PH HOLDING LLC AND SUBSIDIARIES. Consolidated Financial Statements. December 31, 2009 and 2008

Transcription

1 Consolidated Financial Statements (With Independent Auditors Report Thereon)

2 Table of Contents Page Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Equity 4 Consolidated Statements of Cash Flows 5 7

3 KPMG LLP Suite West South Temple Salt Lake City, UT Independent Auditors Report The Board of Directors PH Holding LLC and Subsidiaries: We have audited the accompanying consolidated balance sheets of PH Holding LLC and subsidiaries (the Company) as of December 31, 2009 (Successor) and 2008 (Predecessor), and the related consolidated statements of operations, equity, and cash flows for the years then ended (Predecessor). These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PH Holding LLC and subsidiaries as of December 31, 2009 (Successor) and 2008 (Predecessor), and the consolidated results of their operations and their cash flows for the years then ended (Predecessor) in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, on November 25, 2009, the United States Bankruptcy Court for the Central District of California Riverside Division confirmed the Company s Plan of Reorganization. The Company emerged from bankruptcy at the end of business on December 31, In connection with its emergence from Chapter 11, the Company adopted fresh-start reporting pursuant to FASB ASC Subtopic , Reorganizations, as of December 31, 2009 as further described in note 1 to the consolidated financial statements. As a result, the consolidated financial statements of the Successor are presented on a different basis than those of the Predecessor and, therefore, are not comparable in all respects. Salt Lake City, Utah May 28, 2010 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative

4 Consolidated Balance Sheets (In thousands) Successor Predecessor Assets Cash and cash equivalents $ 221, ,446 Accounts receivable 4,442 5,517 Prepaid expenses and other assets 14,360 24,830 Finished homes, finished lots, construction in process 221, ,341 Land held for development 26, ,986 Costs and estimated earnings in excess of billings 965 Investments 1,618 Investment in joint ventures 8,456 Property and equipment, net 2,008 11,768 Total assets $ 490,143 1,010,927 Liabilities and Equity Accounts payable $ 21,054 29,208 Accrued expenses 41,036 73,516 Customer deposits 1,058 2,771 Claims reserve liability 15,108 Billings in excess of costs and estimated earnings 4,456 Lines of credit 178,642 Notes payable 317,732 28,350 Notes payable to related parties 13,591 Total liabilities 395, ,534 Liabilities subject to compromise 931,212 Commitments and contingencies (note 12) Equity: PH Holding LLC members equity: Predecessor members equity 88,272 Successor members equity 94,155 Accumulated other comprehensive loss (182) Accumulated deficit (349,354) Total PH Holding LLC members equity 94,155 (261,264) Noncontrolling interests 10,445 Total equity 94,155 (250,819) Total liabilities and equity $ 490,143 1,010,927 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Operations Years ended (In thousands) Predecessor Sales $ 406, ,521 Cost of sales 478, ,059 Gross loss (72,281) (130,538) Operating expenses 46, ,149 Loss from operations (118,992) (236,687) Other (expense) income: Interest income Interest expense (659) (54,513) Other expense (3,441) 407 Net other expense (4,062) (53,229) Loss before reorganization items, provision for income taxes, and discontinued operations (123,054) (289,916) Reorganization items, net 544,856 (171,523) Income (loss) before income taxes and discontinued operations 421,802 (461,439) Income tax expense (742) (80) Income (loss) before discontinued operations 421,060 (461,519) Discontinued operations: Loss from discontinued operations, net of income taxes (155,402) (238,738) Net income (loss) attributable to PH Holding LLC $ 265,658 (700,257) See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Equity Years ended (In thousands, except for share and unit data) PH Holding LLC Successor Predecessor Additional Other Members interest Common stock Contributed capital paid-in comprehensive Accumulated Noncontrolling Predecessor Shares Amount Shares Amount Units Amount capital income deficit interests Total equity Balance at December 31, 2007 $ 8,461,207 $ 85 12,887,209 $ 49,674 37, ,157 10, ,065 Issuance of common stock and capital unit 19,612 19, ,029 Abandonment of units (28,123) Conversion to LLC (8,480,819) (85) 8,480,819 37,846 (37,761) Unrealized loss on marketable securities (182) (182) Net loss (700,257) 701 (699,556) Dividends (254) (921) (1,175) Balance at December 31, ,359,517 88,272 (182) (349,354) 10,445 (250,819) Unrealized gain on marketable securities Net income 265,658 4, ,694 Dividends (291) (291) Cancellation of Predecessor members interests (21,359,517) (88,272) ,696 (14,190) (18,599) Issuance of Successor members interests 7,547,630 94,155 94,155 Balance at December 31, ,547,630 $ 94,155 $ $ 94,155 See accompanying notes to consolidated financial statements. 4

