| STANDARD PACIFIC CORP /DE/ ITEM 1A RISK FACTORS Set forth below are certain matters that may affect us |
| An adverse change in economic conditions or interest rates could affect the demand for homes and reduce our earnings |
| The homebuilding industry is cyclical |
| Changes in world, national and local economic conditions affect our business and markets |
| These could include, for example, the impact on economic conditions of terrorist attacks or the escalation or further outbreak of armed conflict involving the United States |
| In addition, declines in consumer confidence or employment levels in our markets or in stock market valuations may adversely affect the demand for homes or increase cancellation rates, thus reducing our sales and earnings |
| Our customers typically finance their home purchases through lenders providing mortgage financing |
| Increases in interest rates or decreases in the availability of mortgage financing could depress the market for new homes because of the increased monthly mortgage costs, or the decreased availability of financing, to potential homebuyers |
| Even if some potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their existing homes to potential buyers who need financing |
| This could adversely affect the demand for homes or increase cancellation rates, thus reducing our sales and earnings |
| Increases in interest rates could also increase the rate of mortgage loan forfeitures by homeowners who financed their home purchases with adjustable rate loans, including interest only loans |
| Increased forfeitures could increase the number of homes available for sale in the resale market |
| We compete with the resale market for existing homes and an increase in the number of these homes for sale or a decrease in the price at which they are selling could adversely impact our sales and earnings |
| In addition, an increase in interest rates would increase our cost of borrowings, which could adversely impact our operating results |
| Although the homebuilding industry has historically been cyclical, it has not experienced a downturn in a number of years |
| A downturn could result in a reduction in our revenues and margins |
| Although the homebuilding business has historically been cyclical, we have experienced significant price appreciation in many of our markets for a number of years, and the industry has not experienced a downturn during this time in these markets |
| This, along with other factors such as decreased affordability, has caused some people to conclude that homes are overvalued and that prices may decline |
| We may need additional funds, and if we are unable to obtain these funds, we may not be able to expand or operate our business as planned or repay or refinance our indebtedness |
| Our operations require significant amounts of cash, and we may be required to seek additional capital, whether from sales of equity or by borrowing more money, for the future growth and development of our business or to fund our operations and inventory or repay our indebtedness, particularly in the event of a market downturn |
| Our revolving credit facility contains a borrowing base provision and financial covenants that may limit the amount we can borrow thereunder or from other sources |
| Our revolving credit facility and the indentures for our notes also limit our investments in unconsolidated joint ventures, which limit our use of joint ventures as financing vehicles |
| In addition, a number of factors could affect our ability to access debt or equity financing, including: • our financial condition, strength and credit rating; • the financial market’s confidence in our management team and financial reporting; 9 ______________________________________________________________________ [32]Table of Contents • general economic conditions and the conditions in the housing sector; and • capital market conditions |
| Even if available, additional financing could be costly or have adverse consequences |
| If additional funds are raised through the issuance of stock, dilution to stockholders will result |
| If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs, may become subject to additional restrictive financial and other covenants, and if our debt to capitalization ratio increases materially, our debt may be downgraded by applicable rating agencies |
| We can give no assurance as to the terms or availability of additional capital |
| If we are not successful in obtaining sufficient capital, it could adversely impact our ability to operate our business effectively, which could reduce our sales and earnings and adversely impact our financial position and ability to pay our indebtedness |
| We depend on the California market |
| Any adverse change in the economic climate of California could harm our sales and earnings |
| Although we have increased our geographic diversification in recent years, we still conduct a significant portion of our business in California and generate a disproportionate amount of our revenues and profits in the state |
| Demand for new homes, and in some instances home prices, have declined from time to time in California |
| If we experience a slowdown in one or more of our California markets, our earnings and financial position would likely be negatively impacted |
| States, cities and counties in which we operate may adopt slow growth initiatives reducing our ability or increasing our costs to build in these areas, which could harm our future sales and earnings |
| Several states, cities and counties in which we operate have in the past approved, or approved for inclusion on their ballot, various “slow growth” or “no growth” initiatives and other ballot measures that could negatively impact the availability of land and building opportunities within those localities |
