10-K 1 tfg0110k4q.txt THE FORECAST GROUP, L.P. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended October 31, 2001 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OR 1934 For the transition period from N/A Commission File Number: 33-72106 THE FORECAST GROUP "Registered Tradename", L.P. (Exact Name of Registrants as specified in their charter) California 33-0582072 (State of Organization) (IRS Employer Identification Number) 10670 Civic Center Drive, Rancho Cucamonga, California 91730 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(909)987-7788 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered -------------------- ----------------------------------------- 11 3/8% Senior Notes None Due 2000 Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO There was no voting stock held by nonaffiliates of the Registrant at December 14, 2001. PART I ITEM 1 - BUSINESS General The Forecast Group "Registered Tradename", L.P., ("Forecast" "Registered Tradename" or the "Company") currently designs, builds and sells affordably-priced single family detached homes primarily to entry-level and first time move-up buyers in California. The Company operates in two distinct geographic regions (Northern California and Southern California), and is a leading homebuilder in its targeted submarkets (based on the number of homes closed)with operations throughout most major metropolitan areas and employment centers within these markets. The Company is the successor to the residential real estate development business founded in 1971 by Mr. James P. Previti, the Chairman of the Board and President of the general partner of The Forecast Group "Registered Tradename", L.P. From 1971 through 1989, the Company's operations were focused on the Southern California regions known as the Inland Empire and Antelope Valley. In 1989, the Company expanded operations into the Sacramento Valley region of Northern California. Further diversification and expansion occurred in 1995 when the Company expanded into northern San Diego County. Since 1976, the Company has closed more than 18,000 homes, including 2,154 homes during the fiscal year ended October 31, 2001. The financial and operational expectations the Company has set out in this filing, for periods extending beyond October 31, 2001, are not actual results, nor guaranteed results. Rather, they are assumptions that are based upon preliminary estimates garnered from factors that the Company's management believes to be reasonable at the time of this filing. The homebuilding industry is extremely competitive, with pricing being determined by a wide variety of factors, including the availability of land and the state of the economy in any one or more regions in which the Company builds. In addition to any of the factors set out in this filing which could present an operational and/or financial risk to the Company, there are economic, competitive, governmental and other factors which could also affect any or all of the forward-looking statements contained in this filing. Geographic Markets The Company's operations service the metropolitan areas surrounding Los Angeles, Orange County, San Diego, San Francisco and Sacramento, California. The Company believes that each of these areas represents an attractive homebuilding market with significant growth opportunities and that its geographic diversity provides a greater balance for the Company's earnings, thereby reducing the Company's exposure to potentially adverse economic conditions in any one geographic area. The Company also believes that each of its local operations is well established in its respective markets and that it has developed a reputation for building superior quality homes at competitive prices. The Company maintains the flexibility to tailor its product mix within a given market depending upon market conditions. Operating Strategy The Company believes that its history of building high quality entry-level and first-time move-up homes in California and its conservative operating strategy, have enabled the Company to successfully weather cyclical downturns and position the Company to capitalize on the improving California market. The Company's strategy has been to (i) select markets that exhibit favorable demographic trends for the construction and sale of affordably-priced, single family detached homes in the entry-level and first-time move-up market segment, (ii) provide its customers with quality homes which reflect a superior value in comparison to the prices of competitors' homes, and (iii) employ an operating strategy designed to reduce the risks and costs inherent in the homebuilding business, while also maximizing its return on investment capital in relation to such risks. Key elements of the Company's operating strategy include the following: Geographic Diversity and Growth Markets. The Company competes in a variety of geographical markets and attempts to react quickly to allocate capital to those markets which it believes provide attractive growth characteristics and opportunities for superior returns. In keeping with this Philosophy, the majority of the Company's markets have experienced significant population and employment growth in recent years. The company strives to maintain a strong competitive position in all of its submarkets and generally is among the top single family homebuilders in its submarkets. The Company, through its full-time in-house research and marketing staff, and through the selective use of third-party sources, regularly conducts market research and demographics analyses of both its existing and potential markets to predict the depth and breadth of demand for affordably-priced houses. Based on its current market research, the Company believes that it has opportunities to expand in its existing markets and has identified several new geographic markets, which possess attractive characteristics well-suited to the Company's homebuilding practices. Focus on Entry-level and First-Time Move-up Home Buyers. Throughout its history, the Company has primarily focused on entry-level and first time move-up home buyers because it believes they represent the largest segment of the homebuilding market, and also during cyclical downturns are the least affected segment in terms of a reduction in the demand for homes. Also, this segment includes first-time home buyers whose home purchases are not dependent on the sale of an existing home. Affordably-priced homes generally qualify for FHA/VA financing and other state sponsored home buying financing programs, which permit lower down payments and, in some instances, may provide lower interest rates, thereby expanding the Company's customer base. In select markets, the Company has entered into the second-time move up segment. The decision to build in the second-time move up market is limited, and when undertaken is predicated on superior demand and unique demographic trends in specific sub-markets, and is undertaken when to do so would help minimize the Company's overall operating and financial risks. Commitment to Customer Satisfaction. The Company is committed to providing customer satisfaction through quality construction and customer service. That is why the Company is especially proud that in its operating markets, customer satisfaction surveys indicate that more than 96% of its home- buyers in 2001 were satisfied with their purchase and would recommend a home built by the Company to a friend. The Company believes that its long history of providing high quality affordably-priced homes has resulted in many referral sales. Build a Standardized Product that can be Constructed Quickly, Efficiently and Cost Effectively. Each product line built by the Company has several different elevations and floorplans, but essentially consists of standardized features that allow relatively quick, cost effective construction. Each product line is periodically value-engineered to identify potential cost savings. Experienced Management and Decentralized Operations. The Company's senior corporate officers and division presidents are highly- experienced and average over 20 years in the homebuilding business. Mr. James P. Previti, Chairman of the Board and President of the general partner of The Forecast Group "Registered Tradename", L.P., founded the Company's predecessors in 1971 and has played a prominent role in the California Building Industry Association. Each division is run by a local division president, who has in-depth familiarity with the geographic area within which the division operates, and who supervises area and district managers with full and direct profit and loss responsibilities in their designated areas. Use of Sophisticated Management Information Systems. The Company employs an accounting and information system used by many of the top homebuilders in the country to track costs and construction activities in multiple communities. The Company, on a real-time basis, can analyze production costs, status of pending sales and inventory levels, lot premiums, homes in escrow, homes closed and profit margins both for the Company as a whole, for each individual community, for each plan type within a community and for each individual lot within each community. This system allows the Company to closely monitor and control its level of completed but unsold homes, detect trends early so it can more effectively deploy capital and resources to respond to such trends and then adjust its production capacity accordingly. Conservative Land Policy. The Company seeks to maximize its return on capital employed by limiting its investment in land and by focusing on inventory turnover. To implement this strategy and to reduce the risks associated with investment in land, the Company's land acquisition process is controlled through a formal corporate land approval committee to help ensure that transactions meet the Company's standards for financial performance and risk. In the ordinary course of its homebuilding business, the Company utilizes both direct acquisition and a variety of option contracts to control the number of lots it maintains in inventory for use in the sale and construction of homes. The choice of which methodology is used is dependent on which vehicle the Company deems to be more advantageous, given the Company's profit objectives, return on investment, and local market conditions. The Company also generally seeks to close escrow on land only after all of the necessary entitlements are received, thereby allowing construction to commence within a relatively short time period thereafter. By doing this, the Company is generally able to maintain inventories of land that are expected to be developed within no more than two to three years in an effort to match land costs with current market prices for finished homes. Maintain Strict Cost Controls. The Company believes that maintaining stringent cost controls is a key factor in improving profitability. The Company controls costs and reduces risk by: (i) generally purchasing land that is already entitled for residential development; (ii) managing the construction process to maintain low levels of unsold inventory and maximize inventory turnover; (iii) utilizing high quality durable building materials and standardized design plans; (iv) utilizing experienced subcontractors, especially those with which the Company has long-standing relationships; and (v) using its competitive advantage in its submarkets to obtain volume discounts on construction materials and favorable pricing from subcontractors. Require Home Buyers to Pre-Qualify Financially Prior to Approving a Sales Contract. Prior to entering into a sales contract with a prospective home buyer, the Company seeks to have the mortgage company, typically its affiliate - Forecast "Registered Tradename" Home Mortgage, LLC ("Forecast Mortgage"), confirm that the home buyer has the apparent ability to qualify for the purchase of the home. Management believes this pre-sale qualifying procedure results in sales that are more likely to close, thereby reducing the cancellation rate. Summary of Residential Projects The following table presents information relating to the Company's markets and communities in which construction is either in progress or in the planning process. All homes are single-family detached, except for one community in Arizona, which has an attached townhome component as part of its overall development. As of October 31, 2001, the Company owned 5,373 lots that are available for future home closings, and had another 2,782 building lots under its control through executed acquisition contracts. ----------------------------------------------------------------------------- Bldg. Total Sales No. of Bldg. Lots Bldg. Backlog Sales Active Lots Under Lots as of Backlog Market Communities Owned Contract Avail 10/31/01 Value (1) (2) (3) ----------------------------------------------------------------------------- Southern California 14 3,736 1,134 4,870 292 $64,032,283 Northern California 10 1,604 1,425 3,029 120 $29,190,330 Arizona 2 33 223 256 47 $8,023,212 ------------------------------------------------------------------------------ Co. Total 26 5,373 2,782 8,155 459 $101,245,825 ==============================================================================