7 Consolidated Statements of Cash Flows Years ended (In thousands) Predecessor Cash flows from operating activities: Net income (loss) $ 265,658 (700,257) Loss from discontinued operations, net of income taxes 155, ,738 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Effect of plan of reorganization and revaluation of assets and liabilities (605,366) Depreciation and amortization 2,792 3,533 Loss on sale of property and equipment 1, Impairment of construction in process 118, ,029 Changes in operating assets and liabilities, net of the effect of the acquired business: Accounts receivable 578 8,307 Construction in process 143,252 45,389 Land held for development (30,430) 83,373 Prepaid expenses and other assets 2,087 1,530 Accounts payable (4,981) (39,245) Accrued expenses 41, ,001 Customer deposits (1,642) (5,147) Billings in excess of costs and estimated earnings (33) (289) Total operating cash flows provided by continuing operations 89,672 89,467 Total operating cash flows provided by discontinued operations 22,510 18,779 Net cash provided by operating activities 112, ,246 Cash flows from investing activities: Proceeds from sale of property and equipment Purchase of property and equipment (825) (1,237) Total investing cash flows used in continuing operations (160) (969) Total investing cash flows provided by (used in) discontinued operations 1,928 (2,143) Net cash provided by (used in) investing activities 1,768 (3,112) 5 (Continued)

8 Consolidated Statements of Cash Flows Years ended (In thousands) Predecessor Cash flows from financing activities: Net borrowings under lines of credit $ 2,677 50,757 Net borrowings from notes payable to related parties (3,962) (11,613) Proceeds from notes payable 1,163 Payment on notes payable (1,723) (1,115) Payment of dividends (254) Total financing cash flows (used in) provided by continuing operations (3,008) 38,938 Total financing cash flows used in discontinued operations (27,172) (4,507) Net cash (used in) provided by financing activities (30,180) 34,431 Net increase in cash and cash equivalents 83, ,565 Cash and cash equivalents, at beginning of year 160,446 20,881 Cash and cash equivalents, at end of year $ 244, ,446 Supplemental disclosures: Noncash distributions from joint ventures $ 419 Noncash issuance of common stock 1,029 Unrealized gain (loss) on marketable securities 15 (182) Cash paid for reorganization items 21,898 1,687 Cash paid during the year for interest 2,559 22,348 See accompanying notes to consolidated financial statements. 6

9 (1) Organization (a) Nature of Operations As a result of the Reorganization Plan, PH Holding LLC (the Company) was formed as a holding company for Woodside Group, LLC (Woodside Group) and Pleasant Hill Investments, LC (Pleasant Hill) and became the successor entity. Prior to the emergence from bankruptcy protection, Woodside Group, Pleasant Hill and Wasatch Pacific Investments, LLC (Wasatch Pacific) were combined for financial reporting purposes as they were entities under common control. The operations of Woodside Group, a wholly owned subsidiary of the Company, consist of the purchase and development of raw land, the sale of raw land and finished lots to the public, Woodside Group s use of developed land in home building, and residential home construction and sales (collectively referred to as Home Building Operations). Included among the discontinued operations in the consolidated statement of operations are the operations of certain subsidiaries of Woodside Group whose activities include Home Building Operations and the construction under U.S. government contracts for building and refurbishing projects at U.S. government-owned facilities. The Company s home building subsidiaries operate under the brand name of Woodside Homes. The Company s operations are principally in Arizona, California, Colorado (prior to December 31, 2009), Florida, Minnesota, Nevada, Texas, Utah, and the Washington D.C. area, and 97% and 95% of revenues represent residential home construction sales for the years ended, respectively. Historically, the primary function of Pleasant Hill, a wholly owned subsidiary of the Company, was to procure financing and fulfill the cash management functions for the Company s land development and home construction operations. Pleasant Hill s current purpose is primarily cash management. Wasatch Pacific was an affiliate of Woodside Group prior to emergence from bankruptcy. Wasatch Pacific s primary function was to invest in land in advance of any development and is included in discontinued operations in the consolidated statement of operations. (b) Reorganization under Chapter 11 Beginning on August 20, 2008, an ad hoc group of creditors filed involuntary petitions under Chapter 11 of Title 11 of the United States Bankruptcy Code (the Bankruptcy Code) against Woodside Group and most of its subsidiaries, and its affiliate, Pleasant Hill (the Woodside Group Debtors) in the United States Bankruptcy Court for the Central District of California (Riverside Division) (the Court). Pursuant to a Court-approved stipulation, on September 16, 2008, the Woodside Group Debtors consented to the entry of orders for relief. The Court jointly administered these cases as In re Woodside Group, LLC, et al., Case No (PC) Jointly Administered. On November 25, 2009 (the Confirmation Date), the Court entered an order (the Confirmation Order) confirming the Second Amended Joint Plan of Reorganization of Woodside Group, LLC and affiliated debtors (the Reorganization Plan), as modified. The effective date of the Reorganization Plan occurred at the close of business December 31, 2009 (the Effective Date). The Company operated its businesses as debtors-in-possession in accordance with the Bankruptcy Code from August 20, 2008 through emergence from Chapter 11 at the close of business on December 31, (Continued)