| Approval of slow or no growth measures would reduce our ability to open new home communities and to build and sell homes in the affected markets, including with respect to land we may already own, and would create additional costs and administration requirements, which in turn could harm our future sales and earnings |
| The market value and availability of land may fluctuate significantly, which could limit our ability to develop new communities and decrease the value of our developed and undeveloped land holdings |
| Our success depends in part upon the continued availability of suitable land at acceptable prices |
| The availability of land for purchase at favorable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding of land prices and restrictive governmental regulation |
| Should suitable land opportunities become less available, it could limit our ability to develop new communities, increase land costs and negatively impact our sales and earnings |
| In addition, the risk of owning developed and undeveloped land can be substantial for homebuilders |
| The market value of undeveloped land, buildable lots and housing inventories can fluctuate significantly as a result of changing economic and market conditions |
| In the event of significant changes in economic or market conditions, we may have to write-down land holdings and work in progress, write-down or write-off goodwill recorded in connection with acquisitions, write-down our investments in unconsolidated joint ventures, sell homes or land at a loss, and/or hold land or homes in inventory longer than planned |
| Inventory carrying costs can be significant and can result in losses in a poorly performing project or market |
| The homebuilding industry is highly competitive and, with more limited resources than some of our competitors, we may not be able to compete effectively |
| The homebuilding industry is highly competitive |
| We compete with numerous other residential construction firms, including large national and regional firms, for customers, land, financing, raw materials, skilled labor and 10 ______________________________________________________________________ [33]Table of Contents employees |
| We compete for customers primarily on the basis of the location, design, quality and price of our homes and the availability of mortgage financing |
| Some of our competitors have substantially larger operations and greater financial resources than we do, and as a result may have lower costs of capital, labor and materials than us, and may be able to compete more effectively for land acquisition opportunities |
| As a result of an ongoing consolidation trend in the industry, some of these competitors may continue to grow significantly in size |
| We also compete with the resale of existing homes and rental homes |
| An oversupply of attractively priced resale or rental homes in the markets in which we operate could adversely affect our ability to sell homes profitably |
| Our mortgage operations are subject to intense competition from other mortgage lenders, many of which are substantially larger and may have a lower cost of funds or effective overhead burden than our lending operations |
| We also compete with mortgage brokers |
| This competition can intensify during periods of rising interest rates as refinance business diminishes |
| Labor and material shortages could delay or increase the cost of home construction and reduce our sales and earnings |
| The residential construction industry experiences serious labor and material shortages from time to time, including shortages in qualified trades people, and supplies of insulation, drywall, cement, steel and lumber |
| These labor and material shortages can be more severe during periods of strong demand for housing or during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures |
| From time to time, we have experienced volatile price swings in the cost of labor and materials, including in particular the cost of lumber, cement, steel and drywall |
| Shortages and price increases are likely to cause delays in and increase our costs of home construction, which in turn could harm our operating results |
| Geologic, weather-related and other natural conditions or disasters may disrupt or delay construction |
| Geologic, weather-related and other natural conditions or disasters, such as earthquakes, landslides, hurricanes, tornadoes, droughts, floods, heavy or prolonged precipitation, and wildfires can negatively affect our operations by requiring us to delay or halt construction or to perform potentially costly repairs to our projects under construction and to unsold homes |
| For instance, in some markets, we periodically experience drought conditions, which have resulted in water conservation measures and/or rationing by municipalities in which we do business resulting in delays in construction and delivery |
| In other markets, such as Florida and the Carolinas, we have experienced periods of heavy or prolonged precipitation and hurricanes that have delayed the construction and delivery and increased the cost of our homes |
| These conditions and disasters are often impossible or difficult to predict and may lead to unanticipated delays in the construction and delivery of our homes, which could harm our operating results |
| We are subject to extensive government regulation, which can increase costs and reduce profitability |
| Our homebuilding operations are subject to environmental, building, worker health and safety, zoning and real estate regulations by various federal, state and local authorities |
