Notes to Consolidated Financial Statements (unaudited)
March 31, 2014
($000's omitted, except share and per share data)
Note 1 -
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of AV Homes, Inc. and all subsidiaries, partnerships and other entities in which AV Homes, Inc. (“AV Homes," “we,” “us,” “our,” or “the Company”) has a controlling interest. Our investments in unconsolidated entities in which we have less than a controlling interest are accounted for using the equity method. The interim consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S generally accepted accounting principles ("GAAP") for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of AV Homes at March 31, 2014 and for all periods presented. These statements should be read in conjunction with our consolidated financial statements and notes thereto included in AV Homes' Annual Report on Form 10-K for the year ended December 31, 2013. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year balances have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
TPG Investment in Company
On June 19, 2013, we entered into a Securities Purchase Agreement (the "Purchase Agreement") by and among AV Homes and TPG Aviator, L.P. ("TPG Aviator") pursuant to which TPG Aviator agreed to acquire
2,557,474
shares of AV Homes’ common stock, par value
$1.00
per share (the “Common Stock"), at a purchase price of
$14.65
per share, and
665,754
shares of a newly authorized series of AV Homes’ preferred stock, designated as Series A Contingent Convertible Cumulative Redeemable Preferred Stock, par value
$0.10
per share (the “Series A Preferred Stock"), at a purchase price and liquidation preference of
$146.50
per share, for an aggregate investment in AV Homes by TPG Aviator of
$135,000
.
On June 20, 2013, AV Homes and TPG Aviator closed the transactions (the “TPG Investment") contemplated by the Purchase Agreement, and AV Homes issued to TPG Aviator the Common Stock and the Series A Preferred Stock in the amounts and in exchange for the purchase price described above.
On September 18, 2013, we held a special meeting of stockholders at which our stockholders: (1) approved the right to convert, at the option of the Company or the holders of the Series A Preferred Stock, the Series A Preferred Stock into
6,657,543
shares of our Common Stock and (2) approved TPG Aviator's pre-emptive rights following the approval of such conversion to participate in future issuances of our Common Stock or securities convertible into or exercisable for our Common Stock. Following the meeting of stockholders, we provided notice to TPG Aviator of our intention to convert the Series A Preferred Stock as of September 18, 2013. The Common Stock issuable upon conversion of the Series A Preferred Stock was issued on September 19, 2013 and the Series A Preferred Stock was cancelled.
In accordance with GAAP, before its conversion, the Series A Preferred Stock was classified outside of permanent equity because the redemption provisions were not solely within our control. We incurred approximately
$7,212
of transaction fees in connection with the TPG Investment, which have been offset against the proceeds received. The contingent beneficial conversion feature of the Series A Preferred Stock was recognized upon stockholder approval of the conversion and amortized at the time of conversion by treating it as a deemed dividend in retained earnings and crediting additional paid-in capital for
$11,894
, consequently resulting in no diminution in total shareholders' equity or book value per share. We have assessed the provisions of the Series A Preferred Stock and concluded that the impact of any embedded derivative features was not material.
Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. As of
March 31, 2014
, our cash and cash equivalents were invested primarily in money market accounts that invest primarily in U.S. government securities. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values.
Our cash items that are restricted as to withdrawal or usage include deposits of
$8,115
and
$3,956
as of March 31,
2014
and December 31,
2013
, respectively. The balance as of March 31,
2014
is comprised primarily of
$3,625
on deposit to collateralize letters of credit,
$4,277
in land escrow accounts and
$214
of housing deposits from customers that will become available when the housing contracts close.
Land and Other Inventories
Land and Other Inventories include expenditures for land acquisition, construction, land development, construction costs for homeowners association amenities, and direct and allocated indirect costs, including interest cost capitalized until development and construction are substantially completed. These costs are assigned to components of Land and Other Inventories based on specific identification, relative sales value, or area allocation methods.
Land and Other Inventories are stated at cost unless the asset is determined to be impaired, in which case the asset is written to its fair value. In accordance with Accounting Standards Codification (ASC) 360,
Property, Plant and Equipment
(“ASC 360”), we review our Land and Other Inventories for indicators of impairment.
For assets held and used, if indicators are present, we perform an impairment test in which the asset is reviewed for impairment by comparing the estimated future undiscounted cash flows to be generated by the asset to its carrying value. If such cash flows are less than the asset’s carrying value, the carrying value is written down to its estimated fair value. Generally, fair value is determined by discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the asset and related estimated cash flow streams. The discount rate used in the determination of fair value would vary, depending on the state of development. Assumptions and estimates used in the determination of the estimated future cash flows are based on expectations of future operations and economic conditions and certain factors described below. Changes to these assumptions could significantly affect the estimates of future cash flows, which could affect the potential for future impairments. Due to the uncertainties of the estimation process, actual results could differ significantly from such estimates.