10 In addition, certain other subsidiaries of Woodside Group, included in the Reorganization Plan, filed bankruptcy petitions at times other than as listed above: (i) Woodside Portofino, Inc. and Woodside AMR 107, Inc. filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on March 31, 2008, (ii) Woodside Ceramista Village, LLC and Woodside Ceramista City, LLC filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on December 19, 2008, (iii) Alameda Investments, LLC (Alameda) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on January 9, 2009, and (iv) Liberty Holdings Group, LLC (Liberty) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 26, Alameda and Liberty are subject to liquidating trusts as further described below, and are not included in the definition of the reorganizing Woodside Group Debtors as used herein. (c) (d) Basis of Presentation Upon the emergence from Chapter 11 and meeting the applicable criteria, the Company adopted fresh start (Fresh Start) reporting in accordance with FASB ASC Subtopic , Reorganizations. The adoption of Fresh Start reporting requires the Company to allocate the reorganization value to its assets and liabilities in a manner similar to that which is required under FASB ASC Topic 805, Business Combinations. Under the provisions of Fresh Start reporting, a new entity has been deemed created for financial reporting purposes. References to successor (the Successor) in the financial statements are in reference to reporting dates as of and after the close of business on December 31, References to predecessor (the Predecessor) in the financial statements are in reference to reporting dates through December 31, 2009 including the impact of Reorganization Plan provisions and the adoption of Fresh Start reporting. As such, the Company s financial information for the Successor is presented on a basis different from, and is therefore not comparable to, the Company s financial information for the Predecessor as of December 31, 2008 or for the years ended. For further information on Fresh Start reporting, see note 2 to the Company s consolidated financial statements. Reorganization Plan The Reorganization Plan was approved by the Court on the Confirmation Date, November 25, In accordance with the Reorganization Plan: As of the Effective Date, the Company owns all of the ownership interests in Woodside Group and Pleasant Hill, and indirectly the remainder of the Woodside Group Debtors. Holders of the equity interests in Woodside Group and Pleasant Hill that were in existence prior to December 31, 2009, including the common stock, did not receive any distributions, and their equity interests were canceled on the Effective Date. Most holders of allowed general unsecured claims against the Woodside Group Debtors received or will receive either cash or debt and equity, depending upon the size of the allowed claim, in satisfaction of their claims. The Reorganization Plan establishes the threshold in determining whether an allowed claim holder receives cash or debt and equity. The indenture and reorganization plan provide that a maximum of $315,000,000 in debt may be issued to the Company s stakeholders. Currently $313,709,000 of the maximum debt has been issued and $249,393,000 of the total debt amount has been distributed. The remaining 8 (Continued)

11 amount of the issued debt has been reserved and will be distributed once certain of the larger outstanding bankruptcy claims are resolved. A litigation trust was established for the pursuit of certain claims. Prior to the Effective Date, the unsecured creditors committee of the Woodside Group Debtors initiated litigation against the directors/managers of Woodside Group and Pleasant Hill and the members of those entities (the Shareholder Litigation). The Shareholder Litigation became part of the Contributed Claims that have been contributed to the Woodside Litigation Trust (the Litigation Trust) to pursue after the Effective Date (see note 13). The Company is required to fund a nonrecourse, noninterest-bearing loan to the Litigation Trust of up to $5,000,000 (see note 13). As of the Effective Date, all of the membership interest in Liberty and all of the assets, liabilities, and operations owned by Liberty were transferred to the Liberty Liquidating Trust. The Liberty Liquidating Trust will liquidate and distribute Liberty s assets to the Liberty Trust beneficiaries. As of the Effective Date, all of the membership interest in Alameda and all of the assets, liabilities, and operations owned by Alameda were transferred to the Alameda Liquidating Trust. The Alameda Liquidating Trust will liquidate and distribute Alameda s assets to the Alameda Trust beneficiaries. The Company has no further responsibility regarding construction warranty claims arising prior to the bankruptcy. The Company is permitted and authorized to honor and apply all customer deposits against pending home purchases in the ordinary course of business. The Company is permitted and authorized to honor all assessment bond obligations in the ordinary course of business. These matters are more fully defined and subject to the terms of the Reorganization Plan. The Company continues to incur expenses related to its Chapter 11 proceedings, primarily professional fees that were classified as a reorganization item by the Predecessor. (e) Resolution of Outstanding Claims As permitted under the bankruptcy process, many of the debtors creditors filed proofs of claim with the Court. Many claims have been disallowed by the Court because they were duplicative, amended, or superseded by later filed claims, were without merit, or were otherwise overstated. Throughout the Chapter 11 proceedings, the Woodside Group Debtors also resolved many claims through arrangements to allow certain creditors to proceed only against available insurance, settlements, or by Court orders following the filing of an objection. The Company will continue to settle claims and file additional objections with the Court after the Effective Date through the claims resolution process. The Company currently estimates that the total allowed general unsecured claims in its Chapter 11 proceedings will be approximately $422,972,000, which includes the $407,864,000 of claims for which the Company has issued distributions of debt and members equity. Differences between claim amounts filed and the Company s estimates are being investigated and will be 9 (Continued)