(1) Building lots under contract include lots the Company has the right to acquire under option provisions in certain acquisition contracts; thus, there can be no assurance the Company will actually acquire these lots. (2) Sales backlog refers to sales contracts that have not yet closed. There can be no assurance that closings of homes will occur. (3) Reflects base price, including any lot premiums and buyer selected options, which vary from community to community. Land Acquisition The Company initiates projects in markets that it believes will exhibit sales absorption rates at or above its investment targets for its projected number of new homes. The Company selects markets characterized by their proximity to urban areas that have convenient access to local and regional commuter corridors. The Company's homes are predominately located within commuting distance to major employment centers. Additional factors the Company considers before purchasing land for the development of a new home community include: proximity to existing developed areas; population growth patterns; availability and quality of existing public services such as water, gas, electricity, sewers and schools; employment growth rates; the perceived sales absorption rates for new housing; transportation availability; the estimated costs of development; and the proximity of competing homebuilders. The general policy of the Company is to complete a purchase of land only after it has conducted a thorough feasibility study at no financial risk to the Company, and when it can reasonably project commencement of development and construction within a specified period of time. Closing of the land purchase is, therefore, generally made contingent upon satisfaction of conditions relating to the property and to the Company's ability to obtain all requisite entitlements from governmental agencies within a certain period of time. The Company customarily acquires unimproved or improved land zoned for residential use which appears suitable for the construction of the number of homes the Company believes fits with its projected sales absorption rates and expected demand within that market or sub-market. The Company has the capability to purchase and develop unentitled land, but in doing so acts to minimize the risks associated with such land by generally conditioning the closing on the attainment of all necessary entitlements. "Entitled" land is generally defined as land that has received all necessary land use approvals for residential development from the appropriate state, county and local governments, including any required tract maps and subdivision approvals. Although the Company's profitability is affected by changing land prices, the Company attempts to minimize this risk by acquiring land under terms that meet its operating schedules, and selling excess lots to other builders who do not compete at the same price point as the Company. The Company has also historically utilized rolling options and phased land purchases in order to control larger amounts of land without the attendant financing and carrying cost risks. The amount of land purchased by the Company has fluctuated substantially from period to period based on when entitlements were obtained, land prices, availability of financing, existing land inventory, projected demand for homes and other factors. In general, the Company's practice is to have a land inventory, either owned or under contract, equal to approximately three to four years of planned operations. As of October 31, 2001 the Company owned 5,373 lots, which the Company believes is adequate for approximately 24 months of operations at current sales absorption levels. In addition, the Company controls approximately 2,782 lots under binding and non-binding agreements which provide the Company with the option to purchase such lots in the event that the Company's targeted markets continue to exhibit increased sales absorption levels. These controlled lots would allow for an additional 12 months of operations based on increased sales absorption levels. Construction The Company acts as the general contractor for the construction of its communities. Virtually all construction work for the Company is performed by subcontractors. The Company's employees oversee the construction of each community, coordinate the activities of subcontractors and suppliers, subject their work to quality and cost controls and assure compliance with zoning and building codes. The Company's subcontractors follow design plans prepared by architects who are retained by the Company and whose designs are geared to the local market. Subcontractors typically are retained on a phase-by-phase basis to complete construction at a fixed price. During its history, the Company has established long-term relationships with a number of subcontractors, and sometimes negotiates price and volume discounts with manufacturers and suppliers on behalf of subcontractors in order to take advantage of its volume of production. The Company is not dependent to any material extent upon the services of any one subcontractor and believes that, if necessary, it can generally retain sufficient qualified subcontractors for each aspect of construction. The Company believes that conducting its operations in this manner enables it not only to readily and efficiently adapt to changes in housing demand, but also to avoid fixed costs associated with retaining construction personnel. Sales, Marketing and Research The Company makes extensive use of advertising and other promotional activities, including newspaper and magazine advertisements, brochures, direct mail and the placement of strategically located sign boards in the immediate areas of its communities. The Company's major media advertising is done regionally. Because the Company usually offers multiple communities within a single market area, it is able to utilize multiple community advertising that highlights all Company developments within that same market. The Company normally builds, decorates, furnishes and landscapes model homes for each community and maintains on-site sales offices, all of which are typically open seven days a week. The Company believes that model homes play a particularly important role in the Company's marketing efforts. Consequently, the Company expends a significant effort in creating an attractive atmosphere at its model homes. Interior decorations vary among the Company's models and are carefully selected based upon the lifestyles of targeted buyers. Structural changes in design from the model homes are not generally permitted, but home buyers may select various other optional construction and design amenities, including floor coverings. The Company sells nearly all of its homes through Company sales representatives, who typically work from the sales offices located at the model homes used in each subdivision or in on-site sales trailers. The sales representatives are paid by the Company on commission. To a lesser extent, the Company also uses independent cooperative brokers to assist in selling its homes. Company representatives are available to assist prospective buyers by providing them with floor plans, price information and tours of model homes and by assisting them with the selection of options. Sales representatives attend periodic meetings at which they are provided information regarding real estate law requirements, other products in the area, the variety of financing programs available, construction schedules and marketing and advertising plans. The Company believes this effort results in a more motivated sales force and higher absorption rate. Customer Financing The Company offers its customers the opportunity to obtain mortgage financing through Forecast "Registered Tradename" Home Mortgage. Forecast "Registered Tradename" Home Mortgage is owned 50% by Wells Fargo Home Mortgage, formally known as Norwest, Inc. (a nationally recognized mortgage banker; "Wells Fargo") and 50% by Inland Counties Mortgage, LLC, a California limited liability company ("Inland Counties Mortgage"). The Company owns a 98% share of Inland Counties Mortgage. Forecast "Registered Tradename" Corporation (the sole limited partner of the Company) owns the other 2%. Through Forecast "Registered Tradename" Home Mortgage, the Company seeks to assist its home buyers in obtaining financing by offering to qualified buyers the variety of financing options offered by Wells Fargo, and by making and processing the loans in a timely and professional manner. Customer Service and Relations Each purchaser of a Company home is given an information booklet describing area amenities and services, such as schools, health services and emergency services. The Company's Warranty Service Manual identifies the appliances, fixtures and heating/cooling and other systems installed in the house, and provides information on warranties, maintenance and manufacturer information. The Company believes that these practices reinforce the home buyer's sense of moving into a community. After closing, the Company continues to communicate its image through a variety of marketing techniques that are designed to enhance the buying experiences of the home buyer. Customer Warranties The Company provides one year limited warranties on purchases of its homes and, by doing so seeks to ensure that the Company will have any deficiencies that arise due to faulty workmanship, defective materials, or significant construction flaws in the structural components of the home or in the lot on which the home is located, corrected. The warranty does not, however, include items that are covered by manufacturer's warranties (such as appliances and air conditioning) or items that are not installed by employees or contractors of the Company (such as flooring installed by an outside contractor employed by the homeowner). Statutory requirements in the states in which the Company does business may grant rights to home buyers in addition to those provided by the Company. California law has established a ten-year statutory period and Arizona law requires an eight-year statutory period during which a home buyer may request the Company to repair any latent defects in the architectural design or actual construction of their home. The Company generally maintains reserves with respect to units previously sold for the purpose of covering estimated future warranty expenditures, and maintains insurance coverage to minimize the impact that any claims for latent defects would otherwise have upon the Company. Competition and Market Factors The homebuilding industry