We evaluate our Land and Other Inventories for impairment on a quarterly basis to reflect market conditions, including a significant oversupply of homes available for sale, higher foreclosure activity and significant competition. During the
three months ended March 31, 2014 and 2013
, our impairment assessment resulted in no impairment charges.
Land and Other Inventories that are subject to a review for indicators of impairment include our: (i) housing communities (active adult and primary residential, including scattered lots) and (ii) land developed and/or held for future development or sale. A discussion of the factors that impact our impairment assessment for these categories follows.
Housing communities
:
Homebuilding activities include the development of active adult and primary residential communities and the operation of amenities. The operating results and losses generated from active adult and primary residential communities during the
three months ended
March 31, 2014
and
2013
include operating expenses relating to the operation of the amenities in our communities as well as divisional overhead allocated among several communities.
In reviewing each of our communities, we determine if potential impairment indicators exist by reviewing various factors such as actual margins on homes closed in recent months, projected margins on homes in backlog, projected margins on speculative homes, average selling prices, sales activities and local market conditions. If indicators are present, the asset is reviewed for impairment. In determining estimated future cash flows for purposes of the impairment test, the estimated future cash flows are significantly impacted by specific community factors such as: (i) sales absorption rates; (ii) estimated sales prices and sales incentives; and (iii) estimated cost of home construction, estimated land development costs, interest costs, indirect construction and overhead costs, and selling and marketing costs. In addition, our estimated future cash flows are also impacted by general economic and local market conditions, competition from other homebuilders, foreclosures and depressed home sales in the areas in which we build and sell homes, product desirability in our local markets and the buyers’ ability to obtain mortgage financing. The build-out of our active adult residential communities generally exceeds
five years
. Our assumptions are based on current activity and recent trends at our active adult and primary residential communities. There are a significant number of assumptions with respect to each analysis. Many of these assumptions extend over a significant number of years. The substantial number of variables related to these assumptions could significantly affect the potential for future impairments.
Declines in margins below those realized from our current sales prices and estimations could result in future impairment losses in one or more of our housing communities.
Land developed and/or held for future development or sale
: Our land developed and/or held for future development or sale represents land holdings for the potential development of future active adult and/or primary residential communities, commercial and industrial uses. For land developed and/or held for future development or sale, indicators of potential impairment include changes in use, changes in local market conditions, declines in the selling prices of similar assets and increases in costs. If indicators are present, the asset is reviewed for impairment. In determining estimated future cash flows for purposes of the impairment test, the estimated future cash flows could be significantly impacted by specific community factors such as: (i) sales absorption rates; (ii) estimated sales prices and sales incentives; and (iii) estimated costs of home construction, estimated land and land development costs, interest costs, indirect construction and overhead costs, and selling and marketing costs. In addition, our estimated future cash flows could also be impacted by general economic and local market conditions, competition from other homebuilders, foreclosures and depressed home sales in the areas where we own land for future development, product desirability in our local markets and the buyers’ ability to obtain mortgage financing. Factors that we consider in determining the appropriateness of moving forward with land development or whether to write-off the related amounts capitalized include: our current inventory levels, local market economic conditions, availability of adequate resources and the estimated future net cash flows to be generated from the project.
Receivables, net
Receivables, net includes amounts in transit or due from title companies for house closings; membership dues related to our amenity operations; and contracts and mortgage notes receivable from the sale of land.
Property and Equipment
Property and Equipment are stated at cost and depreciation is computed by the straight-line method over the following estimated useful lives of the assets: land improvements
10
to
25 years
; buildings and improvements
8
to
39 years
; and machinery, equipment and fixtures
3
to
7 years
. Maintenance and operating expenses of equipment utilized in the development of land are capitalized to land inventory. Repairs and maintenance are expensed as incurred.
Property and Equipment includes amenities such as club facilities, dining facilities, and golf courses owned by us. These amenities include expenditures for land, construction, and direct and allocated costs, including interest cost incurred during development and construction.
Each reporting period, we review our Property and Equipment for indicators of impairment in accordance with ASC 360. For our amenities, which are located within our housing communities, indicators of potential impairment are similar to those of our housing communities (described above), as these factors may impact our ability to generate revenues at our amenities or cause construction costs to increase. In addition, we factor in the collectability and potential delinquency of the fees due for our amenities. For the
three months ended March 31, 2014 and 2013
, we did not identify indicators of impairments for Property and Equipment. During 2013, management changed its plans to sell certain assets, resulting in the reclassification of these assets from assets held for sale to Property and Equipment. There was no change in the carrying value in these assets due to this reclassification.
Assets Held for Sale
We classify assets held for sale in accordance with the criteria set forth in ASC 360. We continue to execute a portfolio rationalization plan whereby we opportunistically sell non-core commercial and industrial assets, as well as scattered lot positions and land assets that are in excess of our needed supply in a given market. Under this plan, assets that meet the criteria above are classified as held for sale.