12 resolved in the claims resolution process. However, the Company believes there will be no further material impact to the consolidated statements of operations of the Successor from the settlement of unresolved general unsecured claims against the Woodside Group Debtors under the Reorganization Plan because the holders of material allowed claims will receive only a pro rata share of the distribution of issued, but undistributed debt and members equity of the Successor. In addition, claims reserve liabilities have been established for those claim holders expected to receive cash in settlement of their allowed claim. The Reorganization Plan provides that administrative and priority claims will be satisfied with cash. Certain administrative and priority claims remain unpaid, and the Company will continue to settle claims and file objections with the Court with respect to such claims. All of these claims have been accrued by the Successor based upon the best available estimates of amounts to be paid. However, the claims resolution process is uncertain and the resolution of claims could result in material adjustments to the Successor s financial statements. In light of the substantial number and amount of claims filed, the Company expects the claims resolution process will take considerable time to complete. Accordingly, the Company does not presently know either the ultimate number and amount of, or the exact recovery with respect to, allowed claims. (f) Liabilities Subject to Compromise The following table summarizes the components of liabilities subject to compromise included on the Predecessor s consolidated balance sheet at December 31, 2008 (in thousands): Predecessor 2008 Debt and accrued interest $ 750,157 Accounts payable and other accrued liabilities 58,504 Joint venture guarantees 100,223 Self-insurance retention reserve 22,328 Total liabilities subject to compromise $ 931,212 Liabilities subject to compromise refers to pre-petition obligations that were impacted by the Chapter 11 reorganization process. The amounts represent the Company s estimate of known or potential obligations to be resolved in connection with its Chapter 11 proceedings. At December 31, 2009, the Company did not have any liabilities subject to compromise due to its emergence from bankruptcy. Differences between liabilities the Company has estimated and the claims filed will be investigated and resolved in connection with the claims resolution process. (2) Fresh Start Reporting The Company adopted Fresh Start reporting in accordance with FASB ASC Subtopic , Reorganizations, on December 31, Fresh Start reporting requires the Company to reset the historical net book value of its assets and liabilities to fair value. The fair values of the assets as determined for Fresh Start reporting were based on estimates of anticipated future discounted cash flows as generated by the Company and applying business valuation techniques. Liabilities existing on December 31, 2009 are stated 10 (Continued)

13 at the fair value of amounts to be paid. The determination of fair values of assets and liabilities is subject to significant estimation and assumptions. As a result of implementing Fresh Start reporting, the consolidated financial statements for the Successor are not comparable to the consolidated financial statements for the Predecessor. To facilitate the calculation of the enterprise value of the Successor, management developed a set of financial projections for the Successor using a number of estimates and assumptions. The enterprise and corresponding reorganization value of the Successor was based on financial projections using various valuation methods, including a comparison of the Company s projected performance to the market values of comparable companies and a calculation of the present value of future cash flows based on the Company s projections. Utilizing these methodologies, the reorganization value of the Successor was estimated to be $94,155,000. The realization of the enterprise value, and corresponding reorganization value, is dependent upon achieving the future financial results set forth in the Company s projections, as well as the realization of certain other assumptions. There can be no assurance that the projections will be achieved or that the assumptions will be realized; actual results could vary materially. The financial projections and estimates of enterprise and reorganization value are not incorporated herein. As outlined in the table below, the reorganization value was allocated to the Successor s assets and liabilities. The Successor s assets and liabilities were stated at fair value. The following Fresh Start balance sheet illustrates the financial effects as of December 31, 2009, the date of the implementation of the Reorganization Plan and the adoption of Fresh Start reporting. Reorganization plan transactions Discontinued Reorganization Fresh start Predecessor operations (a) transactions adjustments Successor Assets: Cash and cash equivalents $ 244,216 (22,839) 221,377 Restricted cash 3,253 (3,253) Accounts receivable 4,965 (523) 4,442 Prepaid expenses and other assets 18,621 (3,631) (630) (g) 14,360 Construction in process 275,778 (46,386) (7,452) (h) 221,940 Land held for development 124,985 (90,092) (8,877) (h) 26,016 Investment in joint ventures 4,298 (4,298) Investments 34 (34) Property and equipment, net 7,397 (2,832) (2,557) (h) 2,008 Total assets $ 683,547 (173,888) (19,516) 490, (Continued)

