Kimball Hill, one of the country's biggest private builders, recorded a net loss of $220.5 million and incurred negative cash flows from operations of $17.1 million for fiscal year 2007, according to form 10-K filed with the U.S. Securities and Exchange Commission. The builder's net loss included inventory impairment charges of $240.0 million.

This poor financial performance pushed Kimball Hill out of compliance with certain parts of its amended covenants for the company's senior credit facility, including the covenant requiring it to maintain a minimum tangible net worth (as defined in the senior credit facility). The company has begun discussions with its lenders to seek a temporary waiver of the breached covenants. So far, there have been no agreements.

"We were unable to get them to agree," said Ed Madell, the company's CFO.

Due to Kimball Hill's covenant violations, it can't get to $100 million within that $500 million credit facility. Those liquidity issues forced Standard & Poor's Ratings Services and Moody's to downgrade their credit ratings of the builder. Standard & Poor's also placed all of the ratings on CreditWatch with negative implications. The rating actions affect $203 million in rated senior subordinated notes.

"Right now, they don't have access to their revolving credit facility," said Lisa Wright, an associate director for Standard & Poor's. "They're in negotiations with the banks on that. Clearly, if they can't reach an agreement, they would face difficulties."

Madell said his biggest challenge has been providing his lenders with any kind of guidance for future performance. "It's very difficult for us to project what we expect to have in sales and revenue," he said. "That's going to tell me how much debt I'm likely to have, how much I'm going to have to service debt, and what decisions I'm likely to make to potentially reduce debt."

Already, Kimball Hill has taken a number of steps to stay in business including tailoring its products to be more affordable, refining its pricing strategy, providing customers with a variety of mortgage products, renegotiating with its vendors, resizing its operating structure, tightening its land acquisition, selling lots, and managing debt. It also exited Milwaukee, Wis., Naples, Fla., Portland, Ore., and Vancouver, Wash., in 2007. During fiscal 2007, the average sales price of the builder's homes delivered was $257,000, which represents a 7.2% decrease from fiscal 2006.

"Our approach has been to try to constrict our inventory, both home building and land," Madell said.

Despite those moves, the market has made it difficult. Kimball Hill's revenue fell to $894.7 million from $1,163.8 million in 2006.The builder's backlog fell to $148.7 million from $210.6 million.

Madell expressed that he would like to project brighter numbers for 2008, but said he has no idea when things will change. If they don't change soon, Kimball Hill may have to liquidate more assets or even curtail operations.

"It is hard to say where Kimball Hill will be in 2008, 2009, and beyond," Madell said.