For assets held for sale (such as homes completed or under construction or vacant land parcels available for sale), we perform an impairment test in which the asset is reviewed for impairment by comparing the fair value (estimated sales price) less cost to sell the asset to its carrying value. If such fair value less cost to sell is less than the asset’s carrying value, the carrying value is written down to its estimated fair value less cost to sell.
During the quarter ended March 31, 2014, we sold assets held for sale with a carrying value of
$11,750
for cash proceeds of
$14,678
. Included in this was the sale of a multi-family property in Arizona to a related party for
$13,850
for a gain of
$2,315
.
Investments in Partnerships and LLCs
When we are either deemed to hold the controlling interest in a voting interest entity or deemed to be the primary beneficiary of a variable interest entity (“VIE”) we are required to consolidate the investment. The primary beneficiary of a VIE is the entity that has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb the majority of losses of the VIE or the right to receive the majority of benefits from the VIE. Investments where we don't hold the controlling interest and we are not the primary beneficiary are accounted for under the equity method.
Factors considered when determining if we hold the controlling interest in a voting interest entity include who holds the general partnership or managing member interests, which partner or member makes the day-to-day decisions regarding the operations of the entity, and whether or not the other partners or members have substantive participating rights. With respect to VIEs, our variable interests may be in the form of
(1)
equity ownership,
(2)
contracts to purchase assets and/or
(3)
loans provided by us to the investor. We examine specific criteria and use judgment when determining if we are the primary beneficiary of a VIE. Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), sufficiency of equity to conduct the operations of the entity, voting rights, involvement in decisions significantly impacting the entity's economic performance, level of economic disproportionality between us and the other partner(s) and contracts to purchase assets from VIEs.
Purchase Accounting
When acquiring a business, we allocate the purchase price of real estate to the tangible and intangible assets and liabilities acquired based on their estimated fair values. In making estimates of fair values for this purpose, we use a number of sources, including independent appraisals and information obtained about each property as a result our pre-acquisition due diligence and its marketing and housing activities.
Goodwill
Goodwill, if any, arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts that were assigned to the identifiable assets acquired and the liabilities assumed. Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.
Non-Controlling Interest
We have consolidated certain investments in LLCs, where AV Homes is determined to be either the primary beneficiary or the controlling member. Therefore, the LLCs’ financial statements are consolidated in our financial statements and the other partners’ equity in each of the LLCs is recorded as non-controlling interest as a component of consolidated equity. At
March 31, 2014
and
December 31, 2013
, non-controlling interest was
$16,111
and
$15,633
, respectively. The increase in non-controlling interest is attributable to capital contributions of
$185
and net income of
$293
during the
three months ended March 31,
2014
.
Revenues
In accordance with ASC 360, revenues from the sales of housing units are recognized when the sales are closed and title passes to the purchasers. In addition, revenues from commercial, industrial and other land sales are recognized in full at closing, provided the buyer's initial and continuing investment is adequate, any financing is considered collectible and there is no significant continuing involvement. Sales incentives are included in Real Estate Revenue-Homebuilding in the accompanying consolidated statements of operations and comprehensive income (loss).
Warranty Costs
Warranty reserves for houses are established to cover estimated costs for materials and labor with regard to warranty-type claims to be incurred subsequent to the closing of a house. Reserves are determined based on historical data and other relevant factors. We have, and require our subcontractors to have, general liability, property, errors and omissions, workers compensation, and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits. We may have recourse against subcontractors for certain claims relating to workmanship and materials. Warranty reserves are included in Accrued and Other Liabilities in the accompanying consolidated balance sheets.
During the
three months ended March 31, 2014 and 2013
, changes in the warranty reserve consist of the following:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
2014
|
|
2013
|
Accrued warranty reserve, beginning of year
|
$
|
638
|
|
|
$
|
549
|
|
Estimated warranty expense
|
383
|
|
|
108
|
|
Amounts charged against warranty reserve
|
(188
|
)
|
|
(204
|
)
|
Accrued warranty reserve, end of period
|
$
|
833
|
|
|
$
|
453
|
|
Income Taxes
Income taxes have been provided using the liability method under ASC 740,
Income Taxes
(“ASC 740”). The liability method is used in accounting for income taxes where deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse.
We evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard. Our cumulative loss position over the evaluation period and the uncertain and volatile market conditions provided significant evidence supporting the need for a valuation allowance. During the
three months ended
March 31, 2014
, we recognized an increase of
$732
in the valuation allowance. As of
March 31, 2014
, our deferred tax asset valuation allowance was
$130,964
. In future periods, the allowance could be reduced based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized.
Any interest or penalties that have been assessed in the past have been minimal and immaterial to our financial results. In the event we are assessed any interest or penalties in the future, we plan to include them in our statement of operations and comprehensive income (loss) as income tax expense.