is highly competitive, with numerous other developers and homebuilders competing for desirable properties, financing, raw materials and skilled labor. The Company competes with national, regional and local builders, many of whom have greater financial resources than the Company. Moreover, sales of homes and land by competitors at deeply discounted prices or with substantial customer incentives could have a material adverse effect on the Company. The Company competes primarily on the basis of quality, price, design, service and location. The Company believes that its primary competitive strength has been its consistent ability to offer quality homes at affordable prices. The homebuilding industry is cyclical and significantly affected by consumer confidence levels, interest rates, employment trends and other prevailing economic conditions. A variety of other factors affect the homebuilding industry and demand for new homes, including consumer preferences, demographic trends, availability of mortgage financing and costs associated with home ownership such as property taxes, assessments and homeowner association fees. Government Regulation and Environmental Matters The housing industry is subject to increasing environmental, building, zoning and real estate regulations that are imposed by various federal, state and local authorities. Such regulations affect homebuilding by specifying, among other things, the type and quality of building material that must be used, certain aspects of land use and building design, as well as the manner in which homebuilders, such as the Company, may conduct their sales activities and other dealings with their home buyers. In developing a community, the Company must obtain the approval of numerous governmental authorities regarding such matters as permitted land uses, housing density, the installation of utility services (such as water, sewer, gas, electricity, telephone and cable television), and the dedication of acreage for open space, parks, schools and other community purposes. Furthermore, changes in prevailing local circumstances or applicable laws, may require additional approvals, or modifications of approvals previously obtained. Environmental laws may cause the Company to incur substantial compliance, mitigation and other costs, may restrict or prohibit development in certain areas and may delay completion of the Company's communities. As a result, the Company engages outside professional consultants to evaluate any land prior to its purchase by the Company. Although environmental laws have not had a material adverse effect on the Company to date, and management is not currently aware of any environmental compliance issues that are expected to have a material adverse effect on the Company, no assurance can be given that such laws will not have a material adverse effect on the Company's operations in the future. Employees As of October 31, 2001, the Company employed 322 persons, including corporate staff and other personnel involved in sales, construction and customer service. Although none of the Company's employees are covered by collective bargaining agreements, a small number of the subcontractors and suppliers engaged by the Company are represented by labor unions or are subject to collective bargaining agreements. The Company believes that relations with its employees, subcontractors and suppliers are good. ITEM 2 - PROPERTIES The principal executive offices of the Company are located at 10670 Civic Center Drive, Rancho Cucamonga, California 91730. The telephone number is (909) 987-7788. The Company leases approximately 15,500 square feet of office space for its corporate headquarters in Rancho Cucamonga and approximately 11,807 square feet of office space in Sacramento, California. The Company's corporate headquarters and Sacramento office are leased from affiliates of Mr. Previti. See "Item 13 - Certain Relationships and Related Transactions". During fiscal year 2000, the Company opened four modular satellite offices for each geographic region in Southern California, which has enhanced its management presence in each area of operation. ITEM 3 - LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business. In the opinion of management, the resolution of such claims will not have a material adverse effect on the operating results or financial position of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the Company's fiscal year ended October 31, 2001. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The registrant's common equity has not been registered pursuant to Section 12(b) of the Act and is not traded. ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data (except operating and other data) are derived from the consolidated financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein. ----------------------------------------------------------------------------- Year Ended October 31, Note: $ are in 2001 2000 1999 1998 1997 thousand ----------------------------------------------------------------------------- Operating Data: -------------- Homes Delivered: Number of Homes Delivered 2,154 1,610 1,531 1,228 901 ----- ----- ----- ----- --- Average Price of Homes Delivered $223.8 $203.5 $183.3 $161.3 $147.1 Sales Backlog (1): Number of Homes in Sales Backlog 459 380 246 233 289 --- --- --- --- --- Aggregate Value of Homes in Sales Backlog $101,246 $83,948 $48,471 $38,179 $44,707 Average Price of Homes in Sales Backlog $220.6 $220.9 $197.0 $163.9 $154.7 Statement of Operations Data: ---------------- Homebuilding Revenues $482,115 $327,617 $280,644 $198,074 $132,518 Cost of Homes Sold 360,324 259,218 228,859 164,335 112,278 Land Sales Revenue 23,545 5,000 42,271 999 0 Cost of Land Sold 22,240 5,000 40,958 999 0 Selling & Marketing Exp. 20,412 16,820 17,165 14,384 13,929 General & Admin. Exp. 31,661 21,361 16,064 11,397 7,397 Provision for Losses on Real Estate Inventory 0 0 0 0 6,635 Other Operating Costs 491 1,362 223 202 726 ----------------------------------------------------------------------------- Operating Income(Loss) 70,532 28,856 19,646 7,756 (8,447) ----------------------------------------------------------------------------- Interest Income 846 965 682 455 395 Interest Expense 0 0 0 264 0 Other Income 727 396 1,247 2,500 156 ----------------------------------------------------------------------------- Income (Loss)before Income Taxes and Extraordinary Gain 72,105 30,217 21,575 10,447 (7,896) ----------------------------------------------------------------------------- Extraordinary Gain on Extinguishment of Senior Notes 0 0 0 34 1,634 ----------------------------------------------------------------------------- Net Income (Loss) $72,105 $30,217 $21,575 $10,481 ($6,262) ============================================================================= Balance Sheet Data: ------------------- Real Estate Inventory $200,770 $142,768 $110,800 $84,152 $71,012 Total Assets 239,794 186,333 146,918 113,908 91,582 Debt 50,029 67,253 64,738 60,059 56,053 Net Partners' Equity 141,122 81,200 52,718 31,143 20,662 Other Data: ---------- Gross Margin % 25.3% 20.9% 18.5% 17.0% 15.3% EBITDA (2) $80,691 $39,411 $30,178 $19,018 $7,434 Interest Incurred (3) $9,134 $9,877 $10,193 $7,123 $ 7,076 Coverage Ratio (4) 8.8 4.0 3.0 2.7 1.1 Debt to Equity Ratio (5) 0.4 0.8 1.2 1.9 2.7

(1) "Backlog" represents the number of homes subject to sales contracts executed by buyers with respect to specific lots and the aggregate dollar value of such sales contracts outstanding at the end of the period. (2) "EBITDA" means earnings before interest (including previously capitalized interest included in cost of sales), income taxes, depreciation and amortization, and has been computed on a basis consistent with the terms of the former Indenture Agreement. EBITDA is not intended to represent cash flow or any other measure of performance in accordance with generally accepted accounting principles. (3) Interest incurred includes all interest incurred during the respective period, whether expensed or capitalized, and has been computed on a basis consistent with the terms of the former Indenture Agreement. (4) "Coverage Ratio" means the ratio of EBITDA to Interest Incurred as calculated in accordance with the definition of such term in the former Indenture Agreement. (5) "Debt-to-Equity Ratio" means the ratio of all outstanding Debt to Net Worth (Partners' Equity) as calculated in accordance with the definition of such term in the former Indenture Agreement. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's results of operations for any period are affected by a number of factors including the number of communities under construction, the length of the development cycle of its communities, product mix, weather, availability of financing, costs of materials and economic conditions in the areas in which the Company operates. Product mix (both product line and size of home) has a substantial effect on the average sales price of homes and gross margin from home sales because smaller homes generally have lower sales prices and gross margins than larger homes. The average sales price of homes from period to period fluctuates based on product line, home size, geographic mix and changes in the market price of housing. The Company's results of operations reflect the cyclical nature of the homebuilding industry and the Company's historical focus on the Southern California housing market. Following approximately seven years of a regional economic downturn, those markets in which the Company operates began to see a recovery in the fourth quarter of 1997 which has continued throughout fiscal year 2001. The following table sets forth certain information by geographic regions in which the Company operates, for the fiscal years 2001, 2000 and 1999. This table excludes land sales revenue and costs of land sold. For the Year Ended October 31 ---------------------------------------------------------------- Note: $ are in thousands 2001 2000 1999 ---------------------------------------------------------------- Number of Homes Delivered: ------------------------- Southern California 1,123 807 711 Northern California 1,016 803 665 Arizona 15 - 155 ----------------------------- Total 2,154 1,610 1,531 ============================= Housing Sales: -------------- Southern California $232,984 $157,878 $123,626 Northern California 246,553 169,739 135,864 Arizona 2,578 - 21,154 -------------------------------- Total $482,115 $327,617 $280,644 ================================ Gross Profit: ------------ Southern California $46,815 $28,431 $20,134 Northern California 75,349 40,370 27,927 Arizona (373) (402) 3,724 ------------------------------- Total $121,791 $68,399 $51,785 ================================ Gross Profit Margin: -------------------- Southern California 20.1% 18.0% 16.3% Northern California 30.6% 23.8% 20.6% Arizona -14.5% - 17.6% --------------------------------- Total 25.3% 20.9% 18.5% =================================