14 Reorganization plan transactions Discontinued Reorganization Fresh-start Predecessor operations (a) transactions adjustments Successor Liabilities and equity: Accounts payable $ 24,509 (3,455) 21,054 Accrued expenses 70,643 (23,244) (6,363) (b) 41,036 Customer deposits 1,300 (242) 1,058 Claims reserve liability 15,108 (c) 15,108 Billings in excess of costs and estimated earnings 4,829 (4,829) Lines of credit 147,353 (147,353) Notes payable 26,730 (22,307) 313,309 (d) 317,732 Notes payable to related parties Total liabilities 275,364 (201,430) 322, ,988 Liabilities subject to compromise 994,950 (48,014) (946,936) Equity: Woodside Group, LLC members equity: Predecessor members equity 88,272 (4,529) (83,743) (e) Successor members equity 83,743 (e) 10,412 (i) 94,155 Accumulated other comprehensive income (loss) (167) 167 Accumulated deficit (689,062) 94, ,882 (f) (29,928) (i) Total Woodside Group, LLC members' equity (600,957) 89, ,882 (19,516) 94,155 Noncontrolling interests 14,190 (14,190) Total equity (586,767) 75, ,882 (19,516) 94,155 Total liabilities and equity $ 683,547 (173,888) (19,516) 490,143 Reorganization Plan Effects (a) Reflects the adjustments resulting from the transfer of assets, liabilities, and operations of Liberty and its subsidiaries (excluding Alameda) to the Liberty Liquidating Trust; assets, liabilities, and operations of Alameda and its subsidiaries to the Alameda Liquidating Trust; and the control of Wasatch Pacific and its subsidiaries, to its majority owners who are unaffiliated with the Successor. (b) (c) Reflects the reclassification of accrued expenses for bankruptcy-related professional fees to claims reserve liability. Reflects the estimate of allowed claims to be settled with cash. 12 (Continued)

15 (d) (e) (f) Reflects the issuance of debt of the Successor and the discharge of the debt of the Predecessor. In addition, it reflects the reclassification of an allowed claim for a note payable to claims reserve liability. Reflects the cancelation of the Predecessor members interest and the issuance of the new members interest. Reflects the elimination of Predecessor retained earnings. Fresh Start Adjustments (g) Reflects the valuation adjustment for certain long-term deposits. (h) (i) Reflects the adjustment to fair market value of construction in process, land held for development, and property and equipment. Reflects the adoption of Fresh Start reporting resulted in a new reporting entity with no beginning retained earnings or accumulated deficit, or accumulated other comprehensive income. All common stock of the Predecessor was eliminated and replaced by the new equity structure of the Successor based on the Reorganization Plan. The Fresh Start consolidated balance sheet reflects initial stockholders equity of $94,155,000 less the amounts ascribed to the New Term Debt of $313,709,000 and Notes Payable of $4,023,000. Impact of Reorganization on Income Taxes The Company has multiple and various taxable entities under its current structure. The filing of the 2009 tax returns has been extended. The Company has not performed an in-depth analysis of the impact of the Reorganization Plan on each taxable entity. The Company realized income from cancellation of indebtedness as a result of the Reorganization Plan. Because the cancellation of indebtedness income was realized as part of the Chapter 11 bankruptcy reorganization, the cancellation of indebtedness is excluded from taxable income on the Company s federal income tax return for the period ended December 31, 2009 under IRC Section 108, Income from Discharge of Indebtedness. However, the Company is required to reduce its tax attributes on the first day of the following tax period. As such, for purposes of fresh start reporting, the Company reduced its net operating loss carry forwards, its estimated AMT loss carryforwards, its AMT credit carryforwards, and the basis in certain assets to zero. 13 (Continued)