Share-Based Compensation
The Amended and Restated 1997 Incentive and Capital Accumulation Plan (2005 Restatement), as amended, (the “Incentive Plan”) provides for the grant of stock options, stock appreciation rights, stock awards, performance awards, and stock units to officers, employees and directors of AV Homes. The exercise prices of stock options may not be less than the stock exchange closing price of our common stock on the date of grant. Stock option awards under the Incentive Plan generally expire
10 years
after the date of grant. On June 2, 2011, our stockholders approved the Amended and Restated 1997 Incentive and Capital Accumulation Plan (2011 Restatement) (the "Incentive Plan") to, among other things, increase the aggregate number of shares of our common stock, par value
$1.00
per share, authorized for issuance under the Incentive Plan by
700,000
shares from
1,500,000
shares to
2,200,000
shares and extend the term of the Incentive Plan until October 25, 2020.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to AV Homes stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of AV Homes. The computation of diluted loss per share for the
three months ended March 31, 2014 and 2013
did not assume the effect of restricted stock units, employee stock options, the
4.50%
Notes, the
7.50%
Notes, or the
7.50%
Exchange Notes because the effects were antidilutive.
The weighted average number of shares outstanding in calculating basic earnings per share includes the cancellation of
7,870
shares of common stock and the issuance of
19,063
shares of common stock for the three months ended March 31, 2014, and the cancellation of
2,364
shares of common stock and the issuance of
6,734
shares of common stock for the three months ended March 31, 2013. In accordance with ASC 260
Earnings Per Share
, non-vested restricted shares are not included in basic earnings per share until the vesting requirements are met.
The following table represents a reconciliation of the net loss and weighted average shares outstanding for the calculation of basic and diluted loss per share for the
three months ended March 31, 2014 and 2013
:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
2014
|
|
2013
|
Numerator:
|
|
|
|
Basic and diluted net loss
|
$
|
(1,926
|
)
|
|
$
|
(4,759
|
)
|
|
|
|
|
Denominator:
|
|
|
|
Basic and diluted weighted average shares outstanding
|
21,929,852
|
|
|
12,654,466
|
|
Comprehensive Income (Loss)
Net loss and comprehensive loss are the same for the
three months ended March 31, 2014 and 2013
.
Note 2 - Royal Oak Homes Acquisition
On March 13, 2014, we acquired substantially all of the assets and certain of the liabilities of Royal Oak Homes, LLC (“Royal Oak”) and certain land positions from an affiliate of Royal Oak. Royal Oak and its affiliate acquire and develop raw land and construct single family homes in the Central Florida area. The transaction will expand our presence in Central Florida and our existing presence in the Poinciana market. With over
2,500
primary residential lots owned or controlled, Royal Oak enhances our position in a key growth market. The total purchase price paid under the acquisition agreements was approximately
$65,000
in cash, which includes a potential
$3,000
payment related to an earn-out covering the financial results for 2014 and 2015. The earn-out has a preliminary fair value of
$2,500
. The actual amount of the earn-out may be more or less than the
$3,000
target amount based on the performance of the Royal Oak business through the end of 2015. We will not pay any earn-out amounts unless the Royal Oak business achieves at least
50%
of the target amount of financial performance. The results of Royal Oak are included in the Company's consolidated financial statements from the acquisition date of March 13, 2014. For the period from March 14, 2014 to March 31, 2014, Royal Oak's revenues and net income were
$3,885
and
$197
, respectively.
The Royal Oak acquisition was accounted for in accordance with ASC 805,
Business Combinations
("ASC 805"). We recorded the acquired assets and liabilities at their estimated fair value. We determined the estimated fair values with the assistance of appraisals or valuations performed by independent third-party specialists, discounted cash flow analyses, quoted market prices where available, and estimates by management. To the extent the consideration transferred exceeded the fair value of the net assets acquired in this transaction, such excess was assigned to goodwill.
We acquired substantially all of the assets of Royal Oak, including all of its real estate, land acquisition agreements and permits, and certain of its leases, contracts, commitments and purchase orders. We also assumed certain liabilities of Royal Oak, including the liabilities and obligations relating to the acquired contracts but excluding certain home warranty obligations relating to homes sold by Royal Oak prior to the acquisition. We will, however, provide warranty administrative services of up to
$150
with respect to these home warranty obligations for the
two years
following the closing of the acquisition.
