 (1,616) 2,990
Exercise of stock options
and related income tax
benefit.................. 9,000 -- 64 -- --
Repurchase of common
shares................... (570,650) (5) (3,856) -- --
Cash dividends declared
($.12 per share)......... -- -- -- -- (3,657)
Change in investment
securities valuation
adjustment............... -- -- -- 1,536 --
Net (loss)................ -- -- -- -- (27,363)
---------- ---- -------- ------ --------
BALANCE, December 31,
1995..................... 30,060,281 301 285,655 (80) (28,030)
Repurchase of common
shares................... (430,300) (5) (2,324) -- --
Cash dividends declared
($.12 per share)......... -- -- -- -- (3,601)
Change in investment
securities valuation
adjustment............... -- -- -- 41 --
Net income................ -- -- -- -- 8,393
---------- ---- -------- ------ --------
BALANCE, December 31,
1996..................... 29,629,981 $296 $283,331 $ (39) $(23,238)
========== ==== ======== ====== ========
The accompanying notes are an integral part of these consolidated statements.
44
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- -------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 8,393 $(27,363) $ 5,887
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Noncash charge for impairment of long-lived
assets........................................ -- 46,491 --
Depreciation and amortization.................. 891 550 782
Amortization of deferred income and discounts.. 16 424 580
Net (gain) loss on sale of investments, loans
and REO....................................... (697) 1,738 508
Provision for loan losses...................... 465 3,354 2,475
Changes in cash and equivalents due to:
Inventories.................................. (5,476) 52,984 21,648
Receivables and accrued interest............. (1,600) 6,763 (6,135)
Investment in and advances to unconsolidated
joint ventures.............................. 3,576 (3,015) 717
Accounts payable and accrued expenses........ 4,260 (4,378) 8,279
Deferred income taxes........................ 3,368 (17,876) (1,823)
Other, net................................... (2,355) (1,060) 433
------- -------- --------
Net cash provided by (used in) operating
activities....................................... $10,841 $ 58,612 $ 33,351
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of investments and
principal repayments............................. $33,047 $ 69,134 $ 38,066
Net sales from real estate owned................. 5,088 3,358 1,630
Net (additions to) retirements from property and
equipment........................................ (622) (227) (402)
Purchases of investment securities............... (46,653) (11,254) (54,967)
Sales (purchases) of FHLB stock.................. -- 1,975 (1,776)
New loan fundings and loan purchases............. (2,436) (17,875) (186,080)
Loan sales and principal repayments from loans... 68,268 48,140 136,514
------- -------- --------
Net cash provided by (used in) investing
activities....................................... $56,692 $ 93,251 $(67,015)
------- -------- --------
45
STANDARD PACIFIC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- --------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) bank lines of
credit and term loans........................... $ 8,800 $ (37,750) $(21,500)
Proceeds from deposits to savings accounts...... 274,382 305,466 566,688
Payments on savings account withdrawals......... (303,508) (340,144) (584,521)
Interest credited to savings accounts........... 4,397 4,056 3,765
Proceeds from FHLB advances..................... 18,000 111,000 365,000
Repayment of FHLB advances...................... (59,000) (121,300) (305,750)
Principal payments on bonds, debentures and
trust deed notes payable........................ (11,021) (12,885) (12,964)
Dividends....................................... (3,601) (3,657) (3,675)
Net change in securities sold subject to
agreements to repurchase........................ (15,016) (31,759) 26,737
Repurchase of common shares..................... (2,329) (3,861) --
Proceeds from exercise of stock options......... -- 64 136
-------- --------- --------
Net cash provided by (used in) financing
activities...................................... $(88,896) $(130,770) $ 33,916
-------- --------- --------
Net increase (decrease) in cash and equivalents. $(21,363) $ 21,093 $ 252
Cash and equivalents at beginning of year....... 37,597 16,504 16,252
-------- --------- --------
Cash and equivalents at end of year............. $ 16,234 $ 37,597 $ 16,504
======== ========= ========
SUMMARY OF CASH BALANCES:
Homebuilding, corporate and manufacturing....... $ 5,975 $ 895 $ 1,838
Savings and loan................................ 10,259 36,702 14,666
-------- --------- --------
$16,234 $ 37,597 $ 16,504
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest.................................... $ 36,081 $ 42,554 $ 39,904
Income taxes................................ 1,477 530 5,792
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Land acquisitions financed by purchase money
trust deeds.................................. $ 635 $ 9,444 $ 12,064
Change in unrealized losses on investment
securities available for sale, net of
deferred taxes............................... 41 1,537 (1,616)
Loans receivable foreclosed on, net........... 3,778 4,106 3,990
Reclass of mortgage backed securities held to
maturity to investment securities available
for sale..................................... -- 48,880 --
The accompanying notes are an integral part of these consolidated statements.
46
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS PRESENTED IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. COMPANY ORGANIZATION AND OPERATIONS
On December 31, 1991, Standard Pacific, L.P. (the "Partnership") converted
to the corporate form by merging the Partnership into Standard Pacific Corp.
("SPC"), a newly formed Delaware Corporation (the "Merger"). In connection
with the Merger, SPC succeeded to all of the assets and liabilities of the
Partnership. In establishing the new stockholders' equity accounts, the
Company was treated as a new entity for accounting purposes. Accordingly,
there was no retained earnings balance recorded as of December 31, 1991.
Unless the context otherwise requires, "Company" refers to SPC and its
predecessors, including the Partnership.
The Company is a regional builder of single-family homes with operations
throughout the major metropolitan areas of California and Texas. Approximately
79 percent of the Company's home deliveries (including the unconsolidated
joint ventures) were in California for the year ended December 31, 1996. There
have been periods of time in California where economic growth has slowed and
the average sales price of homes in certain areas in California in which the
Company does business have declined. There can be no assurance that home sales
prices will not decline further in the future.
The Company's business is affected by national, world and local economic
conditions and events and the effect such conditions and events have on the
markets it serves in California and Texas and in particular by the level of
mortgage interest rates and consumer confidence in those regions. The Company
cannot predict whether interest rates will be at levels attractive to
prospective homebuyers. If interest rates increase, and in particular mortgage
interest rates, the Company's operating results could be adversely impacted.
The Company also has an office furniture manufacturing subsidiary, Panel
Concepts, Inc. and a federally chartered savings and loan institution,
Standard Pacific Savings, F.A., both of which are wholly owned subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--HOMEBUILDING, CORPORATE AND
MANUFACTURING (UNLESS STATED OTHERWISE)
a. Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in unconsolidated joint
ventures in which the Company has less than a controlling interest are
accounted for using the equity method.
b. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Cash and Equivalents
For purposes of the consolidated statements of cash flows, cash and
equivalents include cash on hand, demand deposits, and for Savings, amounts
due from banks, federal funds sold and overnight deposits and all highly
liquid short-term investments, including interest bearing securities purchased
with a remaining maturity of three months or less.
d. Investment Securities
Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires the Company,
including Savings, to carry the portion of their investments in
47
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
debt and equity securities they do not intend to hold to maturity at their
market values. Securities classified as available-for-sale will be carried at
their market values with changes in the market values recorded as a separate
component of stockholders' equity, net of the income tax effect; securities
classified as trading securities will be carried at their market values with
changes in the market values recorded as a component of income, and;
securities classified as held-to-maturity will be recorded at amortized cost.