During the fiscal year ended October 31, 2001, the Company reported home building revenues of $482.1 million and net income of $72.1 million, on closings of 2,154 homes, all of which were records for the Company. Based on continued low mortgage rates and relatively strong employment numbers in the Company's submarket, management believes that consumer confidence and homebuying in its market segment will continue to be strong over the next few years. Seasonality The traditional annual operating cycle for the Company generally starts with fewer customer orders from October through December, followed by stronger customer orders from January through June and moderate orders from July through September. Because home deliveries usually trail customer orders by up to 120 days, the Company's revenues typically are lowest in its first and second fiscal quarters due to seasonally slow customer orders in the immediately preceding fiscal quarters. Historically, the majority of the Company's revenues come in its third and fourth quarters, as contracts for home sales entered into in its second and third fiscal quarters are closed. Backlog The Company's backlog at October 31, 2001 and 2000, respectively, were 459 homes with an average sales price of $220,579 and 380 homes with an average sales price of $220,915. Results of Operations A comparative summary of operating results for fiscal years 2001, 2000 and 1999 is presented in the following table: For the Year Ended October 31 ---------------------------------- 2001 2000 1999 ---------------------------------- Amounts as a Percentage of Revenues: ----------------------- Homebuilding Revenues 100.0% 100.0% 100.0% Cost of Homes Sold 74.7% 79.1% 81.5% ------ ------ ----- Gross Profit 25.3% 20.9% 18.5% ------ ------ ----- Operating Expenses: Selling & Marketing Exp. 4.2% 5.1% 6.1% General & Admin. Exp. 6.6% 6.5% 5.7% Other Operating Costs 0.1% 0.5% 0.1% ------ ------ ----- Total Operating Exp. 10.9% 12.1% 11.9% ------ ------ ----- Operating Income 14.4% 8.8% 6.6% ====== ====== ===== Ave. per Home Closed ($): ------------------------ Homebuilding Revenues $223,823 $203,489 $183,308 Cost of Homes Sold 167,281 161,005 149,483 -------- -------- ------- Gross Profit 56,542 42,484 33,825 -------- -------- ------- Operating Expenses: Selling & Marketing Exp. 9,476 10,447 11,212 General & Admin. Exp. 14,699 13,268 10,492 ------- ------- ------ Total Operating Expenses 24,175 23,715 21,704 ------- ------- ------ Operating Income $32,367 (1) 18,769 (1) 12,121 (1) ======= ======= ====== Other Data: ---------- Number of Homes Closed 2,154 1,610 1,531 Number of Homes Sold 2,233 1,744 1,544 Number of Homes in Sales Backlog 459 380 246 Aggregate Value of Sales Backlog ($ millions) $101.2 $83.9 $48.5

(1) Calculation does not include Other Operating Costs for fiscal years ended October 31, 2001, 2000 and 1999, respectively. Fiscal 2001 Compared to Fiscal 2000 Housing revenues for the fiscal year ended October 2001 were a Company record $482.1 million, representing an increase of $154.5 million or 47.2% from the fiscal year ended October 2000. The revenues for fiscal year 2001 represent 2,154 closings, an increase of 544 closings or 33.8% over fiscal year 2000. The increase reflects the overall strength of the housing market in California. The average sales price of the homes closed during fiscal 2001 was $223,823 as compared to $203,489 for the same period a year ago, representing an increase of 10.0%. The increase in average sales price was due primarily to the Company's ability to increase prices in its high demand communities after carefully weighing the affordability of its homes against the desired absorption of those same homes. In doing so, the Company took extreme care not to raise prices merely to achieve the highest possible revenues. Gross profit from housing sales was $121.8 million for the fiscal year ended October 31, 2001, an increase of $53.4 million or 78.1%, from fiscal year ended October 31, 2000. Gross profit per home increased to $56,542 from $42,484 representing a 33.1% increase over the comparable period in 2000. Gross profit margin for the fiscal year ended October 31, 2001 was 25.3% as compared to 20.9% a year ago. The increase in gross profit and gross margin was due primarily to maintaining high inventory turns which thereby reduced interest in cost of sales, and enabled the Company to take advantage of the continued strength of the affordable range of the California housing market. This strength then permitted the Company to increase sales prices while it maintained construction costs at level amounts. During the year ended October 31, 2001, the Company sold and subsequently leased back 12 model homes and recorded sales of $3,425,000 and gross profit of $608,000. There were no similar transactions in fiscal year 2000. During the fiscal year ended October 31, 2001, the Company had land sales of $23.5 million, which in the aggregate, resulted in net gains of $1.3 million. During the fiscal year ended October 31, 2000, the Company had land sales of $5.0 million, to a related party, and no gain or loss was recorded from the sale. For the fiscal year ended October 31, 2001, the Company's interest incurred decreased $743,000 or 7.5% as compared to the fiscal year ended October 31, 2000. This decrease is the result of the Company's greater liquidity that was produced through higher gross margins achieved from home closings. In turn, this increased liquidity reduced the dependence on bank debt as compared to a year ago. The Company's interest amortized to cost of homes sold (as a percentage of revenue) decreased to 1.7% for the fiscal year ended October 31, 2001, from 2.7% for the same period a year ago. This decrease is primarily attributable to the Company's increased level of closings during fiscal year 2001, thereby increasing the rate of capital turnover, and decreasing capitalized interest costs. Another factor was the interest rate reductions during the year by the Federal Reserve Bank, which reduced the Company's cost of borrowing. In addition, the Company continuously evaluates the cost of capital charged by each of its lenders and carefully monitors and manages its debt level relating to those lenders. Selling and marketing expenses increased $3.6 million or 21.4% during the fiscal year ended October 31, 2001 as compared to the fiscal year ended October 31, 2000, but decreased from 5.1% as a percentage of revenue to 4.2%, when compared to the comparable period in 2000. This decrease, as a percentage of revenue, is attributable to the higher closing volume, higher average sales prices, and lower incentives required to achieve the desired sales absorptions. General and administrative expenses increased $10.3 million during the fiscal year ended October 31, 2001, as compared to the fiscal year ended October 31, 2000. The $10.3 million increase is attributable to an increase in the number of employees in the Company which was necessary to facilitate the Company's continued expansion and active investigation of new land acquisition opportunities, an increase in the bonuses paid to the Company's employees due to the record profits realized and increased expenditures associated with the Company's commitment to provide state-of-the-art training to its employees. Net income for the fiscal year ended October 31, 2001 increased 138.6% to $72.1 million, as compared to net income of $30.2 million in the fiscal year ended October 31, 2000. These results are attributable to maintaining efficient production costs and high inventory turnover, while taking strategic advantage of selling price increase opportunities in select sub-market. Fiscal 2000 Compared to Fiscal 1999 Housing revenues for the fiscal year ended October 2000 were $327.6 million, representing an increase of $46.9 million or 16.7% from the fiscal year ended October 1999. The revenues for fiscal year 2000 represent 1,610 closings, an increase of 79 closings or 5.2% over fiscal year 1999. The increase reflected the continued strengthening of the California housing market, which resulted in increased absorption rates and overall sales in the Company's submarkets. The average sales price of the homes closed during fiscal 2000 was $203,489 as compared to $183,308 during fiscal year 1999, representing an increase of 11.0%. The increase in average sales price is due primarily to increasing prices in high demand communities and no closings in Arizona, which had an average sales price of $136,481 in fiscal year 1999. Gross profit from housing sales was $68.4 million for the fiscal year ended October 31, 2000, an increase of $16.6 million or 32.1%, from the fiscal year ended October 31, 1999. Gross profit per home increased to $42,484 from $33,824 representing a 25.6% increase over the comparable period in 1999. Gross profit margin for the fiscal year ended October 31, 2000 was 20.9% as compared to 18.5% in fiscal year 1999. The increase in gross profit and gross margin was due primarily to a higher concentration of sales in our higher sales priced communities in the Northern California Division and having no closings in Arizona, which had a gross profit per home of $24,024 and a gross margin of 17.6% in fiscal year 1999. During the year ended October 31, 1999, the Company sold and subsequently leased back 71 model homes and recorded sales of $13,729,000 and gross profit of $2,354,000. There were no similar transactions in fiscal year 2000. During the fiscal year ended October 31, 2000, the Company had land sales of $5.0 million, to a related party, and no gain or loss was recorded from the sale. During the fiscal year ended October 31, 1999, the Company had land sales of $42.3 million, which resulted in a net gain from land sales of $1.3 million. The fiscal year 1999 land sales included the sale of the Company's Arizona real estate holdings for approximately $33.5 million and a net gain of $1.8 million. For the fiscal year ended October 31, 2000, the Company's interest incurred decreased $316,000 or 3.1% as compared to fiscal year ended October 31, 1999. This decrease is a result of higher liquidity produced through higher gross margins achieved from home closings, which reduced the dependence on bank debt as compared to a year earlier. The Company's interest amortized to cost of homes sold (as a percentage of revenue) decreased to 2.7% for the fiscal year ended October 31, 2000, from 2.9% for the same period a year earlier. This decrease is attributable to increased rates of capital turnover, thereby resulting in lower capitalized interest costs. Selling and marketing expenses decreased $345,000 or 2.0% during the fiscal year ended October 31, 2000 as compared to the fiscal year ended October 31, 1999. This decrease is attributable to maintaining cost controls on monthly selling and marketing costs. Selling and marketing, as a percentage of revenue, decreased to 5.1% from 6.1% for the comparable period in 1999. This decrease, as a percentage of revenue, is attributable to the higher closing volume and the reduction in sales incentives necessary to achieve desirable absorption rates. General and administrative expenses increased $5.3 million during the fiscal year ended October 31, 2000, as compared to the fiscal year ended October 31, 1999. The $5.3 million increase is attributable to an increase in the number of employees in the Company which was necessary to facilitate the Company's continued expansion and active investigation of new land acquisition opportunities and an increase in bonuses paid to the Company's employees due to increased profits. Net income for the fiscal year ended October 31, 2000 increased 40.1% to $30.2 million, as compared to net income of $21.6 million in the fiscal year ended October 31, 1999 due primarily to the overall improvement of market conditions and the continued commitment to reduce costs. Liquidity and Capital Resources The residential real estate development business is inherently capital intensive. Significant cash expenditures are typically needed to acquire and develop land, construct homes and establish marketing programs for periods of time in advance of revenue realization. The Company generally finances its operations with secured borrowings from commercial banks, financial institutions (and, at times, private investors), unsecured borrowings in the public market, and with available cash flow from operations. The Company's financing needs depend primarily upon sales volume, asset turnover and land acquisition. When liquidating inventory through home closings, the Company generates cash. When building inventory, the Company uses substantial amounts of cash obtained through borrowings, cash flow from operations, and partners' contributions to capital. The Company has had adequate liquidity throughout its operating history, despite recessionary periods. At certain times, several years ago, the