The following table summarizes the preliminary calculation of the fair value of the total consideration transferred to Royal Oak and its affiliate and the provisional amounts of assets acquired and liabilities assumed as of the acquisition date:
|
|
|
|
|
|
Preliminary calculation of purchase price consideration
|
|
|
|
|
|
Cash paid for Royal Oak net assets
|
|
$
|
26,066
|
|
Cash paid for bulk land purchase
|
|
28,009
|
|
Contingent consideration (earn-out)
|
|
2,500
|
|
Debt repaid at closing
|
|
8,827
|
|
|
|
|
Total consideration
|
|
65,402
|
|
|
|
|
Assets acquired and liabilities assumed
|
|
|
Assets
|
|
|
Prepaids and other current assets
|
|
582
|
|
Land and other inventories
|
|
60,530
|
|
Property, plant and equipment
|
|
366
|
|
Trade name
|
|
614
|
|
Goodwill
|
|
5,976
|
|
|
|
|
Total assets acquired
|
|
68,068
|
|
|
|
|
Liabilities
|
|
|
|
Accounts payable
|
|
1,343
|
|
Accrued and other liabilities
|
|
469
|
|
Customer deposits
|
|
854
|
|
|
|
|
Total liabilities assumed
|
|
2,666
|
|
|
|
|
Total net assets acquired
|
|
65,402
|
|
|
|
|
Fair value
Cash and equivalents, other assets, accounts payable, and accrued and other liabilities were generally stated at historical carrying values given the short-term nature of these assets and liabilities. Liabilities were recorded at historical carrying values in accordance with ASC 805.
The Company determined the fair value of inventory on a lot-by-lot basis primarily using a combination of market comparable land transactions, where available, and discounted cash flow models, though independent appraisals were also utilized in certain instances. These estimated cash flows are significantly impacted by estimates related to expected average home selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. See Note 1 for additional discussion of the factors impacting the fair value of land inventory.
The fair values for acquired intangible assets were determined based on valuations performed by independent valuation specialists. The
$614
of acquired intangible assets relates to trade names that will generally be amortized over
two years
. Amortization expense for these assets totaled
$13
for the three months ended March 31, 2014, which is included in the consolidated statement of operations within homebuilding expense.
The Company has completed its preliminary analysis of its business combination accounting as of March 31, 2014 and expects to substantially complete the remainder in the second quarter of 2014. As of May 8, 2014, the Company had not received final valuations from certain independent valuation specialists, including the valuation of acquired property and equipment. Additionally, the Company had not completed its final review of the valuation of acquired inventory, and certain other assets and liabilities. Final determinations of the values of assets acquired and liabilities assumed may result in adjustments to the values presented above and a corresponding adjustment to goodwill. As such, the Company has not completed the assignment of goodwill to reporting units or its determination of the amount of goodwill that is expected to be deductible for tax purposes at this time.
Transaction and integration costs
Transaction and integration costs directly related to the Royal Oak acquisition, including legal, accounting and broker fees, totaled
$891
for the three months ended March 31, 2014, the majority of which are included in the consolidated statements of operations within corporate general and administrative expenses. Such costs were expensed as incurred in accordance with ASC 805.
Goodwill
As of the acquisition date, goodwill largely consisted of the expected economic value attributable to Royal Oak’s assembled workforce. The acquisition provides increased scale and presence in an existing market with immediate revenue opportunities through an established backlog.
Supplemental pro forma information
The following represents pro forma operating results as if Royal Oak had been included in the Company’s condensed consolidated statements of operations as of the beginning of the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Revenue
|
$
|
57,191
|
|
|
$
|
34,224
|
|
Net income (loss)
|
(706
|
)
|
|
(4,127
|
)
|
Loss per common share - basic and diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.33
|
)
|
The supplemental pro forma operating results have been determined after adjusting the operating results of Royal Oak to reflect additional amortization that would have been recorded assuming the fair value adjustments to intangible assets had been applied as of January 1, 2014 and 2013. Certain other adjustments, including those related to conforming accounting policies and adjusting acquired inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts. Additionally, given the significant volatility in the homebuilding industry in recent periods, such a presentation would not be indicative of future operating results.
Note 3 -
Land and Other Inventories
Land and Other Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Active Adult
|
|
|
|
Land developed and in process of development
|
$
|
61,100
|
|
|
$
|
57,138
|
|
Land held for future development or sale
|
60,503
|
|
|
58,423
|
|
Homes completed or under construction
|
39,537
|
|
|
25,478
|
|
Total Active Adult
|
161,140
|
|
|
141,039
|
|
|
|
|
|
Primary Residential
|
|
|
|
|
Land developed and in process of development
|
103,628
|
|
|
77,983
|
|
Homes completed or under construction
|
60,301
|
|
|
11,013
|
|
Total Primary Residential
|
163,929
|
|
|
88,996
|
|
|
|
|
|
Land developed and in process of development-Other
|
9,774
|
|
|
10,043
|
|
|
$
|
334,843
|
|
|
$
|
240,078
|
|
We capitalize interest to inventories during the period of development in accordance with ASC 835,
Interest
("ASC 835"). Homebuilding interest capitalized as cost of inventories is included in cost of sales as related units or lots are sold. To the extent our homebuilding debt exceeds our qualified assets, as defined in ASC 835, we expense a portion of interest incurred. Qualified homebuilding assets consist of all land, lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development.