During 1995, and resulting from regulatory agency clarification of the
ruling regarding the effects of unrealized losses on regulatory capital, all
of Savings' investment securities classified as held to maturity were
transferred to available for sale. For investment securities transferred into
the available-for-sale category from the held-to-maturity category, any
unrealized holding gain or loss at the date of the transfer is recognized in a
separate component of stockholders' equity.
e. Real Estate and Manufacturing Inventories
For real estate under development the Company capitalizes direct carrying
costs, including interest, property taxes and related development costs. Field
construction supervision and related direct overhead and certain selling costs
are also included in the capitalized cost of real estate inventories. General
and administrative costs are expensed as incurred.
Prior to December 31, 1995, each real estate project was carried at the
lower of its cost or its estimated net realizable value. Estimated net
realizable value was deemed to be the undiscounted estimated future cash flows
from the project, including relevant carrying costs such as interest.
Effective December 31, 1995, the Company adopted the provisions of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" (FAS 121). FAS 121 changed
the method of valuing long-lived assets, including real estate inventories,
whereby long-lived assets that are expected to be held and used in operations
are to be carried at the lower of cost or, if impaired, the fair value of the
asset, rather than the net realizable value. Long-lived assets to be disposed
of should be reported at the lower of carrying amount or fair value less cost
to sell. In evaluating long-lived assets held for use, an impairment loss is
recognized if the sum of the expected future cash flows (undiscounted and
without interest charge) is less than the carrying amount of the asset. Once a
determination has been made that an impairment loss should be recognized for
real estate inventories expected to be held and used, various assumptions and
estimates are used to determine fair value including, among others, estimated
costs of construction, development and marketing, sales absorption rates,
anticipated sales prices and carrying costs. The calculation of the impairment
loss is based on estimated future cash flows which are calculated to include
an appropriate return and interest. The estimates used to determine the
impairment adjustment could change in the near term as the economy in the
Company's key areas change.
The effect of the adoption of FAS 121, plus the effects of continued adverse
trends experienced during 1995 in certain of the geographic markets in which
the Company operates, on the values of certain of the Company's land holdings,
particularly in San Diego county, resulted in a pretax noncash charge of $46.5
million for the year ended December 31, 1995. These adverse developments
included, among other things, record high foreclosure rates, declines in
median home prices and continued anemic economic recovery.
Manufacturing inventories are stated at the lower of cost (first-in, first-
out) or market. Cost includes materials, labor and manufacturing overhead.
48
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
f. Capitalization of Interest
The Company follows the practice of capitalizing interest on real estate
inventories during the period of development. Interest capitalized as a cost
of real estate under development is included in cost of sales as related units
are sold. The following is a summary of interest capitalized and expensed for
the three years ended December 31, 1996:
CORPORATE AND HOMEBUILDING OPERATIONS 1996 1995 1994
------------------------------------- ------- ------- -------
Total interest incurred during the period........ $16,687 $19,200 $19,600
Less: Interest capitalized as a cost of real
estate under development........................ 9,545 17,340 19,600
------- ------- -------
Interest expense................................. $ 7,142 $ 1,860 $ --
======= ======= =======
Interest previously capitalized as a cost of real
estate under development, included in
homebuilding cost of sales...................... $16,920 $27,638(1) $33,069
======= ======= =======
Capitalized interest in ending inventories....... $25,142 $32,517 $54,373
======= ======= =======
- - --------
(1) Excludes $11.6 million of interest included in the FAS 121 adjustment.
g. Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization is
recorded using the straight-line method over the estimated useful lives of the
assets.
h. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires a liability approach for measuring deferred taxes based on
temporary differences between the financial statement and tax bases of assets
and liabilities existing at each balance sheet date using enacted tax rates
for years in which taxes are expected to be paid or recovered.
i. Warranty Costs
Estimated future warranty costs are charged to cost of sales in the period
when the revenues from home closings are recognized.
j. Revenue Recognition
Sales of residential housing are recorded after construction is completed,
required down payments are received and title passes. Manufacturing sales are
recorded as of the date shipments are made to customers.
k. Earnings Per Share
Earnings per share, representing primary and fully diluted amounts (which
are not materially different), are based on the weighted average number of
common and equivalent shares outstanding during the year. Equivalent shares
were determined by using the treasury stock method, which assumes that all
dilutive securities were exercised and that the proceeds received were applied
to repurchase outstanding shares at the average market prices during each
year. The weighted average number of common and equivalent shares amounted to
30,011,595, 30,488,676 and 30,674,349 in the three years ended December 31,
1996, respectively. Equivalents were anti-dilutive for the year ended December
31, 1995.
49
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
l. Stock-Based Compensation
The Company accounts for its stock-based compensation plan using the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25).
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). Under the provisions of FAS 123, companies can elect
to account for stock-based compensation plans using a fair-value-based method
or continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB 25. FAS 123 requires that companies electing to
continue using the intrinsic value method must make pro forma disclosures of
net income and earnings per share as if the fair-value-based method of
accounting had been applied.
Effective December 31, 1996, the Company adopted FAS 123 for financial
statement disclosure purposes only and accordingly, the adoption had no impact
on the Company's results of operations or financial position for the year then
ended.
m. Reclassifications
Certain items in prior period financial statements have been reclassified to
conform with current year presentation.
3. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
Summarized financial information related to the Company's two joint ventures
accounted for by the equity method are as follows:
AT DECEMBER 31,
---------------
1996 1995
------- -------
Assets:
Cash...................................................... $ 545 $ 1,583
Real estate in process of development and completed model
homes.................................................... 9,809 12,692
Other assets.............................................. 3,355 401
------- -------
$13,709 $14,676
======= =======
Liabilities and Equity:
Accounts payable and accrued expenses..................... $ 3,409 $ 941
Construction loans payable................................ 7,153 --
Equity.................................................... 3,147 13,735
------- -------
$13,709 $14,676
======= =======
The Company's share of equity shown above is $843,000 and $4.6 million at
December 31, 1996 and 1995, respectively.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
Revenues............................................ $32,168 $46,166 $30,558
Cost of revenues.................................... 23,817 32,881 22,608
------- ------- -------
Net earnings of joint ventures.................... $ 8,351 $13,285 $ 7,950
======= ======= =======
50
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Generally, the Company's share of earnings in the two joint ventures
detailed above is 50 percent.
Additionally, the Company is party to a joint venture whose sole purpose is
to develop finished lots whereby the Company will purchase the lots from the
joint venture to construct homes thereon. The Company does not anticipate
recording any income or loss from this joint venture and accordingly, the
tables above do not reflect the results of operations or financial condition
of this particular joint venture.