Company repurchased portions of its since repaid 11 3/8% Senior Notes on the open market at prices below par, retired such repurchased notes, and then reported the resultant income as extraordinary gain in the Company's consolidated financial statements. At times, those debt repurchases were utilized to satisfy certain covenant requirements set out in the Indenture for the 11 3/8% Senior Notes. In December 2000, the Company paid off and retired the balance of their Senior Notes. At October 31, 2001, the Company had commitments for $105.7 million under several revolving credit facilities with commercial banks and financial institutions of which $43.7 million was outstanding. In addition, at October 31, 2001, the Company had community specific facilities capable of providing aggregate funding of $6.3 million, all of which was outstanding. Borrowings under the credit facilities are secured by liens on specific real property owned by the Company, and carry varying levels of recourse against the Company. On October 31, 2001, the aggregate outstanding principal balance under the Company's credit facilities was $50.0 million and the recourse amount of such debt to the Company was only $15.2 million. To date, the Company has been able to obtain acceptable land acquisition and construction financing. Consistent with an industry trend, certain lenders require increased amounts of cash invested in a project by borrowers in connection with both new loans and the extension of existing loans. The Company currently intends to continue utilizing conventional bank financing for land acquisition and construction financing, and under its present credit facilities is required to use its own cash to fund a portion of the total development and acquisition costs in order to obtain that financing. The Company considers its current relationships with its lenders to be good. In February 1994, the Company issued $50 million in Senior Notes through a public debt offering. At certain times during the past few years the Company repurchased portions of its outstanding 11 3/8% Senior Notes on the open market. In December 2000, the Company paid off and retired all remaining outstanding Senior Notes. There can be no assurance that the impact of market conditions affecting the demand for homes or the availability of debt financing will not adversely affect the Company's future needs for capital. However, the Company expects that available capital resources will be sufficient to meet its normal operating requirements over the near term. ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risks related to financial instruments as defined in the Market Risk Disclosure Rules issued by the Securities and Exchange Commission are considered to be immaterial. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the index to the consolidated financial statements, Report of Independent Auditors and the Consolidated Financial Statements, which appear beginning on page F-1 of this report and are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company is a limited partnership and has no officers or directors. The sole general partner of the Company is Forecast "Registered Tradename" Homes, Inc. ("FHI"). FHI manages the business and affairs of the Company. The directors and executive officers of FHI are as follows: Name Age Position ----- --- --------------------------- James P. Previti* 55 Chairman of the Board, Chief Executive Officer and President Frank Glankler 51 Chief Operating Officer Larry R. Day 52 Chief Legal Officer and Secretary Richard B. Munkvold 36 Chief Financial Officer and Principal Accounting Officer Steven Fowlkes* 47 Director Peter T. Healy 50 Director Leo Previti** 48 Director Jim Ellis 54 Director * Member of the Compensation Committee ** Member of Audit Committee James P. Previti is the founder and organizer of the predecessor of the Company. Mr. Previti has held the position of Chairman of the Board, Chief Executive Officer and President of each of the predecessor entities to the Company since their formation and has controlled the management of the business of the Company since 1976. Mr. Previti is the Chairman of the Board, Chief Executive Officer and President of Forecast Commercial Real Estate Services, Inc. and Inland Empire Personnel ("IEP"), each of which are affiliates of the Company. Frank Glankler has served as Chief Operating Officer since January 1996, after returning to the company in July 1995 as Vice President of Operations. Effective August 1, 1998, Mr. Glankler was elected to the position of Operating Committee member of Forecast Home Mortgage, the Company's mortgage affiliate. From July 1992 until October 1993 he served as President of the Company's Arizona Division, and from October 1993 until July 1995, Mr. Glankler was President of MFR Holdings. Mr. Glankler has over 18 years in the homebuilding industry, including previous senior management positions with U.S. Home Corporation. Mr. Glankler was the former Chairman of the Arizona division of U.S. Home Corporation, responsible for operations in Phoenix, Tucson and New Mexico. Positions held by Mr. Glankler at U.S. Home include President of the Louisiana, North Houston, East Houston and South Houston divisions, respectively. He is former board member of the Southern Arizona Homebuilders Association and holds a Class B Arizona Contractors License and an Arizona Real Estate License. Larry R. Day joined the Company's predecessor as Vice President and General Counsel in December 1992 and now holds the position of Chief Legal Officer. He was elected to FHI's board of directors in November 1993 and served in that capacity until January 1996. Since March 1993, Mr. Day has also supervised the Company's human resources, payroll and risk management departments. From 1989 to 1992, Mr. Day was in private practice specializing in real estate finance and transactional matters. From 1988 to 1989, Mr. Day was a Director, Vice President and General Counsel of Guardian Savings and Loan. From 1985 to 1988, Mr. Day was Director of Real Estate Legal Services for Taco Bell Corporation. Prior to that, Mr. Day served 6 years as Vice President of Corporate and Special Real Estate with First Interstate Bank. Mr. Day is admitted to practice law in the States of California and Vermont, and is a licensed California real estate broker. Richard B. Munkvold joined the Company in 1995 as a Division Controller of both the Southern California and Arizona Divisions and now holds the position of Chief Financial Officer. Mr. Munkvold is responsible for capital procurement, external financial reporting, internal financial controls, and the Information Technology Department. Prior to joining the Company, Mr. Munkvold held several financial positions with the Ryland Group from 1989 through 1995 and last served as Ryland Group's West Region Financial Analyst. Steven K. Fowlkes became a Director of the Company in January 1996. Mr. Fowlkes is President and Chief Operating Officer of R.W. Selby & Company, Inc., a real estate investment and management firm in Los Angeles, California. Peter T. Healy became a Director of the Company in January 1996. Mr. Healy is a Senior Partner with the law firm of O'Melveny & Myers LLP in their San Francisco, California office. Leo Previti became a Director of the Company in January 1996. Mr. Previti has been an attorney with the firm of Brown, Michael & Carroll in Atlantic City, New Jersey since 1996 and prior thereto was Associate Counsel of International Game Technology. Leo Previti is also a Certified Public Accountant and is the brother of James P. Previti. Jim Ellis became a Director of the Company in November of 2000. Since 1997, Mr. Ellis has held the position of Associate Professor with the USC Marshall School of Business, in the Department of Marketing. Prior to 1997, Mr. Ellis was the CEO of Ports O'Call in Pasadena, and has held executive marketing positions with retailers Miller's Outpost and The Broadway Department Stores. Mr. Ellis holds an MBA from Harvard Business School and an undergraduate degree from the University of New Mexico. The Board of Directors of FHI is elected annually by Mr. Previti, the sole shareholder of FHI. Officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. The Board of Directors of FHI meets three or four times per year on a quarterly basis. The Boards of Director of FHI has an Audit Committee of which Mr. Leo Previti is a member and a Compensation Committee of which Mr. Steven Fowlkes is a member. ITEM 11 - EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the compensation earned by the Chief Executive Officer and each of the other most highly paid executive officers of FHI (pursuant to Regulation S-K, Item 402, of the Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975) whose total compensation for services rendered during fiscal 2001 exceeded $100,000 (collectively, the "Named Executive Officers"): Summary Compensation Table ------------------------------------------------------------------------------- Annual Compensation ------------------------------------------------ Principal Name Position Salary Bonus All Other Compensation ------------------------------------------------------------------------------- James P. Previti Chairman of the Board 250,000 $4,073,123 $0 Chief Executive Officer/ President Frank Glankler Chief Operating Officer 240,000 2,761,186 7,200 Larry Day Chief Legal Officer/ 200,000 814,625 7,200 Secretary Larry Young Northern Division - 180,000 1,972,454 7,200 President James Rex Southern Division - 165,000 837,067 7,200 President Richard Munkvold Chief Financial Officer/ 120,000 814,625 3,600 Principal Accounting Officer

The Company and Mr. Previti are parties to an employment agreement whereby Mr. Previti's annual compensation is $250,000 plus a quarterly bonus of up to five percent of the pretax consolidated net income of the Company. Mr. Previti's employment contract extends through October 31, 2002. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 1, 2001, the beneficial ownership of the partnership interests in the Company by (a) each of the directors, (b) the directors and officers of FHI, and (c) each person known to the Company to own beneficially more than 5% of the Company 's limited partnership interests or general partnership interests. % of Profits/ Name of Beneficial Owner [1] Type of Losses/ % of Interest Capital Class ------------------------------------------------------------------ James P. Previti [2] General Partner 100.00% 100.00% James P. Previti [3] Limited Partner 100.00% 100.00% All directors and officers as a group (10 persons) [2] General Partner 100.00% 100.00% All directors and officers as a group (10 persons) [3] Limited Partner 100.00% 100.00% Forecast Homes, Inc. General Partner 1.00% 100.00% Forecast Construction Limited Partner 2.00% 2.00% Forecast Corporation Limited Partner 10.9698% 10.9698% Forecast Mortgage Corp. Limited Partner 1.0157% 1.0157% Forecast Development, L.P. Limited Partner 4.8837% 4.8837% Forecast Development, L.P./ Prestige Homes, LLC Limited Partner 20.00% 20.00% Inland Empire Personnel, Inc. Limited Partner 16.2516% 16.2516% Previti Realty Fund, L.P. Limited Partner 43.8792% 43.8792%

