The continued existence of Kimball Hill Homes, one of the housing industry's largest privately owned builders, as a business entity now hinges on the outcome of its negotiations with lenders over the terms of its debt and finding some way to stop the cash draining from its operations.

In its 10-k filing with the U.S. Securities and Exchange Commission, which had been delayed for several weeks, Kimball Hill reported that it's lost $220.5 million in the year ended Sept. 30, 2007, exacerbated by $240 million in impairment charges. Its revenue for the year fell 23.1 percent, to $894.7 million, as its deliveries declined by 20.1 percent to 3,246 units, and its new orders dropped by 8.5 percent to 3,081 units. The value of Kimball Hill's backlog declined 29.3 percent to $148.7 million.

As a result of this erosion in buyer demand and its impairments, Kimball Hill's operations incurred negative cash flow of $17.1 million, and its net worth fell below levels for one of the covenants in its senior credit facility. Being in violation of that covenant limits the company's access to an estimated $100 million within that $500 million credit facility, which is why Standard & Poor's and Moody's last week downgraded their respective credit ratings of Kimball Hill, and S&P placed the builder on Credit Watch. "We will consider lowering the ratings further if the company is unable to reach an agreement with its bank group for access to additional borrowings," S&P wrote. Jim Fielding, the ratings service's senior director of structured finance ratings, tells BUILDER Online that while bank groups in general "are very accommodative" to borrowers in trouble, the banks could become more conservative and demand more collateral, like land, for loan adjustments.

Bob Ryan, a senior vice president at Kimball Hill who is answering all media inquiries, tells BUILDER Online that his company has formed a negotiating team comprised of its president and CEO Ken Lowe, its acting CFO Brad Grining, and its CFO Ed Madell, who is recovering from leukemia. That team is seeking a temporary waiver of its breached covenants, as well as amendments to its credit facility. Ryan says that the builder has had a "very constructive relationship" with its main lender, Harris Bank. He also asserts that "from a cash position, we're okay."

However, in its 10-k, the company is more sanguine about current market conditions when it states that it has "substantial doubts about whether we will be able to continue as a going concern." Kimball Hill's future rests with "our ability to return to profitable operations in the future and to retain the necessary financing to meet our obligations and pay our liabilities when they come due." At the end of its fiscal year, Kimball Hill had $563.7 million in debt. In the event that it does not achieve its goals, "we may have to liquidate assets or curtail our operations."

Ryan did not provide details about how the company plans to return to profitability, except to note, "we are focused on selling." The company has also placed more operational responsibility in the hands of its regional presidents Mike Richardson and Tim Jacobs. Its 10-k states that its recovery strategy revolves around offering buyers more affordable homes and options packages, reducing its unsold inventory overhang by lowering prices (in fiscal 2007, Kimball Hill's average sales price fell 7.2 percent to $257,000); getting better deals from vendors, land sellers, and contractors; downsizing its operations while retaining key management talent (its headcount dropped by 30 percent, from 1,076 employees on Aug. 1, 2006 to 748 employees on Sept. 30, 2007); and reducing debt and "maximizing liquidity," partly by selling land.

At the end of its fiscal year, the company owned or controlled 18,815 lots and had raised $58.9 million from land sales. Last year, Kimball Hill exited the Milwaukee, Wis., Portland, Ore., and Vancouver, Wash., markets. The company currently operates in 12 markets within five regions, down from 17 markets a year ago.

Another element of the company's strategy is to provide broader financing choices to buyers. Last year, the company's KH Financial mortgage subsidiary captured 54 percent of Kimball Hill's deliveries, but the company admits its availability of mortgages to buyers has been reduced by tightening credit standards. In October, Kimball Hill entered into a joint venture with Wells Fargo to operate a full-service mortgage bank for its customers, and KH Financial will cease operations in the second quarter of fiscal 2008.