The following table represents interest incurred, interest capitalized, and interest expense for the
three months ended March 31, 2014 and 2013
:
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
Interest incurred
|
$
|
2,331
|
|
|
$
|
2,324
|
|
Interest capitalized
|
(2,217
|
)
|
|
(551
|
)
|
Interest expense
|
$
|
114
|
|
|
$
|
1,773
|
|
Note 4 -
Investments in Partnerships and LLCs
We participate in entities with equity interests ranging from
20%
to
58.2%
for the purpose of acquiring and/or developing land in which we may or may not have a controlling interest or be the primary beneficiary. We determine the method for accounting for our investment at inception or upon a reconsideration event.
Consolidated Investments
In May 2012, we entered into an agreement with JEN Arizona 4, LLC to form a limited liability company, EM 646, LLC (“EM 646”). We hold a
58.2%
interest in the venture, which was organized for the purpose of acquiring, entitling, developing, and distributing specific sections of real property located in Mesa, Arizona. The property was acquired in November 2012 and will be distributed to the partners at cost, once certain entitlements and development activities are completed.
As of
March 31, 2014
and
December 31, 2013
, our consolidated balance sheets include
$34,525
and
$33,997
, respectively, in Land and Other Inventories owned by EM 646.
We and our equity partners make initial or ongoing capital contributions to the consolidated entity on a pro rata basis. The obligation to make capital contributions is governed by the consolidated entity’s operating agreement.
As of
March 31, 2014
, the consolidated entity was financed by partner equity and does not have third-party debt. In addition, we have not provided any guarantees to the entity or our equity partner. The assets of our investee can only be used to settle obligations of the investee.
Equity Method Investments
We own non-controlling equity interests ranging from
20%
to
50%
in entities formed for the purpose of acquiring and/or developing land. We analyze these entities when they are entered into or upon a reconsideration event. These investments are accounted for under the equity method.
We share in the profits and losses of these unconsolidated entities generally in accordance with our ownership interests. We and our equity partners make initial and ongoing capital contributions to these unconsolidated entities on a pro rata basis. The obligation to make capital contributions is governed by each unconsolidated entity’s respective operating agreement. We made contributions totaling
$0
and
$83
to our unconsolidated entities during the
three months ended March 31, 2014 and 2013
, respectively. The balance of our investments in unconsolidated entities was
$1,231
and
$1,230
at March 31, 2014 and December 31, 2013, respectively.
The following are the combined condensed balance sheets of the entities we account for under the equity method as of
March 31, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Assets:
|
|
|
|
Cash
|
$
|
60
|
|
|
$
|
70
|
|
Land and other inventory
|
6,126
|
|
|
6,131
|
|
Other assets
|
5
|
|
|
5
|
|
Total assets
|
$
|
6,191
|
|
|
$
|
6,206
|
|
Liabilities and Partners’ Capital:
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
52
|
|
|
$
|
80
|
|
Partners’ capital of:
|
|
|
|
AV Homes
|
1,231
|
|
|
1,230
|
|
Equity partners
|
4,908
|
|
|
4,896
|
|
Total liabilities and partners’ capital
|
$
|
6,191
|
|
|
$
|
6,206
|
|
The following are the combined condensed statements of operations of these entities for the
three months ended March 31, 2014 and 2013
:
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
Revenues
|
$
|
—
|
|
|
$
|
—
|
|
Costs and expenses
|
(9
|
)
|
|
138
|
|
Net income (loss) from unconsolidated entities
|
$
|
9
|
|
|
$
|
(138
|
)
|
AV Homes' share of income (loss) from unconsolidated entities
|
$
|
1
|
|
|
$
|
(63
|
)
|
Note 5 -
Notes Payable
Our notes payable are summarized as follows:
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
4.50% Convertible Notes due 2024 (a)
|
5,402
|
|
|
5,402
|
|
7.50% Senior Convertible Notes due 2016
|
55,481
|
|
|
55,500
|
|
7.50% Senior Exchange Convertible Notes due 2016
|
44,500
|
|
|
44,500
|
|
(a) These Notes were tendered and repaid on April 1, 2014, see Note 11--Subsequent Events.
We made interest payments of
$3,749
and
$3,935
for the
three months ended March 31, 2014 and 2013
respectively.