4. UNSECURED NOTES PAYABLE AND TRUST DEED NOTES PAYABLE
a. Notes Payable to Banks
In December 1996, the Company completed a syndication of its principal
revolving credit facility whereby the total unsecured commitment was increased
to $200 million and additional lenders were added to the facility. In
connection with the syndication the Company combined its separate bank
revolver and term loan facilities into a single larger facility. The facility
has a current maturity date of July 31, 1999. The facility includes covenants
which require, among other things, the maintenance of certain amounts of
tangible stockholders' equity, as defined, and the maintenance of debt-to-
equity ratios, as defined. The facility also contains provisions which may, in
certain circumstances, limit the amount the Company may borrow under the
credit facility. At December 31, 1996, the Company had borrowings of $57.3
million outstanding under this revolving credit arrangement and had
approximately $140 million of additional borrowing capacity available under
the provisions of the agreement. Interest rates charged under this facility
primarily include LIBOR and prime rate pricing options. In addition to fees
charged on the commitment and unused portion of the facility, this line of
credit facility also requires the Company to maintain a compensating balance
of one percent of a portion of the commitment amount or pay certain fees in
lieu of the compensating balance.
In conjunction with the syndication discussed above, the Company repaid in
full the principal balances on two separate bank term loans in the fourth
quarter of 1996.
As of December 31, 1996, and throughout the year, the Company was in
compliance with the covenants of its lending agreements.
b. Trust Deed Notes Payable
At December 31, 1996 and 1995, trust deed notes payable primarily consist of
trust deeds on land purchases.
c. Borrowings and Maturities
The following summarizes the borrowings during the three years ended
December 31, 1996 for the unsecured notes payable and trust deed notes
payable:
1996 1995 1994
------- -------- --------
Maximum borrowings outstanding during year at
month end......................................... $91,299 $101,947 $137,730
Average outstanding balance during the year....... $78,552 $ 86,377 $119,988
Weighted average interest rate for the year....... 6.8% 7.5% 6.6%
Weighted average interest rate on borrowings
outstanding at year end........................... 7.1% 6.8% 7.7%
51
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of the trust deed notes payable and the 10 1/2% Senior Notes (see
Note 5 below) are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1997............................................................ $ 24,467
1998............................................................ 20,000
1999............................................................ 20,000
2000............................................................ 40,000
--------
$104,467
========
5. 10 1/2 PERCENT SENIOR NOTES DUE 2000
In 1993, the Company issued $100 million principal amount of its 10-1/2
Percent Senior Notes due March 1, 2000 (the "Notes"). Interest is due and
payable on March 1 and September 1 of each year. The Notes are not redeemable
at the option of the Company prior to maturity. The Company is required to
make annual mandatory sinking fund payments sufficient to retire 20 percent of
the original aggregate principal amount of the Notes ($20 million per year)
commencing on March 1, 1997, at a redemption price of 100 percent of the
principal amount, with the balance of the Notes ($40 million) retired on March
1, 2000.
The Notes are senior unsecured obligations of the Company. The Company will
be obligated to make an offer to purchase a portion of the Notes in the event
of the Company's failure to maintain a minimum consolidated net worth, as
defined, and under certain other circumstances. In addition, the Notes contain
other restrictive covenants which, among other things, impose certain
limitations on the ability of the Company to (i) incur additional
indebtedness, (ii) create liens, (iii) make restricted payments, as defined,
and (iv) sell assets. As of December 31, 1996, the Company was in compliance
with the covenants.
6. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate:
Cash and Equivalents--The carrying amount is a reasonable estimate of
fair value. These assets primarily consist of short term investments and
demand deposits.
Investment Securities Held to Maturity--These investments consist
primarily of U.S. government and corporate debt securities which are
publicly traded. The fair value of these issues is based on their quoted
market prices at year end.
Revolving Credit Facilities--The carrying amounts of the revolving credit
obligations approximate market value because of the frequency of repricing
the borrowings (usually at 14 to 90 day maturities).
Term Loans Payable--For 1995, these notes payable were set to mature at
various dates, however, borrowings typically reprice every three months or
less. Consequently, the carrying value approximated market value for 1995.
These term loans were paid off during 1996, therefore, no balance is
reflected as of the year ended December 31, 1996.
Trust Deed Notes Payable--These notes are primarily for purchase money
deeds of trust on land acquired. These notes generally have maturities
ranging from one to two years. The rates of interest paid on these notes
approximate the current rates available for secured real estate financing
with similar terms and maturities.
52
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10 1/2 Percent Senior Notes Due 2000--This issue is publicly traded on
the New York Stock Exchange. Consequently, the fair value of this issue is
based on its quoted market price at year end.
The estimated fair values of the Company's financial instruments are as
follows:
AT DECEMBER 31,
---------------------------------
1996 1995
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
Financial Assets:
Cash and equivalents........................ $ 5,975 $ 5,975 $ 895 $ 895
Investment securities held to maturity...... 5,329 5,379 5,410 5,457
Financial Liabilities:
Revolving credit facilities................. $57,300 $57,300 $ 7,500 $ 7,500
Term loans payable.......................... -- -- 41,000 41,000
Trust deed notes payable.................... 4,467 4,467 14,854 14,854
10 1/2 percent senior notes due 2000........ 100,000 103,375 100,000 103,125
7. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under noncancelable operating leases.
Generally, the Company is required to pay taxes and insurance and maintain the
assets under such operating leases. Future minimum rental payments on
operating leases having an initial term in excess of one year as of December
31, 1996 are as follows:
1997.............................................................. $1,452
1998.............................................................. 1,312
1999.............................................................. 887
2000.............................................................. 473
2001.............................................................. 354
Thereafter........................................................ 78
------
Subtotal........................................................ 4,556
Less-Sublease income.............................................. (481)
------
Net rental obligations.......................................... $4,075
======
Rent expense under noncancelable operating leases for the three years ended
December 31, 1996 was approximately $1.4 million, $1.4 million and $1.3
million, respectively.
The Company and certain of its subsidiaries are parties to claims and
litigation proceedings arising in the normal course of business. Although the
legal responsibility and financial impact with respect to such claims and
litigation cannot presently be ascertained, the Company does not believe that
these matters will result in the payment by the Company of monetary damages,
net of any applicable insurance proceeds, that, in the aggregate, would be
material in relation to the consolidated financial position of the Company. It
is reasonably possible that the reserves provided for by the Company with
respect to such claims and litigation could change in the near term.