16 (3) Reorganization Items Reorganization items refer to revenues, expenses (including professional fees), realized gains and losses, and provisions for losses that are realized or incurred as a result of the bankruptcy proceedings. The following table summarizes the components included in reorganization items on the consolidated statements of operations (in thousands): Predecessor Fresh start adjustments (1) $ (19,516) Gain on debt for equity exchange (2) 343,117 Professional fees and other costs (3) (23,434) (10,678) Unamortized deferred loan costs (4) (507) Gain (loss) on liabilities subject to compromise (5) 245,196 (160,845) $ 544,856 (171,523) (1) Adjustments to reflect the fair value of assets and liabilities in accordance with Fresh Start reporting. (2) Gain on extinguishment of the old notes payable, related interest, and equity in exchange for debt and members capital of the Successor in accordance with the Reorganization Plan. (3) Cost for professional services, including legal, financial advisory, and related services directly related to the bankruptcy proceedings. (4) Write-off of unamortized deferred loan costs related to the old notes payable. (5) Gain (loss) on liabilities subject to compromise includes, among other items, surety liabilities, joint venture guarantees and related obligations, and the self-insured retention accrual. (4) Summary of Significant Accounting Policies (a) Basis of Presentation The consolidated financial statements as of December 31, 2009 include the financial statements of PH Holding LLC, and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements for the year ended December 31, 2009 and as of and for the year ended December 31, 2008 include the financial statements of Woodside Group, and its wholly owned subsidiaries and its affiliates, Pleasant Hill, and Wasatch Pacific. All significant intercompany balances and transactions have been eliminated in consolidation and combination. The Company reviews each of its joint ventures to determine whether it is a variable interest entity (VIE), and if so, whether the Company is the primary beneficiary of the VIE. The primary beneficiary of a VIE is the party that absorbs a majority of the VIE s expected losses, receives a majority of the VIE s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the VIE. The Company also considers whether or not the Company has a 14 (Continued)

17 controlling financial interest in the joint ventures. If the Company is either the primary beneficiary of, or has a controlling interest in, the joint venture, the Company is required to consolidate the joint venture in its financial statements. The Company also evaluates its deposits for future land purchases to determine whether the deposit represents a variable interest in the selling entity and whether the Company is the primary beneficiary. The predecessor financial statements include one joint venture with a third party in which the Company holds a 50% equity interest. The joint venture is included in the discontinued operations in the accompanying statement of operations. (b) (c) (d) Cash and Cash Equivalents Cash equivalents consist of money market accounts that can be easily accessed and have original maturities of three months or less. The Company maintained 97.6% and 78.2% of its cash and cash equivalents in one federally insured financial institution at, respectively. Accounts Receivable Accounts receivable consist primarily of escrow proceeds receivable from the sale of homes. Accounts receivable are recorded at sales value, which approximates the fair value. The Company records an allowance for doubtful accounts when specific accounts are deemed uncollectible. For the years ended, there were no write-offs of accounts receivable. No allowance for uncollectible amounts was recorded at. Revenue and Cost Recognition Home Building and Home Sales The Company recognizes revenue on short-term real estate sales using the full-accrual method. The contracts are generally completed in less than 270 days. A contract is considered complete when (1) substantially all costs have been incurred; (2) the customer has accepted the home according to contract specifications; (3) the property has been deeded to the customer; and (4) a significant down payment is received. Contract costs include all direct material and labor costs and capitalized interest. Certain indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs, are allocated on a percentage of construction cost incurred basis. General and administrative costs are charged to operating expense as incurred. Sales Incentives When sales incentives involve a discount on the selling price of the home, the Company records the discount as a reduction of revenue at the time of house closing. If the sales incentive requires the Company to provide a free product or service to the customer, the cost of the free product or service is recorded as cost of sales at the time of house closing. This includes the cost of optional upgrades and seller-paid financing or closing costs. 15 (Continued)

18 Land Sales In the normal course of business, the Company contracts to sell both undeveloped and developed land to outside parties. Revenue is recognized when title to the properties has transferred to the buyer and adequate consideration has been received. Allowance for Warranties The Company provides a limited warranty on all of its homes. The specific terms and conditions of warranties vary depending upon the market in which the Company does business. The Company generally provides a limited warranty, purchased from third-party insurance carrier, against specified workmanship and materials for one year, mechanical systems in the home for two years, and structural defects for ten years. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized in accrued liabilities. Factors that affect the Company s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company also purchases liability insurance from a third party that currently requires a $500,000 self-insured retention per occurrence. As part of the Reorganization Plan, the Company was relieved of all prepetition responsibility to honor or satisfy warranty claims outstanding as of December 31, However, the Company has accrued a liability for warranty obligations related to homes closed during the last year of the bankruptcy. Changes in the Company s liability for warranties were as follows (in thousands): Predecessor Balance at January 1 $ 2,298 3,137 Settlements made (1,529) (2,315) Increase in liability 921 1,476 Balance at December 31 $ 1,690 2,298 In addition, a subsidiary of Woodside Group, Reliant Structural Warranty Insurance Company, Inc. (Reliant), has warranty claims reserves of $3,981,000 and $4,895,000 at December 31, 2009 and 2008, respectively, to cover claims for certain warranty obligations related to homes sold in prior years. (e) Finished Homes, Furnished Lots, Construction in Process and Land Held for Development Construction in process and land held for development are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to 16 (Continued)