Note 6 -
Estimated Development Liability for Sold Land
The estimated development liability consists primarily of utilities improvements in Rio Rico and Poinciana for more than
8,000
home sites previously sold, in most cases prior to 1980, and is summarized as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Gross estimated unexpended costs
|
$
|
36,109
|
|
|
$
|
36,117
|
|
Less costs relating to unsold home sites
|
(2,885
|
)
|
|
(2,885
|
)
|
Estimated development liability for sold land
|
$
|
33,224
|
|
|
$
|
33,232
|
|
The estimated development liability for sold land is reduced by actual expenditures and is evaluated and adjusted, as appropriate, to reflect management’s estimate of potential costs. In addition, we obtain third-party engineer evaluations and adjust this liability to reflect changes in the estimated costs. We recorded charges associated with these obligations of
$0
and
$19
during
three months ended March 31, 2014 and 2013
, respectively. Cash expenditures associated with these obligations were
$8
and
$20
, during
three months ended March 31, 2014 and 2013
, respectively. Future increases or decreases of costs for construction, material and labor, as well as other land development and utilities infrastructure costs, may have a significant effect on the estimated development liability.
Note 7 -
Stock-Based Compensation
As of
March 31, 2014
, an aggregate of
1,067,262
shares of our common stock, subject to certain adjustments, were reserved for issuance under the Incentive Plan, including an aggregate of
816,887
options, restricted stock units and stock units granted. There were
250,375
shares available for grant at
March 31, 2014
.
During the three months ended March 31, 2013, we cancelled
114,750
restricted shares granted in 2011 to certain executives and issued additional performance-based restricted shares in exchange. We also issued performance-based restricted shares to other members of management. Vesting is contingent upon the achievement of certain performance objectives, some of which are subjective in nature. Compensation cost for these awards is recognized over the service period, and variable accounting is applied whereby the fair value of the award is remeasured each reporting period until vesting occurs. The cancellation and issuance of shares was accounted for as a modification with the future compensation expense computed using the greater of unamortized fair value of the cancelled awards or the incremental fair value as remeasured each reporting period.
Compensation expense related to the stock option, restricted stock, and restricted stock unit awards during the
three months ended March 31, 2014 and 2013
was
$596
and
$282
, respectively. During the
three months ended March 31,
2014
, we granted
108,212
restricted stock unit awards, which have a weighted average grant date fair value of
$13.03
per share. During the three months ended March 31, 2013, we granted
77,974
shares of restricted stock, which have a weighted average grant date fair value of
$19.97
per share.
As of
March 31, 2014
, there was
$2,443
of unrecognized compensation expense related to unvested restricted stock units. That expense is expected to be recognized over a weighted-average period of
1.82
years.
As of
March 31, 2014
, there was
$4,472
of unrecognized compensation expense related to unvested stock options. That expense is expected to be recognized over a weighted-average period of
2.2 years
.
Note 8 -
Commitments and Contingencies
We are involved in various pending litigation matters primarily arising in the normal course of our business. These cases are in various procedural stages. Although the outcome of these matters cannot be determined, we believe it is probable, in accordance with ASC 450-20,
Loss Contingencies
, that certain claims may result in costs and expenses estimated at approximately
$0
and
$275
, which have been accrued in the accompanying consolidated balance sheets as of
March 31, 2014
and
December 31, 2013
, respectively
.
Liabilities or costs arising out of these and other currently pending litigation is not expected to have a material adverse effect on our business, consolidated financial position or results of operations.
Performance bonds, issued by third-party entities, are used primarily to guarantee our performance to construct improvements in our various communities. As of
March 31, 2014
, we had outstanding performance bonds of approximately
$19,924
. We do not believe that it is likely any of these outstanding performance bonds will be drawn upon.
Note 9 -
Segments
Our current operations include the following reportable segments: the development, sale and management of active adult communities; the development and sale of primary residential communities; and the sale of commercial, industrial or other land.
Our operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision maker, or decision-making group, to evaluate performance and make operating decisions. We have identified our chief operating decision maker as the Chief Executive Officer.
The following table summarizes our information for reportable segments for the
three months ended March 31, 2014 and 2013
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Revenues:
|
2014
|
|
2013
|
|
|
|
|
Active adult communities
|
$
|
16,349
|
|
|
$
|
12,006
|
|
Primary residential communities
|
11,797
|
|
|
10,542
|
|
Commercial and industrial and other land sales
|
15,706
|
|
|
2,305
|
|
Other operations
|
13
|
|
|
257
|
|
Total Revenues
|
43,865
|
|
|
25,110
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
Segment operating income (loss)
|
|
|
|
Active adult communities
|
(163
|
)
|
|
(879
|
)
|
Primary residential communities
|
(311
|
)
|
|
662
|
|
Commercial and industrial and other land sales
|
3,752
|
|
|
1,440
|
|
Other operations
|
(19
|
)
|
|
189
|
|
|
3,259
|
|
|
1,412
|
|
|
|
|
|
Unallocated income (expenses)
|
|
|
|
|
Interest income and other
|
103
|
|
|
9
|
|
Equity gain (loss) from unconsolidated entities
|
1
|
|
|
(63
|
)
|
General and administrative expenses
|
(4,396
|
)
|
|
(3,705
|
)
|
Interest expense
|
(114
|
)
|
|
(1,773
|
)
|
Other real estate expenses
|
(486
|
)
|
|
(639
|
)
|
Loss attributable to AV Homes
|
$
|
(1,633
|
)
|
|
$
|
(4,759
|
)
|
Note 10 -
Fair Value Disclosures
ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”), provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The accounting standards require that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Fair value determined based on quoted market prices in active markets for identical assets and liabilities.