53
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
The Company's provision (benefit) for income taxes includes the following
components:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ -------- -------
Current:
Federal.......................................... $ 194 $ 1,183 $ 4,819
State............................................ 77 590 1,664
------ -------- -------
271 1,773 6,483
------ -------- -------
Deferred:
Federal.......................................... 4,105 (15,210) (1,705)
State............................................ 1,229 (5,089) (675)
------ -------- -------
5,334 (20,299) (2,380)
------ -------- -------
Total Provision (Benefit).......................... $5,605 $(18,526) $ 4,103
====== ======== =======
The deferred income tax provision resulted from the following temporary
differences in the recognition of revenues and expenses for income tax and
financial reporting purposes:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------ -------- -------
Inventory adjustments............................ $4,792 $(18,966) $(2,024)
Financial accruals............................... (720) (638) (1,040)
Bad debt deduction--Savings...................... 981 (799) (739)
Deferred loan fees and other income--Savings..... 28 (220) 777
Decrease in operating loss carry forward......... -- -- 754
Other............................................ 253 324 (108)
------ -------- -------
$5,334 $(20,299) $(2,380)
====== ======== =======
The components of the Company's deferred income tax asset (liability) as of
December 31, 1996 and 1995 are as follows:
1996 1995
------- -------
Inventory adjustments...................................... $13,264 $16,307
Financial accruals......................................... 4,144 3,478
Bad debt deduction--Savings................................ 1,212 2,240
Deferred loan fees and other income--Savings............... (830) (811)
Investment securities market valuation adjustment.......... 28 57
Other...................................................... 244 159
------- -------
$18,062 $21,430
======= =======
At December 31, 1996, the Company has recorded a consolidated deferred tax
asset of approximately $18.1 million reflecting the benefit created primarily
as a result of the $46.5 million noncash charge taken during 1995 related to
the impairment of long-lived assets. A significant portion of this asset's
realization is dependent upon the Company's ability to generate sufficient
taxable income in future years. Although realization is not assured,
management believes it is more likely than not that the net deferred tax asset
will be realized. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income are reduced or if tax rates are lowered.
54
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effective tax rate differs from the Federal statutory rate of 34 percent
due to the following items:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- -------- ------
Financial income (loss) before income taxes..... $13,998 $(45,889) $9,990
======= ======== ======
Provision (benefit) for income taxes at
statutory rate.................................. $ 4,759 $(15,602) $3,397
Increases (decreases) in tax resulting from:
State income taxes, net....................... 859 (2,947) 582
Other......................................... (13) 23 124
------- -------- ------
Provision (benefit) for income taxes............ $ 5,605 $(18,526) $4,103
======= ======== ======
Effective tax (benefit) rate.................... 40.0% (40.4)% 41.1%
======= ======== ======
9. STOCK OPTION PLAN
In connection with the Merger, the Company adopted the 1991 Employee Stock
Incentive Plan (the "Plan") pursuant to which officers, directors and
employees of the Company are eligible to receive options to purchase common
stock of the Company. This Plan replaced the option plan used by the
Partnership. Under the Plan the maximum number of shares of Company stock thay
may be issued pursuant to awards granted is one million.
Options are typically granted to purchase shares at prices equal to the fair
market value of the shares at the date of grant. The options typically vest
over a one to five year period and are generally exercisable at various dates
over one to 10 year periods. When the options are exercised, the proceeds are
credited to equity along with the related income tax benefits, if any.
The following is a summary of the transactions relating to the Plan for the
years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- ------- -------- ------- --------
Options, beginning of
year.................... 721,590 $9.73 771,990 $9.80 835,250 $9.73
Granted................. 365,000 6.35 20,000 5.75 50,000 11.38
Exercised............... -- -- (9,000) 6.88 (16,010) 7.65
Canceled................ (158,000) 9.48 (61,400) 9.76 (97,250) 10.44
-------- ----- ------- ----- ------- -----
Outstanding, end of
year.................... 928,590 $6.30 721,590 $9.73 771,990 $9.80
======== ===== ======= ===== ======= =====
Options exercisable at
end of year............. 588,590 671,590 517,840
======== ======= =======
Options available for
future grant............ 7,775 214,775 173,375
======== ======= =======
During the fourth quarter of 1996 the Company repriced 326,100 options which
were previously granted to nonexecutive employees. The new price represents
the fair market value of the shares at the date of repricing. Additionally,
the weighted average exercise price for all options outstanding as of December
31, 1996 reflects the repriced options at their new exercise price.
The following information is provided pursuant to the requirements of FAS
123.
55
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option granted during 1996 is estimated using the
Black--Scholes option-pricing model on the date of grant using the following
weighted average assumptions:
1996 1995
------- -------
Dividend yield............................................. 2.0% 2.1%
Expected volatility........................................ 46.30% 53.46%
Risk-free interest rate.................................... 6.12% 6.70%
Expected life.............................................. 5 years 5 years
The 928,590 options outstanding as of December 31, 1996 have exercise prices
between $5.38 and $13.75, with a weighted average exercise price of $6.30 and
a weighted average remaining contractual life of 6.85 years. As of December
31, 1996, 588,590 of these options are exercisable with a weighted average
exercise price of $6.27.
During the years ended December 31, 1996 and 1995, no compensation expense
was recognized related to the stock options granted, however, had compensation
cost been determined consistent with FAS 123 for the Company's 1996 and 1995
grants for its stock-based compensation plan, the Company's net income (loss),
and net income (loss) per common and equivalent share for the years ended
December 31, 1996 and 1995 would approximate the pro forma amounts below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995
--------------------- ---------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
Net income (loss).................. $8,393 $7,619 $(27,363) $(27,394)
====== ====== ======== ========
Net income (loss) per common share. $ .28 $ .25 $ (.90) $ (.90)
====== ====== ======== ========
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts.
10. STOCKHOLDER RIGHTS PLAN AND COMMON STOCK REPURCHASE PLAN
In connection with the Merger, the Company adopted a stockholder rights
agreement (the "Agreement"). Under the Agreement, one right will be granted
for each share of the Company's outstanding common stock. Each right entitles
the holder, in certain takeover situations, as defined, and after paying the
exercise price (currently $40), to purchase Company common stock having a
market value equal to two times the exercise price. Also, if the Company is
merged into another corporation, or if 50 percent or more of the Company's
assets are sold, the rightholders may be entitled, upon payment of the
exercise price, to buy common shares of the acquiring corporation at a 50
percent discount from the then current market value. In either situation,
these rights are not available to the acquiring party. However, these exercise
features will not be activated if the acquiring party makes an offer to
acquire all of the Company's outstanding shares at a price which is judged by
the Board of Directors to be fair to all Company stockholders. The rights may
be redeemed by the Company under certain circumstances at the rate of $.01 per
right. The rights will expire on December 31, 2001, unless earlier redeemed or
exchanged.
In July 1995, the Board of Directors of the Company authorized the
repurchase of up to $10 million of the Company's common stock. In January 1997
the Board increased the repurchase limit to $20 million. For the year ended
December 31, 1996, the Company repurchased 430,300 shares of its common stock
for an aggregate price of $2.3 million. In connection with the common stock
repurchase plan, the Company has repurchased an aggregate amount of
approximately $6.2 million through the year ended December 31, 1996.