| These regulations, which affect all aspects of the homebuilding process, including development, design, construction and sales, can substantially delay or increase the costs of homebuilding activities |
| In addition, regulations, such as those governing environmental and health matters, may prohibit or severely restrict homebuilding activity in environmentally sensitive regions |
| New housing developments, including in California where a significant portion of our business is conducted, are often subject to various assessments for schools, parks, streets, highways and other public improvements |
| The costs of these assessments can be substantial and can cause increases in the effective prices of our homes, which in turn could reduce our sales |
| 11 ______________________________________________________________________ [34]Table of Contents During the development process, we must obtain the approval of numerous governmental authorities that regulate matters such as: • permitted land uses, levels of density and architectural designs; • the installation of utility services, such as water and waste disposal; • the dedication of acreage for open space, parks, schools and other community services; and • the preservation of habitat for endangered species and wetlands |
| The approval process can be lengthy and cause significant delays in the development process |
| In addition, changes in local circumstances or changes or reinterpretations of laws, including as a result of lawsuits brought by third parties, may require additional approvals or modifications to approvals previously obtained, which can result in further delays, additional expenses or a permanent halt in development |
| Delays in the development process can cause substantial increases to development costs, which in turn could harm our operating results |
| There can be no assurance that we will be successful in securing approvals for all of the land we currently control or that there will not be any significant modifications to approvals previously obtained |
| Our mortgage operations are subject to numerous federal, state, and local laws and regulations, including eligibility requirements for participation in federal loan programs and various consumer protection laws |
| Our title insurance agency operations are subject to applicable insurance laws and regulations |
| Failure to comply with these requirements can lead to administrative enforcement actions, the loss of required licenses and other required approvals, claims for monetary damages or demands for loan repurchase from investors, and rescission or voiding of the loan by the consumer |
| In addition, our operations are subject to the Real Estate Settlement Procedures Act (“RESPA”) and its regulations, which, among other matters, prohibits giving or accepting any thing of value for referrals of settlement services (including mortgage lending and title services) in connection with certain loans |
| Notwithstanding this prohibition, RESPA permits payment provided that they bear a reasonable relationship to the value of the services actually performed |
| Although we believe that our settlement services arrangements comply with all applicable laws, including RESPA, there can be no assurance that a court or regulatory agency will not take a contrary position and find that payments we receive do not bear a reasonable relationship to the value of the services performed |
| We are subject to product liability and warranty claims arising in the ordinary course of business, which can be costly |
| As a homebuilder, we are subject to construction defect and home warranty claims arising in the ordinary course of business |
| These claims are common in the homebuilding industry and can be costly |
| While we maintain product liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be adequate to cover all construction defect and warranty claims for which we may be liable |
| For example, contractual indemnities can be difficult to enforce, we are often responsible for applicable self-insured retentions (particularly in markets where we include our subcontractors on our general liability insurance) and certain claims may not be covered by insurance or may exceed applicable coverage limits |
| Additionally, the coverage offered by and availability of product liability insurance for construction defects is limited and costly |
| There can be no assurance that coverage will not be further restricted or become more costly |
| We may not be able to successfully identify, complete and integrate acquisitions, which could harm our profitability |
| Our growth strategy includes expanding and diversifying geographically through strategic acquisitions |
| Successful acquisitions require us to correctly identify appropriate acquisition candidates and to integrate acquired operations and management with our own |
| Should we make an error in judgment when identifying an 12 ______________________________________________________________________ [35]Table of Contents acquisition candidate, should the acquired operations not perform as anticipated, or should we fail to successfully integrate acquired operations and management, we will likely fail to realize the benefits we intended to derive from the acquisition and may suffer other adverse consequences |
| Acquisitions involve a number of other risks, including: • the incurrence of substantial transaction costs; • diversion of the attention of our management and corporate staff from operating our existing business; • the assumption of liabilities of an acquired business (including unforeseen liabilities); • charges to earnings in the event of any write-down or write-off of goodwill and other assets recorded in connection with acquisitions; • diluting the ownership of existing stockholders if we issue equity securities in acquisitions; and • depletion of our cash resources and incurrence of additional indebtedness to fund acquisitions, potentially diverting available capital from funding the ongoing operations and growth of our existing business and other uses |