19 fair value. As a result of Fresh Start reporting, the balances at December 31, 2009 are stated at fair value. Inventory costs include land, land development, and home construction costs. Interest costs incurred during home construction or land development and certain other indirect project costs are capitalized and subsequently charged to cost of sales as the units associated with such costs are sold. Land held for development and related construction in process are reviewed for potential write-downs when impairment indicators are present. In the event the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, impairment charges are required to be recorded if the fair value of such assets is less than their carrying amounts. These estimates of cash flows are significantly impacted by estimates of revenues, costs, and other factors. Due to uncertainties in the estimation process, actual results could differ from such estimates. For those assets deemed to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company s determination of fair value is primarily based upon discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams. In performing its annual impairment analyses in 2009 and 2008, the Company utilized a range of discount rates of 14% to 18.5% and 15% to 30%, respectively. During 2009 and 2008, management evaluated several projects under development that demonstrated potential impairment indicators. The Company determined that projects with a carrying value of $381,462,000 and $428,716,000, the majority of which were in California, Arizona, Florida, and Nevada, were impaired as of, respectively. Consequently, the Company recorded an impairment charge of $248,300,000 and $255,365,000 in 2009 and 2008, respectively, to reduce the carrying value of the projects to their estimated fair value. The impairment charges are included in cost of sales. (f) (g) Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives, ranging from 3 to 27½ years. Major improvements that extend the life of the asset are capitalized, while minor or regular maintenance costs are expensed as incurred. Contributed Capital The Company is owned by a group of former creditors of Woodside Group and Pleasant Hill. The issuance of equity is controlled by the Reorganization Plan. Holders of the Predecessor s equity interests that were in existence prior to December 31, 2009, including the Predecessor s common stock, did not receive any distributions as part of the Reorganization Plan, and their equity interests were canceled on the Effective Date. (h) Marketing Costs Marketing costs are expensed as incurred. Marketing costs were $1,880,000 and $3,475,000 for the years ended, respectively, and are included in operating expenses. 17 (Continued)

20 (i) Fair Value of Financial Instruments The Company applies fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk. The carrying amounts of financial instruments except for notes payable approximate fair value because of the general short-term nature of these instruments. The carrying amounts of notes payable approximate fair value as the terms of the notes payable are consistent with market terms for similar debt instruments. (j) Income Taxes As a limited liability company, the Company is generally not liable for federal and state income taxes. The Company s income is allocated to its members who are responsible for paying the tax on such income. The Company may make cash distributions to the members, which are considered sufficient to pay the tax liabilities of the members. The Company has certain subsidiaries that are taxed as C-corporations and taxed at the corporate level for which an income tax provision is prepared. The Company bases its provision or benefit for income taxes on income recognition for financial statement purposes, which includes the effects of temporary differences between financial statement income and income recognized for tax return purposes. The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that the deferred tax asset will not be realized. At December 31, 2009, and 2008, the Company s net deferred tax assets carried a full valuation allowance of $1,472,000 and $5,286,000, respectively. Effective January 1, 2009, the Company adopted authoritative guidance included in ASC 740, Income Taxes, related to the accounting for uncertain tax positions. The total liability for unrecognized tax benefits at January 1, 2009, including temporary tax differences, was zero. The Company accounts for interest expense and penalties for unrecognized tax benefits as part of the income tax provision. During the year ended, December 31, 2009, there was no change in the Company s liability related to unrecognized tax benefits. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date. The Company is currently under examination by the Internal Revenue Service for one of its subsidiaries, Woodside Group, for the tax year The Company is currently not under any other examinations by any federal or state tax authority, but remains subject to income tax examinations for each of its open tax years, which extend back to 2006 for federal income tax purposes and 2005 for state income tax purposes. Under Rev Proc 92-21, the Company has agreed to extend the federal 18 (Continued)