56
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INDUSTRY SEGMENT INFORMATION
Included as an integral part of these Consolidated Financial Statements is
the Selected Financial Information and Selected Balance Sheet Information
tables on pages 21, 25 and 26 of this Form 10-K for the Company's significant
operating segments: residential housing and corporate, manufacturing and
savings and loan. Capital expenditures and depreciation and amortization
expenses during 1996, 1995 and 1994 were not material.
12. SAVINGS AND LOAN OPERATIONS
a. General
In 1987 the Company acquired the assets and assumed the liabilities of a
savings and loan institution in receivership from the Federal Savings and Loan
Insurance Corporation (the "FSLIC") and formed Standard Pacific Savings, F.A.
("Savings").
Savings operates one branch in Southern California. Its primary source of
revenue is interest income from its portfolio of mortgage loans and investment
securities. Savings also receives income for servicing loans for others.
b. Revenue Recognition
Interest income is recognized as earned. Amortization of discounts on loans
receivable and net deferred loan fees are recognized over the contractual
lives of the related individual loans using methods which approximate the
effective interest method and adjusted for actual prepayments. Interest is
accrued only so long as it is deemed collectible (generally not more than 90
days past due).
c. Mortgage Notes Receivable and Allowance for Loan Losses
Mortgage notes receivable are recorded at cost net of unamortized deferred
credits. Loans held for sale are carried at the lower of their cost or market
value. Savings provides for loan losses using the allowance method. The
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on Savings' past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. In providing such allowance,
consideration is given to all elements of net realizable value, including
costs of recovery, holding and disposition of the underlying collateral. While
management uses currently available information to evaluate the adequacy of
allowances, ultimate losses may vary from current estimates. Adjustments to
estimates are charged to earnings in the period in which they become known.
In May 1995, the Financial Accounting Standards Board issued Statement No.
122, "Accounting for Mortgage Servicing Rights" (FAS 122) which is effective
for years beginning after December 15, 1995. FAS No. 122 amended FAS No. 65,
"Accounting for Certain Mortgage Banking Activities". FAS 122 requires the
recognition of originated mortgage servicing rights, as well as purchased
mortgage servicing rights, as assets by allocating total costs incurred
between the loan and the servicing rights based on their relative fair values.
FAS 122 also requires that all capitalized mortgage servicing rights be
evaluated for impairment based on the excess of the carrying amount of such
rights over their fair value. As Savings' did not originate or acquire a
material amount of loans during 1996, FAS 122 did not have an impact on
results of operations for the year ending December 31, 1996. FAS 122 could
have an impact on future operations depending upon the amount of mortgage
servicing rights originated or acquired by Savings.
57
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial Accounting Standards Board issued Statement No. 114, "Accounting
by Creditors for Impairment of a Loan" (FAS 114), and as amended by Statement
No. 118, require that impaired loans be measured based on the present value of
expected future cash flows, the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
d. Investment Securities Available for Sale
Shown below are the amortized cost and market values of investment
securities classified as available-for-sale at December 31, 1996 and 1995 with
related maturity data:
1996 1995
--------------------------------------- ---------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- ------- --------- ---------- ---------- -------
U.S. Agency securities:
Maturing less than 1 year. $ 1,255 $ -- $ -- $ 1,255 $ -- $-- $ -- $ --
Maturing after 1 year but
within 5 years........... 12,078 3 11 12,070 7,781 1 -- 7,782
Maturing after 5 years but
within 10 years.......... 3,900 7 -- 3,907 -- -- -- --
Maturing after 10 years... 5,023 -- 4 5,019 -- -- -- --
------- ---- ---- ------- ------- --- ---- -------
22,256 10 15 22,251 7,781 1 -- 7,782
------- ---- ---- ------- ------- --- ---- -------
Mortgage-backed securities:
Maturing after 10 years... 20,211 146 207 20,150 20,990 -- 137 20,853
------- ---- ---- ------- ------- --- ---- -------
Total................... $42,467 $156 $222 $42,401 $28,771 $ 1 $137 $28,635
======= ==== ==== ======= ======= === ==== =======
Shown below are the proceeds from sales of investment securities classified
as available-for-sale and the related gross gains and gross losses realized:
YEAR ENDED
DECEMBER 31,
----------------
1996 1995
------- -------
Proceeds from sales........................................ $28,494 $63,351
Gross gains realized....................................... 43 --
Gross losses realized...................................... (64) (1,841)
e. Investment Securities Held to Maturity
During 1995, and resulting from regulatory agency clarification of the
ruling regarding the unrealized loss effects on regulatory capital, all of
Savings' investment securities classified as held to maturity were transferred
to available for sale. No investment securities were classified as held to
maturity as of December 31, 1996 or 1995.
f. Real Estate Acquired in Settlement of Loans
Real estate acquired is recorded at the lower of the recorded investment in
the loan satisfied or the fair value of the assets received, adjusted for
estimated holding and selling costs. Estimated losses are subsequently charged
off when the carrying value of the real estate acquired exceeds the fair
value.
58
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
g. Savings Accounts
Information on savings accounts as of December 31, 1996 and 1995, is
summarized as follows:
WEIGHTED
MATURITIES OF THE ACCOUNTS AVERAGE RATE AT
AS OF DECEMBER 31, DECEMBER 31,
--------------------------- ------------------
1996 1995 1996 1995
------------- ------------- -------- --------
No minimum term--checking.... $ 2,571 $ 4,515 2.10% 2.58%
No minimum term--savings..... 1,729 2,528 2.77 3.47
Certificates of Deposit:
Less than 6 months......... 77,917 89,181 5.82 6.26
6 months to 1 year......... 28,308 30,099 5.95 6.29
1 year to 3 years.......... 16,547 28,535 6.21 6.65
3 years to 5 years......... 5,433 2,684 6.66 6.94
5 years to 10 years........ 308 0 6.28 --
------------- ------------- -------- --------
Total.................... $ 132,813 $ 157,542 5.82% 6.20%
============= ============= ======== ========
Included in certificates of deposit are jumbo certificates (certificates in
excess of $95,000) totaling $96.8 million and $97.9 million at December 31,
1996 and 1995, respectively. Brokered deposits in the above certificates of
deposit totaled $99,000 for both 1996 and 1995.
A summary of certificate accounts (including IRA/BRP certificate accounts)
by maturity as of December 31, 1996 is as follows:
MATURITY AMOUNT
-------- --------
1997............................................................... $106,320
1998............................................................... 14,658
1999............................................................... 1,794
2000............................................................... 2,215
2001............................................................... 3,526
--------
$128,513
========
Interest expense related to savings accounts consisted of the following for
the years ended December 31, 1996 and 1995:
1996 1995
------ -------
Passbook..................................................... $ 84 $ 47
Money Market and NOW Accounts................................ 68 199
Other Certificates........................................... 966 1,026
Jumbo Certificates........................................... 8,140 11,641
------ -------
$9,258 $12,913
====== =======
h. Advances from Federal Home Loan Banks
During 1995, and as part of Savings' balance sheet restructure, Savings
prepaid $45 million of FHLB advances with a weighted average interest rate of
7.78 percent and a weighted average days to maturity of 693 days. In
connection with the prepayment, Savings incurred a prepayment fee of $1.2
million which was expensed in 1995. No prepayments of advances occurred in
1996.