[1] The address of each beneficial owner is: 10670 Civic Center Drive, Rancho Cucamonga, California 91730. [2] Reflects beneficial ownership resulting from status as sole trustor and trustee of the Trust, which owns all of the outstanding interests in each of the current limited partners of the Company. [3] Reflects beneficial ownership resulting from status as sole trustor and trustee of the Trust, which owns all of the outstanding equity interests in each of the current limited partners of the Company. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Relationships Among Mr. Previti, the Trust and the Company The Company was formed in 1993 in connection with a reorganization of the homebuilding businesses owned by the James Previti Family Trust (the "Trust"). The Company is the successor to substantially all the assets and known liabilities of the residential real estate development business of the Trust's affiliates. The Trust is a living, revocable trust with James Previti as the sole trustor and trustee. Transactions With Affiliates In 1994, the Board of Directors of FHI resolved that it would be in the Company's best long-term interests to seek the assistance of Mr. James Previti, the Company's President and Chief Executive Officer, in acquiring the Company's 11 3/8% Senior Notes on the open market, if he could acquire them at a favorable discount from their stated face value. At the same time, the Board of Directors of FHI agreed that the Company would repurchase the notes from Mr. Previti at his cost basis, plus interest, at such time as the Company had sufficient financial resources. Acting upon this authorization, Mr. Previti did acquire $20.4 million of the 11 3/8% Senior Notes all of which were repurchased and retired prior to October 31, 1999. The Company believes that these transactions were on terms at least as favorable to the Company as a comparable transaction made on an arm's length basis between unaffiliated parties. From time to time, the Trust and/or Mr. Previti have guaranteed indebtedness of the Company in order to enable the Company to obtain financing on more favorable terms than would otherwise be available. There can be no assurances that the Trust and/or Mr. Previti will continue to provide such guarantees in the future. In 1993, Mr. Previti contributed two undeveloped parcels of real property in Bullhead City, Arizona zoned for multi-family use, to the Company. In May 1995, the Company sold one of these parcels to Previti Realty Fund in exchange for a note for $641,000 secured by the parcel. Previti Realty Fund developed the parcel as part of an adjacent existing multi-family operating property bringing the total units in that operating property to 204. The remaining parcel of undeveloped property held by the Company was also sold to Previti Realty Fund in fiscal year 2001 for $1,713,000. The Company received cash payments of $400,000 and an unsecured note of $1,313,000. No gain or loss was recorded on the sale. As of October 31, 2001, both notes have been paid off. During the fiscal year ended October 31, 2001, the Company sold to an entity owned by Mr. Previti, 60 acres of commercial land located in Fontana, California. The Company received cash payments of $350,000 and an unsecured note of $3,150,000. No gain or loss was recorded on the sale. Land Acquisitions From Affiliates In the fiscal year ended October 31, 2001, the Company purchased 1,578 lots in Menifee, Victorville, Corona, Rancho Cucamonga, Folsom, California and Flagstaff, Arizona from entities owned or controlled by Mr. Previti with acquisition prices totaling $17.5 million, which was equal to their book value. In the fiscal year ended October 31, 2000, the Company purchased 167 lots in Corona, California from entities owned or controlled by Mr. Previti with acquisition prices totaling $6.7 million, which was equal to their book value. Over the next 18 months, the Company anticipates purchasing another 1,377 lots, located in Fontana, Moreno Valley, Vacaville, Corona and Elk Grove, California and Flagstaff, Arizona from related entities. As of October 31, 2001, deposits toward the purchase of the 1,377 lots totaled $10.3 million. Receivables From Affiliates During the fiscal year ended October 31, 2001, Accounts and Notes Receivable from Related Parties decreased $10.3 million to $3.9 million. The decrease primarily relates to the paydown of certain receivables from affiliated entities in which Mr. Previti is the 100% owner. During the fiscal year ended October 31, 2000, Accounts Receivable from Related Parties increased by $7.2 million. The increase primarily relates to the Company making four new loans to entities owned or controlled by Mr. Previti. These notes were repaid in the fiscal year ending October 31, 2001. Management Services The Company entered into management service agreements with several affiliates as a part of the reorganization described previously in 1993. The agreements obligate the Company to provide certain executive management, legal, tax, accounting, human resources, payroll, environmental, risk management, treasury and management information services to these affiliates, in exchange for a fixed management fee specified in the agreement. In fiscal year 2001 and 2000, the Company charged $103,000 and $28,000 in management fees, to affiliates, for these services, respectively. Transactions with Mortgage Banking Company - Forecast "Registered Tradename" Home Mortgage LLC During fiscal year 1998, the Company entered into negotiations with Norwest for the purpose of forming a broader-based mortgage services entity that would be better able to attract and fulfill the mortgage needs of the Company's home buyers, increase the Company's cash flow from its mortgage business and take advantage of the standardization in the mortgage industry. As of January 16, 1998, the Company began to send its home buyers to Norwest for all of its mortgage needs. At the same time, Norwest and the Company applied to conduct business as "Forecast "Registered Tradename" Home Mortgage LLC" ("Forecast Mortgage"), a joint venture owned in equal shares by Norwest and Inland Counties Mortgage. The Company owns a 98% share of Inland Counties Mortgage, with Forecast "Registered Tradename" Corporation owning the other 2%. In July 1999, Wells Fargo purchased Norwest and continued (through Wells Fargo Home Mortgage) as a partner in Forecast Mortgage. Forecast Mortgage provides the Company with the ability to control the mortgage processing and funding of the loans its home buyers obtained in their dealings with the Company, and has provided the Company (through the consolidation of Inland Counties with the Company) with income for fiscal year 2001 of $1,307,000, generated through the origination of those mortgage loans to its home buyers. Insurance Brokerage Services IEI, an affiliate of the Company that is owned by the Trust, is a licensed insurance broker that does business as Inland Southern Insurance Services, Inc. ("ISIS"). The Company purchases various insurance policies through ISIS. Such purchases are made on terms at least as favorable to the Company as could be obtained through an unaffiliated insurance broker. In addition, ISIS markets various forms of insurance to the Company's home buyers. The vast majority of the business of ISIS consists of home buyers referred by the Company. The Company receives no referral fee from ISIS for such referrals or providing its customer lists. The Company purchases other insurance and sureties through independent brokers under an arrangement whereby ISIS receives a commission as a co-broker on the insurance and sureties sold. ISIS performs no services for the Company in obtaining the insurance and no portion of such commission is rebated to the Company as a referral fee. The Company believes that the aggregate cost of the insurance coverage purchased pursuant to this arrangement is no greater than the cost that would have been charged in an arms-length transaction with an unaffiliated party. Office Leases The Company leases from Previti Realty Fund, approximately 15,500 square feet of office space in Rancho Cucamonga for its corporate and Southern California headquarters and approximately 11,807 square feet of office space in Sacramento. The Company presently pays approximately $27,000 triple net per month to lease its corporate headquarters and approximately $17,000 full service per month for its Sacramento office. "Triple Net" provisions require the Company to pay insurance, taxes and operating expenses on the building while "Full Service" provisions include such expenses in the monthly rent. The terms and conditions of such leases, including rent payments by the Company thereunder, are believed by the Company to be equivalent to such as would be available on an arm's length, fair market value basis. Aircraft Charter From time to time the Company charters aircraft from JP Air Charter, Inc., and CJ Air, LLC, affiliates of the Company. In fiscal 2001 the Company paid those affiliates approximately $83,000. All such charter services are provided on terms equivalent to those offered to unaffiliated third parties. Loan Payable From time to time, Mr. Firestone, a former director of the Company, made non-recourse loans to the Company to partially fund the acquisition of specific communities. Those loans had an rate of 10% per annum and were repaid at maturity. As of October 31, 2000 the Company was obligated to Mr. Firestone for $1,709,000 through such loans. The loans were made on terms commensurate with those generally available for similar loans. As of October 31, 2001, the Company has paid off all existing loans owed to Mr. Firestone. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K (a) (1) and (a) (2) Financial Statements and Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report beginning on page F-1. All other schedules are not applicable or not required and accordingly have been omitted. (a) (3) Exhibits Exhibit No. Description ----------- ----------- 1.1 Limited Partnership Agreement of The Forecast Group "Registered Tradename", L.P. effective as of September 30, 1993 by and among Forecast "Registered Tradename" Homes, Inc., Forecast "Registered Tradename" Mortgage Corporation, Forecast "Registered Tradename" Corporation, Inland Empire Personnel Inc. and Forecast "Registered Tradename" Development, L.P. 1.2 First amendment to the Limited Partnership Agreement of The Forecast Group, "Registered Tradename" L.P., dated November 3, 2000. 1.3 Second amendment to the Limited Partnership Agreement of The Forecast Group, "Registered Tradename", L.P., dated June 29, 2001. 1.4 Articles of Incorporation of Forecast "Registered Tradename" Capital Corporation. 1.5 Bylaws of Forecast "Registered Tradename" Capital Corporation. 3.1 Employment Agreement by and between The Forecast Group "Registered Tradename", L.P. and James P. Previti dated as of November 1, 1993. 4.1 Subsidiaries of the Registrant. _________ Each of the foregoing exhibits was filed as part of the Company's Form S-1 and Amendments thereto dated November 24, 1993, January 18, 1994, February 7, 1994 and February 11, 1994 and are incorporated herein by reference. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FORECAST GROUP "Registered Tradename", L.P. By: FORECAST "Registered Tradename" HOMES, INC. A California corporation its General Partner By: /s/ James P. Previti -------------------- President Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FORECAST GROUP "Registered Tradename", L.P., by FORECAST "Registered Tradename" HOMES, INC., General Partner: Name Title Date ---- ---------------------- ------------------ /s/ James P. Previti -------------------- James P. Previti Chairman of the Board, President, Principal Executive Officer December 14, 2001 /s/ Richard B. Munkvold ----------------------- Richard B. Munkvold Chief Financial Officer, Principal Accounting Officer December 14, 2001 REPORT OF INDEPENDENT AUDITORS Board of Directors The Forecast Group "Registered Tradename", L.P. We have audited the accompanying consolidated balance sheets of The Forecast Group "Registered Tradename", L.P. and subsidiaries (the "Company") as of October 31, 2001 and 2000, and the related consolidated statements of income and partners' equity, and cash flows for each of the three years in the period ended October 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Forecast Group "Registered Tradename", L.P. and subsidiaries at October 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG, LLP San Diego, California December 7, 2001 The Forecast Group "Registered Tradename", L.P. Consolidated Balance Sheets (Amount's in 000's) October 31 ----------------------- 2001 2000 ----------------------- Assets: ------ Cash and Cash Equivalents $30,869 $26,607 Accounts Receivable 2,844 809 Accounts and Notes Receivable, Related Parties 3,880 14,149 Real Estate Inventory 200,770 142,768 Property and Equipment, Net 419 435 Other Assets 1,012 1,565 -------- -------- Total Assets $239,794 $186,333 ======== ======== Liabilities & Partners' Equity: ------------------------------- Accounts Payable $42,893 $31,382 Accrued Expenses 5,750 6,498 Notes Payable: Senior Notes at 11 3/8% due December 2000 - 19,700 Collateralized by Real Estate Inventory 50,029 44,028 Other Notes Payable - 3,525 ------ ------ Total Notes Payable 50,029 67,253 ------ ------ Total Liabilities 98,672 105,133 Commitments and Contingencies (Note 8) Partners' Equity 141,122 81,200 -------- -------- Total Liabilities & Partners' Equity $239,794 $186,333 ======== ========