21 statute of limitations for assessing additional taxes for certain projects, which apply to years prior to On July 25, 2008, the Company converted from an S-corporation to a limited liability company (LLC) in a nontaxable reorganization. Both S-corporations and LLCs are taxed as pass-through entities for tax purposes in that taxable income and losses flow through to owners. However, a number of the Company s general contracting and project specific subsidiaries did not convert to an LLC and as such they lost their Qualified Subchapter S Subsidiary status. The result is that these former Qualified Subchapter S Subsidiaries were converted to C-corporations, which are taxable entities. The Company recognized the impact of the change in tax status through provision expense during 2008, which was not significant to the consolidated financial statements. (k) (l) Claims Reserve Liability Under the Reorganization Plan, allowed claims will receive distributions of either: debt and equity in the Company, or cash. The claims reserve liability represents the estimated cash amounts necessary to satisfy the undisputed and disputed claims against the Woodside Group Debtors under the Reorganization Plan. The claims reserve as of December 31, 2009 is $15,108,000. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s knowledge of current events and actions it may undertake in the future, original estimates may ultimately differ from actual results. (5) Fair Value Disclosures FASB authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also 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 standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices for identical assets or liabilities in active markets; Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 19 (Continued)

22 The Company applies fair value techniques on a nonrecurring basis associated with applying Fresh Start accounting as well as valuing potential impairment losses related to long-lived assets. Nonfinancial assets and liabilities measured at fair value on a nonrecurring basis are summarized below (dollars in thousands): Fair value measurements as of December 31, 2009 Total Level 1 Level 2 Level 3 Financial assets: Other assets $ 18,802 18,802 Financial liabilities: Other liabilities 78,256 78,256 Notes payable 317, ,732 Nonfinancial assets: Construction in process 221, ,940 Land held for development 26,016 26,016 Property and equipment 2,008 2,008 (6) Property and Equipment The balances at December 31 are as follows (in thousands): Successor Predecessor Estimated useful lives Land $ 502 Buildings 1, years Furniture, computers, machinery, and equipment 1,117 8, years Model and sales office furniture , years Vehicles 316 3, years 2,008 25,321 Less accumulated depreciation (13,553) Net property and equipment $ 2,008 11,768 Depreciation expense was approximately $3,004,000 in 2009 ($212,000 of which is included in discontinued operations) and $3,597,000 ($64,000 of which is included in discontinued operations) in (7) Lines of Credit and Notes Payable (a) Successor Under the Reorganization Plan, a new indenture instrument was approved for the Company. The new indenture obligation carries a maximum principal amount of $315,000,000 with a 7% annual interest rate paid quarterly and an additional 3% interest (PIK) accruing (but not compounding) paid at 20 (Continued)

23 maturity. The indenture obligation has a maturity date of December 31, 2012 (with a one-year extension option). The first quarterly principal payment of $20,000,000 is due December 31, 2010, and quarterly interest payments are due starting March 31, There is also a semiannual excess cash sweep component of the indenture that requires the Company to make additional principal payments for any cash held by the Company over $100,000,000 (excluding cash set aside for items including, but not limited to, unpaid principal, interest, taxes, and cash claims payments) starting June 30, 2010 and continuing each December and June thereafter. At December 31, 2009, the notes payable included $313,709,000 for the indenture debt, which is collateralized by all cash and personal property of the Company, and $4,023,000 for other permitted debt which is collateralized by three land parcels and one piece of equipment. The Indenture contains certain financial covenants, including a tangible net worth covenant of $65,000,000. The maturities under the indenture for each of the next five years subsequent to December 31, 2009 are as follows (in thousands): Total 2010 $ 21, , , , Thereafter $ 317,732 As noted in the subsequent event footnote to year-end, the Company elected to make a prepayment on the debt. (b) Predecessor Under the Predecessor company structure there were generally two separate major borrowing facilities backed by certain subsidiaries described below as Restricted Entities and Nonrestricted Entities. i) Restricted Entities Under a line-of-credit agreement with a bank group, the Predecessor could borrow a maximum of $660,000,000 with an accordion to $750,000,000. The line of credit was a liability of Pleasant Hill and was guaranteed by Woodside Group and certain subsidiaries comprising the Woodside Group Debtors (Restricted Entities). As of December 31, 2008, the balance outstanding on the line of credit was $316,186,000. In addition, the Restricted Entities had various notes payable with institutional investors. As of December 31, 2008, the balance outstanding on notes payable were $372,143,000. The line of credit and notes payable are included in liabilities subject to compromise in the accompanying 2008 balance sheet. Under the Reorganization Plan, the line-of-credit agreement and notes payable were canceled, and such creditors generally received debt and equity in the Company. 21 (Continued)