59
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FHLB advances of $109.0 million and $150.0 million with interest rates
ranging from 4.87% to 6.88% and 4.32% to 6.88%, are secured by the investment
in stock of the Federal Home Loan Banks and certain mortgage loans aggregating
approximately $155.4 million and $222.0 million at December 31, 1996 and 1995,
respectively. The weighted average interest rate on these advances was 6.10%
and 6.07% at December 31, 1996 and 1995, respectively.
The maturities of FHLB advances at December 31, 1996 are as follows:
WEIGHTED AVERAGE
AMOUNT INTEREST RATE
-------- ----------------
1997............................................... $ 19,000 5.41%
1998............................................... 85,000 6.24
2001............................................... 5,000 6.32
-------- ----
$109,000 6.10%
======== ====
i. Securities Sold Subject to Agreements to Repurchase
There were no securities sold under agreements to repurchase as of December
31, 1996. As of December 31, 1995, securities sold subject to agreements to
repurchase were collateralized by investment securities with an amortized cost
of $16.2 million and a market value $16.0 million. At December 31, 1995, these
borrowings had a weighted average maturity of 22 days and a weighted average
interest rate of 5.81 percent. The maximum amounts outstanding at any month-
end during each year were $18.1 million and $33.5 million during 1996 and
1995, respectively. The average amounts outstanding during 1996 and 1995 were
$7.0 million and $24.9 million, respectively. The weighted average interest
rates for the years 1996 and 1995 were 5.61 percent and 6.18 percent,
respectively. The securities underlying the agreements are held by the
securities dealers until the maturities of the agreements. Generally, the
dealers agree to resell the same securities back to Savings.
j. Income Taxes
Savings has executed a tax allocation agreement (the "Agreement") with the
Company. The Agreement states that Savings will file a consolidated federal
income tax return and a combined California franchise tax return with the
Company. The Agreement requires the parties to allocate their total tax
liability based on each parties separate return tax liability. Moreover, the
parties agree to reimburse any party which has tax losses or credits in an
amount equal to 100% of the tax benefits realized by the consolidated group.
Savings makes payments to the Company at the time that such tax amounts are
actually paid to the respective taxing authority by the Company. Any tax
related funds paid by Savings to the Company prior to the estimated tax due
dates or filing dates are to be held in trust.
60
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
k. Mortgage Notes Receivable and Accrued Interest
Mortgage notes receivable at December 31, 1996 and 1995 are summarized as
follows:
AT DECEMBER 31,
------------------
1996 1995
-------- --------
Real Estate:
Residential 1-4 units..................................... $191,408 $264,295
Residential 5 or more units............................... 5,790 4,235
Non-residential........................................... 2,448 2,279
-------- --------
Total Real Estate....................................... 199,646 270,809
Accrued interest and other................................. 1,640 1,932
Less:
Discount on acquired loans................................ 213 135
Deferred loan fees (costs)................................ (97) (222)
Allowance for loan losses................................. 1,899 3,496
Other deferrals........................................... 136 204
-------- --------
Total mortgage notes receivable, net....................... $199,135 $269,128
======== ========
Weighted Average Interest Rate............................. 7.33% 7.09%
======== ========
Included in the above amounts are loans classified as held for sale of $4.4
million and $14.1 million, net of a market value allowance of $0 and $225,000,
at December 31, 1996 and 1995, respectively.
Savings had no loans to directors or officers as of December 31, 1996 or 1995.
Activity in the allowance for loan losses for the years ended December 31,
1996 and 1995 is as follows:
1996 1995
------- -------
Balance at beginning of year............................ $ 3,496 $ 1,906
Provision for losses.................................... 465 3,354
Net charge-offs......................................... (2,062) (1,764)
------- -------
Balance at end of year.................................. $ 1,899 $ 3,496
======= =======
For the years ended December 31, 1996 and 1995, interest income of
approximately $275,000 and $395,000, respectively, (all of which has been
fully reserved) related to non-accrual loans would have been recorded had the
loans been performing in accordance with their original terms. The total
balance of non-accrual loans at December 31, 1996 and 1995 was $691,000 and
$3.2 million, respectively.
The amount of impaired loans as defined by FAS 114 was $3.2 million and $2.6
million which required loss allowances of $229,000 and $353,000 as of December
31, 1996 and 1995, respectively. The amount of impaired loans for which no
loss allowance was required was $2.2 million and $1.6 million as of December
31, 1996 and 1995, respectively. The average balance of impaired loans for the
years ending December 31, 1996 and 1995 was $4.1 million and $5.2 million,
respectively. Interest income recognized for those loans was $151,000 and
$253,000, for the years ending December 31, 1996 and 1995, respectively.
Savings was servicing loans for others with principal amounts of
approximately $40.5 million and $43.1 million, of which approximately $2.4
million and $2.8 million was serviced for the Company, at December 31, 1996
and 1995, respectively.
61
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Substantially all of Savings' loans are on residential properties located in
California. This does not expose Savings to undue credit risk; however,
economic conditions and real estate markets in California may affect Savings'
loan portfolio and underlying collateral values.
l. Regulatory Net Worth
As of December 31, 1996, Savings exceeded each of the minimum capital
requirements as follows:
TANGIBLE RISK-WEIGHTED
CAPITAL CORE CAPITAL CAPITAL
------------- ------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
Minimum Regulatory Requirements...... $ 3,980 1.5% $10,611 4.0% $ 9,952 8.0%
Actual Capital Levels................ $21,042 7.9% $21,042 7.9% $22,684 18.2%
Tangible and core capital are virtually the same as Savings' equity with the
exception of the investment securities valuation adjustment. The risk-weighted
capital amount is higher due to the inclusion of general valuation allowances
for purposes of this capital calculation.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) included dividend restrictions for savings associations. The dividend
restrictions require savings associations to give the Office of Thrift
Supervision (OTS) thirty days written notice prior to the declaration of a
dividend. In addition, savings associations are required to meet certain
regulatory capital requirements and net income requirements prior to the
declaration of a dividend.
m. Disclosure about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate.
Cash and Equivalents--The carrying amount is a reasonable estimate of fair
value. These assets primarily consist of amounts due from banks, federal funds
sold, overnight deposits and certificates of deposit.
Investment Securities Available for Sale--Investment securities available
for sale are carried at their market value with changes in the securities'
market values recorded as a component of stockholders' equity, net of the
income tax effect. Investment securities available for sale consist of U.S.
Treasury, U.S. Federal Agency, corporate debt securities, mortgage-backed
securities and other securities. Fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Mortgage Notes Receivable--The fair values for mortgage notes receivable are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
Federal Home Loan Bank Stock--The carrying amount of Federal Home Loan Bank
stock is a reasonable estimate of fair value since shares are redeemable at
par value.