See notes to consolidated financial statements. The Forecast Group "Registered Tradename", L.P. Consolidated Statements of Income and Partners' Equity (Amounts in 000's) For the Year Ended October 31 2001 2000 1999 --------- --------- ---------- Homebuilding Revenues $482,115 $327,617 $280,644 Cost of Homes Sold 360,324 259,218 228,859 -------- -------- -------- Gross Profit 121,791 68,399 51,785 -------- -------- -------- Land Sales Revenues 23,545 5,000 42,271 Cost of Land Sold 22,240 5,000 40,958 ------- -------- -------- Gain on Land Sales, net 1,305 - 1,313 ------- -------- -------- Operating Expenses: ------------------- Selling & Marketing Exp. 20,412 16,820 17,165 General & Admin. Exp. 31,661 21,361 16,064 Other Operating Costs 491 1,362 223 ------ ------ ------ Total Operating Expenses 52,564 39,543 33,452 ------ ------ ------ Operating Income 70,532 28,856 19,646 Other Income: ------------ Interest Income 846 965 682 Other Income and Expenses, net 727 396 1,247 ------- ------- ------- Total Other Income 1,573 1,361 1,929 ------- ------- ------- Net Income $72,105 $30,217 $21,575 ======= ======= ======= Partners' Equity at Beginning of Year 81,200 $53,018 $31,443 Capital Distributions, net (12,183) (2,035) - Net Income 72,105 30,217 21,575 ------- ------- ------- Subtotal 141,122 81,200 53,018 Less: Capital Notes Receivable from Partners - - (300) ------- ------- ------- Net Partners' Equity at End of Year $141,122 $81,200 $52,718 ======== ======= =======

See notes to consolidated financial statements. The Forecast Group "Registered Tradename", L.P. Consolidated Statements of Cash Flows (Amount in 000's) For the Year Ended October 31 2001 2000 1999 ----------------------------------- Operating Activities: --------------------- Net Income $72,105 $30,217 $21,575 Adjustments to Reconcile Net Income to Net Cash Provided by (Used In) Operating Activities Depreciation on Property and Equip. 255 295 389 Loss on Sale of Property and Equip. 1 8 63 Gain on Land Sales, net (1,305) - (1,313) Other Operating Costs 491 1,362 223 Equity Income of Unconsolidated Joint Venture (1,307) (595) (564) (Increase)/Decrease in Accounts Receivable (2,035) 3,489 (2,889) Increase in Real Estate Inventory (57,188) (33,330) (25,558) Decrease (Increase) in Other Assets 339 408 (901) Increase in Accounts Payable and Accrued Expenses 10,763 8,418 6,756 ------ ----- ----- Net Cash Provided by (Used in) Operating Activities 22,119 10,272 (2,219) ------ ------ ----- Investing Activities: --------------------- Contribution to Joint Venture - (5) (7) Distribution from Joint Venture 1,521 397 795 Additions to Property and Equip. (240) (216) (369) Proceeds from Sale of Property and Equipment - 29 - ----- ---- ---- Net Cash Provided by Investing Activities 1,281 205 419 ----- ---- ---- Financing Activities: --------------------- Capital Distributions, net (12,183) (2,035) - Payment received on Capital Notes Receivable from Partner - 300 - Retirement of Senior Notes at 11 3/8% due December 2000 (19,700) - - Decrease/(Increase) in Accounts and Notes Receivable, Related Parties 10,269 (7,244) 3,522 Proceeds from Notes Payable, Collateralized by Real Estate 305,371 219,694 220,310 Proceeds from Notes Payable, Unsecured 9,204 - - Proceeds from Notes Payable, Other 3,769 319 322 Principal Payments on Notes Payable, Collateralized by Real Estate (299,370) (216,598) (214,914) Principal Payments on Notes Payable, Unsecured (9,204) - - Principal Payments on Notes Payable, Other (7,294) (900) (1,039) ------ ------- ------ Net Cash (Used in) Provided By Financing Activities (19,138) (6,464) 8,201 ------- ------- ----- Increase in Cash and Cash Equivalents 4,262 4,013 6,401 Cash and Cash Equivalents at Beginning of Year 26,607 22,594 16,193 ------- ------- ------- Cash and Cash Equivalents at End of Year $30,869 $26,607 $22,594 ======= ======= =======

See notes to consolidated financial statements. THE FORECAST GROUP "Registered Tradename", L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001 1. Organization The Forecast Group "Registered Tradename", L.P. is a California limited partnership (the "Company") which was formed in October 1993 to be the successor to substantially all the assets and liabilities of the single-family residential real estate development business of the James Previti Family Trust (the "Trust") and its affiliates. The Trust is a living, revocable trust with James Previti as Trustor. The Company's sole general partner is Forecast "Registered Tradename" Homes, Inc. ("FHI"), a California corporation, which owns a 1% interest in the profits, losses and capital of the Company. The Company builds and sells single-family homes in three distinct geographic regions (Northern California, Southern California and Arizona). 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned entities engaged in single-family residential real estate development and related businesses. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 significantly in the near term. Cash and Cash Equivalents Cash and cash equivalents include unrestricted deposit accounts at financial institutions, unrestricted certificates of deposit with a maturity of less than 90 days and certain funds not yet remitted and held in trust by escrow companies on homes which have closed escrow. These escrow funds are generally received within one to three days after the close of escrow. Real Estate Inventory and Recognition of Revenue Real estate inventory is carried at cost and consists of single-family residential projects and land held for future development of single-family communities. Interest and property taxes are capitalized to inventories during periods of development and construction. In accordance with FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121), when events or circumstances indicate that an impairment to an asset to be held and used might exist, the expected future undiscounted cash flows from the affected asset or group of assets must be estimated and compared to the carrying value of the asset or group of assets. If the sum of the estimated future undiscounted cash flows is less than the carrying value of the assets, an impairment loss must be recorded. The impairment loss is measured by comparing the estimated fair value of the assets with their carrying amount. Statement 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less costs of disposal. On an ongoing basis, management analyzes future undiscounted cash flows for all real estate projects where impairment indicators are present. Based upon such analysis, no provision for impairment loss was recorded for the years ended October 31, 2001, 2000 or 1999. Sales of single-family residences and other real estate are generally recognized when title is conveyed to the buyer at close of escrow and other conditions for profit recognition have been met. Selling expenses include escrow charges, commissions, sales incentives, advertising, promotions, and the cost of model home center operation and maintenance. These expenses are generally charged to operations as incurred. Cost of homes sold include direct and allocated costs for land and construction including an estimate for future warranty costs. The Company allocates the cost of land, common area development, production overhead, capitalized sales center costs, interest, and property taxes to homes within a particular community on a pro-rata basis which approximates relative value. Property and Equipment Property and equipment, consisting primarily of vehicles and office furniture and equipment, is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of three to seven years. Investment in Joint Venture The Company accounts for its effective 49% ownership interest in Forecast "Registered Tradename" Home Mortgage, LLC under the equity method of accounting. Warranties The Company provides one-year limited warranties to purchasers of its homes. Statutory requirements in the states in which the Company does business may grant rights to home buyers in addition to those provided by the Company. Estimated warranty costs are accrued at the time of each home's closing. Income Taxes The Company, as a partnership, is not subject to federal and state income taxes since the results of its operations will be allocated to the partners for inclusion in their respective income tax returns. Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The Company's financial instruments consist of cash equivalents, accounts and notes receivable, and notes payable. The fair value of financial instruments approximates their recorded values. The fair value of Accounts and Notes Receivable from related parties is not determinable due to the related party nature. Effect of New Accounting Standards Effective November 1, 2000, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 133 did have an impact on the Company's results of operations or financial condition in fiscal year 2001, due to the fact that the Company held no derivative financial instruments and did not invest in derivative investments or engage in hedging activities. 3. Accounts and Notes Receivable, Related Parties Accounts and notes receivable, related parties, consist of the following: October 31, ---------------------- 2001 2000 ----------------------- Unsecured Note receivable from Forecast Corporation $ - $5,000,000 Note receivable from Previti Realty Fund 3,150,000 - Receivable from Previti Realty Fund 211,000 3,326,000 Receivables from other affiliates, net 519,000 1,356,000 Note receivable from Corona Country Club Estates, unsecured - 1,125,000 Note receivable from Mr. Previti, collateralized by a partnership interest in River Road Ventures - 1,083,000 Note receivable from Newport Murrieta Land Co., secured by real property in Flagstaff, Arizona - 657,000 Note receivable from Previti Realty Fund secured by real property in Mohave County, Arizona - 641,000 Note receivable from Previti Realty Fund, unsecured - 500,000 Management fees from Affiliates - 161,000 Note receivable from Mr. Previti, Unsecured - 300,000 ---------- ----------- Total $3,880,000 $14,149,000 ========== ===========

As of October 31, 2001, accounts and notes receivable from related parties, include a note receivable from an entity in which Mr. Previti is the 100% owner in the amount of $3,150,000, relating to the sale by the Company of commercial land in Fontana, California. This note is due February 1, 2002 and bears interest at the rate of 8%. The receivable from an entity in which Mr. Previti is the 100% owner in the amount of $211,000, relates primarily to advances. The receivables from other affiliates are primarily advances, which totaled $519,000 as of October 31, 2001. For further discussion regarding these and other transactions with affiliates, see Note 6. 4. Real Estate Inventory and Related Notes Payable Real estate inventory and related notes payable consist of the following: October 31, 2001 -------------------------------- Real Estate Notes Payable Inventory -------------------------------- Homes Under Construction $92,981,000 $22,765,000 Development Projects in Process 73,209,000 16,656,000 Unimproved Land 27,161,000 10,608,000 Model Homes 7,419,000 - -------------------------------- Total $200,770,000 $50,029,000 ================================ October 31, 2000 -------------------------------- Real Estate Notes Payable Inventory -------------------------------- Homes Under Construction $71,399,000 $20,028,000 Development Projects in Process 49,501,000 17,213,000 Unimproved Land 15,293,000 6,787,000 Model Homes 6,575,000 - -------------------------------- Total $142,768,000 $44,028,000 ================================