Level 2: Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means.
Level 3: Fair value determined using significant unobservable inputs, such as discounted cash flows, or similar techniques.
The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payable approximates the fair value due to their short-term maturities.
The majority of our non-financial instruments, which include Land and Other Inventories and Property and Equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.
For assets held for sale (vacant land parcels available for sale), we perform an impairment test in which the asset is reviewed for impairment by comparing the fair value (estimated sales price) less cost to sell the asset to its carrying value. If such fair value less cost to sell is less than the asset’s carrying value, the carrying value is written down to its estimated fair value less cost to sell.
For assets held and used, if indicators are present, we perform an impairment test in which the asset is reviewed for impairment by comparing the estimated future undiscounted cash flows to be generated by the asset to its carrying value. If such cash flows are less than the asset’s carrying value, the carrying value is written down to its estimated fair value. Generally, fair value is determined by discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the asset and related estimated cash flow streams. The discount rate used in the determination of fair value would vary depending on the stage of development. Assumptions and estimates used in the determination of the estimated future cash flows are based on expectations of future operations and economic conditions and certain factors described below. Changes to these assumptions could significantly affect the estimates of future cash flows which could affect the potential for future impairments. Due to the uncertainties of the estimation process, actual results could differ significantly from such estimates.
The carrying amounts and fair values of our financial instruments at
March 31, 2014
and
December 31, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Notes Payable:
|
|
|
|
|
|
|
|
4.50% Notes
|
$
|
5,402
|
|
|
$
|
5,402
|
|
|
$
|
5,402
|
|
|
$
|
5,425
|
|
7.50% Notes and 7.50% Exchange Notes
|
$
|
99,981
|
|
|
$
|
110,938
|
|
|
$
|
100,000
|
|
|
$
|
111,775
|
|
In estimating the fair value of financial instruments, we used the following methods and assumptions:
7.50%
Notes,
7.50%
Exchange Notes, and
4.50%
Notes:
At
March 31, 2014
and
December 31, 2013
, the fair value of the
7.50%
Notes,
7.50%
Exchange Notes, and the
4.50%
Notes is estimated, based on quoted or estimated market prices. These fall within Level 2 of the fair value hierarchy.
Note 11 -
Subsequent Events
Repurchase of 4.50% Notes
On April 1, 2014, we were informed by the trustee and paying agent that the entire
$5,402
aggregate principal amount of the
4.50%
Convertible Senior Notes due 2024 were validly surrendered for repurchase pursuant to the repurchase right. We paid for all of the notes repurchased pursuant to the repurchase right as of April 1, 2014 with available cash. The full aggregate principal amount of the notes was surrendered for repurchase, and therefore none of the notes remain outstanding.
Senior Secured Credit Facility
On April 7, 2014, we entered into a senior secured credit facility with JPMorgan Chase Bank, N.A., as agent, a lender and a letter of credit issuer. The other lenders and letter of credit issuers include Royal Bank of Canada and Credit Suisse AG.
The senior secured credit facility includes revolving credit and letter of credit facilities in an aggregate principal amount of up to
$65,000
, with an “accordion” feature that allows us, with the consent of the lenders, to increase the aggregate amount to
$175,000
. The senior secured credit facility also includes a swing line loan facility in an aggregate principal amount of up to
$30,000
. The maximum amount available under the senior secured credit facility is limited to
100%
of cash maintained in a borrowing base account, to the extent it exceeds the interest reserve, and escrowed deposits and funds payable to us following the sale of real property, plus the following, subject to certain limitations:
|
|
|
|
|
|
•
|
|
85% of the appraised value of our real property that is under contract or under construction and is or is planned to be single-family residential housing units or model homes; plus
|
|
|
|
|
|
|
•
|
|
65% of the appraised value of our finished lots and lots under development; plus
|
|
|
|
|
|
|
•
|
|
50% of the appraised value of our entitled lands that are not finished lots or lots under development.
|
To be included in this borrowing base, the real property must be owned by us or one of our subsidiaries that guaranties the senior credit facility and it must be appraised, pledged as collateral and meet certain other criteria. At May 8, 2014, we had not met the criteria to include any real property in the borrowing base, nor had we funded the borrowing base account with cash or pledged any escrowed deposits or funds, and there were no borrowings under the senior credit facility. We have until May 15, 2014 to add real property, cash or escrowed deposits to the borrowing base.
We evaluated subsequent events up until the time the financial statements were filed with the SEC.