Savings Accounts--The fair values disclosed for savings accounts (e.g.,
interest and non-interest checking, passbook savings and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term money market accounts and certificates
of deposit approximate their fair values at the reporting date. Fair values
62
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Advances from Federal Home Loan Bank--Federal Home Loan Bank advances are
composed of both variable and fixed rate borrowings. For variable rate
borrowings the carrying amounts approximate their fair value. The fair value
of fixed rate borrowings are estimated using a discounted cash flow analysis,
based upon the current incremental borrowing rates.
Securities Sold Under Agreements to Repurchase--The carrying amounts of
securities sold under agreements to repurchase approximate their fair values.
Interest Rate Swap Agreements--The fair value of the interest rate swaps
(used for hedging purposes) is the estimated amount that the Company would
receive or pay to terminate the swap agreements at the reporting date, taking
into account current interest rates and the current credit worthiness of the
swap counterparty.
Interest Rate Cap Agreements--The fair value of the interest rate caps (also
used for hedging purposes) is based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
prices of comparable instruments.
The estimated fair values of Savings' financial instruments are as follows:
AT DECEMBER 31,
------------------------------------
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial Assets:
Cash and equivalents................... $ 10,259 $ 10,259 $ 36,702 $ 36,702
Investment securities available for
sale.................................. 42,401 42,401 28,635 28,635
Mortgage notes receivable, net......... 197,552 199,518 267,239 268,966
Federal Home Loan Bank stock........... 7,958 7,958 7,500 7,500
Financial Liabilities:
Savings Accounts:
Non-interest bearing checking........ 964 964 1,024 1,024
Interest bearing checking............ 627 627 769 769
Passbook............................. 508 508 908 908
Money market accounts................ 2,201 2,201 4,342 4,342
Certificates of deposit.............. 128,513 128,771 150,499 151,386
-------- -------- -------- --------
Total Savings Accounts............. 132,813 133,071 157,542 158,429
-------- -------- -------- --------
Advances from Federal Home Loan Bank:
Variable-rate........................ 13,000 13,000 -- --
Fixed-rate........................... 96,000 96,351 150,000 151,542
Securities sold under agreements to
repurchase............................ -- -- 15,016 15,016
Other Financial Instruments:
Interest rate swaps in a net payable
position.............................. -- (1,874) -- (3,490)
Interest rate caps..................... 138 -- 64 --
63
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
n. Interest Rate Swaps and Caps
Savings has entered into interest rate exchange agreements ("Swaps") as a
means to manage interest rate risk. Swaps generally involve the exchange of
fixed and floating rate interest payment obligations without the exchange of
the underlying notional principal amounts. Swaps contain the risk of default
by the counterparties; however, the amounts subject to credit risk are much
smaller than the notional principal amounts used to express these
transactions. All of the Swaps Savings has entered into are designated as
hedging certain assets. In October 1995, Savings restructured the terms of its
remaining interest rate swap with a $50 million notional amount by buying down
the fixed interest rate it pays of 8.78 percent. The revised terms reflect a
fixed rate of 6.78 percent to October 1996, 7.78 percent from October 1996 to
October 1997 and 8.78 percent to October 1998. The buydown fee of $1.4 million
will be amortized over the remaining term of the swap agreement.
The interest differential on the Swap to be paid or received is accrued and
recognized over the life of the agreement as an adjustment to interest expense
on savings accounts. The net spread (expense) on the Swap was approximately
$(916,000) in 1996 and $(1.4) million in 1995. Savings has pledged mortgage-
backed securities as collateral on the Swap agreement. The pledged securities
had an amortized cost of $3.3 million and a market value of $3.3 million at
December 31, 1996.
At December 31, 1996, Savings was a participant in interest rate cap
programs ("Caps") as another means to manage interest rate risk. The aggregate
notional principal amount is $100 million with a remaining average term of 19
months for both caps, which provides for payments of interest to Savings if
the indices upon which the Caps are based exceed a weighted average rate of
8.00%. Amortization of the fees Savings was required to pay in order to
participate in the Caps was $106,000 and $171,000 for the years ended December
31, 1996 and 1995, respectively, and is included in interest expense in the
accompanying Consolidated Statement of Operations. The remaining unamortized
amount of such fees was $138,000 at December 31, 1996. During 1995, Savings
received payments of $87,000 as a reduction to interest expense under the
Caps. Savings had no risk of loss due to caps as of December 31, 1996.
o. Regulatory Matters
In October 1995, and in response to the Company's April 1990 written request
for interpretation, Savings received the OTS' response regarding the
applicability of sections 23A and 23B of the Federal Reserve Act to its
savings operation. The OTS concluded that in its opinion the loans made by
Savings to the Company's unaffiliated homebuyers are to be considered
affiliated transactions. Under this interpretation of Sections 23A and 23B,
Savings is limited to holding such loans in its portfolio to an amount not to
exceed 10 percent of its capital. At December 31, 1996 Savings had
approximately $4.4 million of these loans in its portfolio. The OTS has given
Savings until September 1997 to meet the 10 percent of capital limitation. All
of the loans made to the Company home buyers have been classified as held for
sale and carried at the lower of cost or market value. Since June 1994 Savings
has not originated loans on behalf of the Company's homebuyers.
Congress passed legislation to recapitalize the Federal Deposit Insurance
Corporation's (FDIC) Savings Association Insurance Fund (SAIF). The
legislation required all SAIF insured institutions to pay a one time special
assessment in 1996 of .66 percent of their outstanding deposits as of March
31, 1995. The special assessment was approximately $1.3 million which was
charged to expense in September 1996.
p. Commitments and Contingencies
Savings leases office space for its operations, as well as some office
equipment, under operating lease agreements. Net rent expense for
noncancelable operating leases and sub-leases for the three years in the
period
64
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ended December 31, 1996 were approximately $260,000, $357,000 and $375,000,
respectively. As of December 31, 1996 the future lease rentals payable under
noncancelable operating commitments for premises and equipment are as follows:
1997................................................................. $148
1998................................................................. 148
1999................................................................. 148
2000................................................................. 148
2001................................................................. 148
Thereafter........................................................... 235
----
$975
====
13. RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL (1)
------- -------- -------- -------- --------
1996
Sales and revenues.............. $70,893 $112,223 $114,743 $141,387 $439,246
Income before taxes............. 957 3,705 3,342 5,994 13,998
Net income...................... 573 2,211 2,025 3,584 8,393
======= ======== ======== ======== ========
Net income per share............ $ .02 $ .07 $ .07 $ .12 $ .28
======= ======== ======== ======== ========
1995:
Sales and revenues.............. $77,333 $ 89,853 $109,585 $110,474 $387,245
Income (loss) before taxes...... 1,883 2,060 (868) (48,964) (45,889)
Net income (loss)............... 1,101 1,212 (476) (29,200) (27,363)
======= ======== ======== ======== ========
Net income (loss) per share..... $ .04 $ .04 $ (.02) $ (.97) $ (.90)
======= ======== ======== ======== ========
- - --------
(1) Some amounts do not add across due to rounding differences in the quarterly
amounts.