During the years ended October 31, 2001 and 1999, the Company sold and subsequently leased back 12 and 71 model homes for a sales price of $3,425,000 and $13,729,000 and gross profit of $608,000 and $2,354,000, respectively. The sales and related profit were recorded in accordance with Statement of Financial Accounting Standard No. 98 "Accounting for Leases". Certain of the model sales in 1999 were done with a former director of the Company. Notes payable secured by real estate inventory bear interest at rates ranging from the three month LIBOR rate (2.52% at October 31, 2001) plus 2.10% to prime rate (5.5% at October 31, 2001) plus 1.0%. The interest rate on $26.1 million of the loans outstanding at October 31, 2001 which bear interest at the LIBOR rate plus 2.10% will increase to the prime rate if the Company fails to maintain average deposits with the lender of $10 million. At October 31, 2001, the Company's cash balance with this LIBOR lender was in excess of $30 million. Principal payments on notes payable collateralized by real estate held for development and sale are generally due within eighteen months. Notes payable collateralized by residential developments that are in process are generally repaid as homes in the related communities are closed. At October 31, 2001, the Company had commitments for $105.7 million under several revolving credit facilities with commercial banks and financial institutions of which $43.7 million was outstanding. In addition, at October 31, 2001, the Company had community specific facilities capable of providing aggregate funding of $6.3 million, all of which was outstanding. Borrowings under the credit facilities are secured by liens on specific real property owned by the Company, and carry varying levels of recourse against the Company. On October 31, 2001, the aggregate outstanding principal balance under the Company's credit facilities was $50.0 million and the recourse amount of such debt to the Company was only $15.2 million. The following summarizes the components of interest expense for all notes payable: For the Year Ended October 31 ------------------------------------ 2001 2000 1999 ------------------------------------- Interest Incurred and Capitalized $9,134,000 $9,877,000 $10,193,000 Interest Incurred and Expensed - - - ------------------------------------- Total Interest Incurred $9,134,000 $9,877,000 $10,193,000 ===================================== Capitalized Interest Amortized to Cost of Homes Sold $8,331,000 $8,899,000 $8,214,000 Interest Paid $10,066,000 $9,877,000 $10,193,000

5. 11 3/8% Senior Notes Due December 2000 In February 1994, the Company issued $50,000,000 in 11 3/8% Senior Notes through a public debt offering. During the year ended October 31, 1998, the Company repurchased on a margin account, a portion of the Senior Notes. As of October 31, 2000 approximately $3,525,000 was outstanding on the margin account and has been classified as Other Notes Payable on the balance sheet. During the year ended October 31, 2001, the Company retired the remaining outstanding $19,700,000 of Senior Notes held in the names of investors other than the Company. 6. Related Party Transactions The Company leases its corporate offices and certain of its operating division offices from Mr. Previti or partnerships in which Mr. Previti maintains at least a 50% ownership. These leases are generally noncancelable and have expiration dates ranging through 2004. Payments under these leases were $505,000, $486,000 and $401,000 for the fiscal years ended October 31, 2001, 2000 and 1999, respectively. See Note 8 of Notes to Consolidated Financial Statements for aggregate operating lease commitments of the Company. As of January 16, 1998 the Company started a business relationship with Norwest, Inc. (a nationally recognized mortgage banker, "Norwest") to provide mortgages for certain of the Company's customers. On August 1, 1998 the Company (through its limited partnership interest in Inland Counties Mortgage, LLC ["Inland Counties"], a majority-owned subsidiary of the Company) entered into a joint venture with Norwest under the name Forecast "Registered Tradename" Home Mortgage, LLC ("Forecast "Registered Tradename" Mortgage"). During fiscal year 2000, Wells Fargo purchased Norwest and continued (through Wells Fargo Home Mortgage) to be a partner in Forecast "Registered Tradename" Mortgage. During the years ended October 31, 2001, 2000 and 1999, the Company recognized $1,307,000, $595,000 and $564,000 of income from this joint venture. The Company has entered into management services agreements with several affiliates, whereby the Company provides certain executive management, real estate development, legal, tax, accounting, human resources, environmental, risk management, treasury and management information services to these affiliates, in exchange for a fixed management fee. The Company charged $103,000, $28,000 and $1,178,000 in net management fees to affiliates under these agreements for the fiscal years ended October 31, 2001, 2000 and 1999, respectively. In the fiscal year ended October 31, 2001 and 2000, the Company purchased 1,578 lots in Menifee, Victorville, Corona, Rancho Cucamonga and Folsom, California, and Flagstaff, Arizona from entities owned or controlled by James P. Previti with acquisition prices totaling $17.5 million, which was equal to their book value. In the fiscal year ended October 31, 2000, the Company purchased 167 lots in Corona, California from entities owned or controlled by James P. Previti totaling $6.7 million, which was equal to their book value. Over the next 18 months, the Company anticipates purchasing another 1,377 lots, located in Fontana, Moreno Valley, Vacaville, Corona and Elk Grove, California and Flagstaff, Arizona from related entities. As of October 31, 2001, deposits toward the purchase of the 1,377 lots totaled $10.3 million, which is included in real estate inventory. During the fiscal year ended October 31, 2001, the Company sold to an entity owned by Mr. Previti, 60 acres of commercial land located in Fontana, California for $3,500,000. The Company received cash payments of $350,000 and an unsecured note of $3,150,000. No gain or loss was recorded on the sale. From time to time, Mr. Firestone, a former member of the Board of Directors, has made non-recourse loans to the Company. These loans bear interest at the rate of 10% per annum and are repaid at maturity. As of October 31, 2000, the Company was obligated to Mr. Firestone for $1,709,000. There was no outstanding balance at October 31, 2001. In August 2000, the Company sold 296 lots in Hemet, California, at its book value, to a corporation owned 100% by Mr. Previti for total consideration of $5 million in the form of an unsecured note due in August 2003. No gain or loss was recognized on the sale. During the year ended October 31, 2001, this note was paid in full. Through the fiscal year ended October 31, 2000, the Company incurred $8.6 million in site development costs on real property in Northern California, on behalf of an affiliated entity in which Mr. Previti is a 100% owner. The Company has been reimbursed all of these costs. During fiscal year 2001 and 2000, the Company wrote-off $698,000 and $206,000 of uncollectible receivables from affiliates. From time to time the Company charters aircraft from JP Air Charter, Inc. and CJ Air, LLC, affiliates of the Company. During the years ended October 31, 2001, 2000 and 1999, the Company paid the affiliates approximately $83,000, $49,000 and $52,000, respectively. For further discussion of these and other transactions with affiliates, see Note 3 of Notes to Consolidated Financial Statements. 7. Profit Sharing and Pension Plans In fiscal 1995, the Company adopted a non-contributory 401(k) plan covering substantially all employees. In fiscal 1997, the Company adopted a qualified matching program relating to employees' contribution to their 401(k) plans, and created an obligation for the Company to contribute 25% of any employee's contribution to the 401(k) plan, up to the first 6% of any one employee's contribution. In fiscal year 2000, the Company modified its employer matching funds, to equal 100% of the first 3% of any employee's contribution to their 401(k) account. Participating employees vest in the Company's matching contribution over a five (5) year period, at 20% per year. During 2001, 2000 and 1999, the Company paid $171,000, $142,000 and $95,000, respectively, to employees' accounts as a result of this program. 8. Commitments and Contingencies COMMITMENTS The Company leases office facilities under noncancelable operating leases with various expiration dates ranging through 2004. Aggregate rental costs incurred under such leases were $505,000, $583,000 and $401,000 for the years ended October 31, 2001, 2000 and 1999, respectively. Future minimum annual rental payments of $140,000 for its Corporate Office are due during 2002. Future minimum annual rental payments of $144,000, $146,000 and $99,000 for its Sacramento office are due during 2002, 2003, and 2004, respectively. Future minimum annual rental payments of $17,000, and $14,000 for its four satellite offices in Southern California are due during 2002 and 2003, respectively. See Note 6 of Notes to Consolidated Financial Statements for further discussion regarding leases with affiliates. CONTINGENCIES The Company is subject to routine litigation incidental to its business. In the opinion of management, the resolution of such claims will not have a material adverse effect on the operating results or financial position of the Company. In addition to the routine litigation, the Company's contingent liabilities include warranty obligations and other disputes arising from construction and sales of single-family homes in the ordinary course of business. In the opinion of management, adequate reserves have been provided for warranty obligations and the ultimate outcome of any disputes on these other matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 9. Quarterly Results of Operations (Unaudited) 2001 -------------------------------------------------------- Three Months Ended -------------------------------------------------------- January 31 April 30 July 31 October 31 -------------------------------------------------------- Revenues $82,471,000 $109,989,000 $127,728,000 $161,927,000 Gross Profit 18,652,000 27,780,000 33,414,000 41,945,000 Net Income 9,150,000 17,268,000 20,175,000 25,512,000 2000 -------------------------------------------------------- Three Months Ended -------------------------------------------------------- January 31 April 30 July 31 October 31 -------------------------------------------------------- Revenues $61,041,000 $69,045,000 $83,202,000 $114,329,000 Gross Profit 12,259,000 14,135,000 17,175,000 24,830,000 Net Income 3,342,000 5,372,000 8,045,000 13,458,000 1999 -------------------------------------------------------- Three Months Ended -------------------------------------------------------- January 31 April 30 July 31 October 31 -------------------------------------------------------- Revenues $38,164,000 $65,802,000 $81,226,000 $95,452,000 Gross Profit 7,262,000 11,479,000 14,654,000 18,390,000 Net Income 1,330,000 4,217,000 5,673,000 10,355,000

FORECAST GROUP LP 10-K