| We can give no assurance that we will be able to successfully identify, complete and integrate strategic acquisitions |
| We currently have a significant amount of debt, and we can incur significant additional debt in the future |
| Such a significant amount of debt could harm our financial health and prevent us from fulfilling our obligations |
| We currently have a significant amount of debt |
| As of December 31, 2005, our total consolidated indebtedness was approximately dlra1cmam695dtta0 million (excluding trade payables) |
| As of that date, our Adjusted Homebuilding Debt (which is included in total consolidated indebtedness) was approximately dlra1cmam528dtta4 million (which excludes trade payables, dlra123dtta4 million of indebtedness relating to our mortgage operations and dlra43dtta2 million of indebtedness included in liabilities from inventories not owned) |
| In addition, subject to the restrictions in our revolving credit facility and our note indentures, we may incur significant additional indebtedness |
| The amount of additional debt we can incur under these restrictions varies over time based on a number of factors, including changes in interest rates, our tangible net worth, and the value and composition of our real estate inventory |
| In addition, the amount of additional debt we can incur as of a particular date is dependent, in part, on the use of the proceeds of the additional borrowing |
| Thus any calculation of the amount of additional debt we can incur under these restrictions requires various assumptions and is subject to change |
| As of December 31, 2005, making assumptions that would result in the largest figure, the amount of additional senior debt we could have incurred under these restrictions was in excess of dlra2dtta1 billion |
| This calculation is based on a number of assumptions and only reflects the amount of senior debt that we could incur without violating the restrictions in our revolving credit facility and indentures and is not intended as an indication of the amount of additional borrowing that we could in fact obtain from third parties |
| There is no guarantee that this amount of additional borrowings, or any amounts, would be available to us |
| In the event such amounts were available to us, and if the borrowing of such additional amounts materially altered our debt to capitalization ratio, our debt would likely be downgraded by applicable rating agencies making it more difficult and more expensive to incur additional debt |
| In addition, as these and other factors change, the amount of additional senior borrowing we could incur under these restrictions could increase or decrease significantly |
| Our indebtedness could have important consequences such as: • requiring us to dedicate a substantial portion of our cash flows from operations to payments on our debt; • limiting our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt obligations and other general corporate requirements; • making us more vulnerable to general adverse economic and industry conditions; 13 ______________________________________________________________________ [36]Table of Contents • limiting our flexibility to engage in certain transactions or to plan for, or react to, changes in our business and the homebuilding industry; and • putting us at a disadvantage compared to competitors who have less debt |
| Our unconsolidated joint ventures also have significant amounts of debt and will likely incur additional debt |
| At December 31, 2005, our unconsolidated joint ventures had borrowings outstanding of approximately dlra658dtta2 million |
| Under credit enhancements that we typically provide with respect to joint venture borrowings, we could be required to make additional investments in these joint ventures, either in the form of capital contributions or loan repayments, to reduce these outstanding borrowings |
| If we were required to make such additional investments in amounts that exceed those permitted under our revolving credit facility or indentures, this could cause a default under the revolving credit facility or the indentures and could cross-default one or more of our joint venture financing arrangements |
| If we decide not to make an additional investment that we are required to make, our equity interest in the applicable joint venture would likely be diluted in accordance with the terms of the joint venture’s operating agreement, which could result in an impairment of our investment which in turn would result in a charge that would negatively affect our operating results |
| Our revolving credit facility and our note indentures impose restrictions on our operations and activities and require us to comply with certain financial covenants |
| If we fail to comply with these restrictions or covenants, our debt could become due and payable prior to maturity |
| We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional personnel could adversely effect us |
| Our senior corporate and division operating managers average over 20 years of experience in the homebuilding business |
| Our success is dependent upon the management and the leadership skills of members of our senior management |
| The loss of any of these individuals or an inability to attract and retain additional qualified personnel could adversely affect us |
| There can be no assurance that we will be able to retain our existing senior management personnel or attract additional qualified personnel |