65
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401 of Regulation S-K is set forth in the
Company's 1997 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996. The Company's 1997 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions "Report of the Compensation
Committee" and "Company Performance," are incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is set forth in the
Company's 1997 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996. The Company's 1997 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions "Report of the Compensation
Committee" and "Company Performance," are incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is set forth in the
Company's 1997 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1996. The Company's 1997 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions "Report of the Compensation
Committee" and "Company Performance," are incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
66
STANDARD PACIFIC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
REFERENCE
---------
(a) (1) Financial Statements, included in Part II of this report:....
Report of Independent Public Accountants......................... 40
Consolidated Statements of Operations for each of the three years
in the period ended
December 31, 1996............................................... 41
Consolidated Balance Sheets at December 31, 1996 and 1995........ 42
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1996............... 44
Consolidated Statements of Cash Flows for each of the three years
in the period ended
December 31, 1996............................................... 45
Notes to Consolidated Financial Statements....................... 47
(2) Financial Statement Schedules:
Financial Statement Schedules are omitted since the required in-
formation is not present or is not present in the amounts suffi-
cient to require submission of the schedule, or because the in-
formation required is included in the consolidated financial
statements, including the notes thereto.
(3) Index to Exhibits
See item (a) (3) below.
(b)Reports on Form 8-K. No Current Reports on Form 8-K were filed during the
last quarter of the period covered by this Annual Report on Form 10-K.
(c)INDEX TO EXHIBITS. See Item 14(a)(3) below.
(d)Financial Statements required by Regulation S-X excluded from the annual
report to shareholders by Rule 14(a)-3(b)(1). Not applicable.
67
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN THE CITY OF
COSTA MESA, CALIFORNIA, ON THE 14TH DAY OF MARCH 1997.
STANDARD PACIFIC CORP.
(Registrant)
By: /s/ Arthur E. Svendsen
__________________________________
Arthur E. Svendsen
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Arthur E. Svendsen Chairman of the Board, Chief March 14, 1997
____________________________________ Executive Officer and
(Arthur E. Svendsen) Director
/s/ Stephen J. Scarborough President and Director March 14, 1997
____________________________________
(Stephen J. Scarborough)
/s/ Andrew H. Parnes Vice President of Finance March 14, 1997
____________________________________ and Treasurer and Principal
(Andrew H. Parnes) Financial and Accounting
Officer
/s/ Robert J. St. Lawrence Director March 14, 1997
____________________________________
(Robert J. St. Lawrence)
/s/ William H. Langenberg Director March 14, 1997
____________________________________
(William H. Langenberg)
/s/ James L. Doti Director March 14, 1997
____________________________________
(James L. Doti)
/s/ Keith D. Koeller Director March 14, 1997
____________________________________
(Keith D. Koeller)
/s/ Donald H. Spengler Director March 14, 1997
____________________________________
(Donald H. Spengler)
/s/ Ronald R. Foell Director March 14, 1997
____________________________________
(Ronald R. Foell)
68
INDEX TO EXHIBITS
(a)(3)
*2.1 Agreement and Plan of Merger, dated September 30, 1991 between
Standard Pacific, L.P. and Standard Pacific Corp. incorporated by
reference to Exhibit 2.1 of the Registrant's Registration Statement on
Form S-4 (file no. 33-42293).
*3.1 Certificate of Incorporation of the Registrant incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form S-4 (file no. 33-42293).
*3.2 Certificate of Correction of Certificate of Incorporation of the
Registrant incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form 8-B filed with the
Securities and Exchange Commission on December 17, 1991.
*3.3 Form of Certificate of Amendment to Certificate of Incorporation of
the Registrant incorporated by reference to Exhibit 3.3 of the
Registrant's Registration Statement on Form 8-B filed with the
Securities and Exchange Commission on December 17, 1991.
*3.4 Form of Certificate of Merger of the Registrant incorporated by
reference to Exhibit 3.4 of the Registrant's Registration Statement on
Form 8-B filed with the Securities and Exchange Commission on December
17, 1991.
*3.5 Bylaws of the Registrant incorporated by reference to Exhibit 3.2 of
the Registrant's Registration Statement on Form S-4 (file no. 33-
42293).
*4.1 Rights Agreement, dated as of December 31, 1991, between the
Registrant and Manufacturers Hanover Trust Company of California, as
Rights Agent, incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-4 (file no. 33-42293).
*4.2 Standard Pacific Corp. Officers' Certificate dated March 5, 1993 with
respect to the Company's 10 1/2% Senior Notes due 2000, incorporated
by reference to Exhibit 4 of the Company's Current Report on Form 8-K
dated March 5, 1993.
*4.3 Indenture dated as of April 1, 1992 by and between the Company and
United States Trust Company of New York, Trustee, with respect to the
Company's 10 1/2% Senior Notes due 2000, incorporated by reference to
Exhibit 4 to the Company's Current Report on Form 8-K dated February
24, 1993.
*10.1 Acquisition Agreement dated March 6, 1987 between the Federal Savings
and Loan Insurance Corporation and Standard Pacific Savings, F.A.
incorporated by reference to Exhibit C of the Company's Current Report
on Form 8-K dated March 6, 1987.
*10.2 Assistance Agreement dated March 6, 1987 among the Federal Savings
and Loan Insurance Corporation, Standard Pacific Savings, F.A. and
Standard Pacific, L.P., incorporated by reference to Exhibit D of the
Company's Current Report on Form 8-K dated March 6, 1987.
*10.3 $35 million Term Loan Agreement dated as of December 29, 1994,
between the Company and Bank of America, incorporated by reference to
Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
*10.4 First Amendment to $35 million Term Loan Agreement dated as of
February 28, 1995, between the Company and Bank of America,
incorporated by reference to Exhibit 10.14 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
69
*10.5 Fourth Amended and Restated Revolving Credit Agreement dated as of
March 15, 1996, between the Company, Bank of America and NBD Bank.
*10.6 Second Amendment to $35 million Term Loan Agreement dated as of March
15, 1996, between the Company and Bank of America.
10.7 Fifth Amended and Restated Revolving Credit Agreement dated as of
December 27, 1996, between the Company, Bank of America and several
financial institutions.
11.0 Statement of computation of per share earnings.
22.0 Subsidiaries of the Company.
24.0 Consent of Arthur Andersen LLP, Independent Public Accountants.
27.0 Financial Data Schedule.
*28.1 Registrant's 1991 Employee Stock Incentive Plan, incorporated by
reference to Annex B of the Registrant's prospectus dated October 11,
1991, filed with the Securities and Exchange Commission pursuant to
Rule 424(b).
*28.2 Form of Stock Option Agreement to be used in connection with the
Registrant's 1991 Employee Stock Incentive Plan, incorporated by
reference to Exhibit 28.2 of the Registrant's Registration Statement
on Form S-8 filed on January 3, 1992.
- - --------
(*) Previously filed.
70