At present, we do not have any plans or arrangements to issue additional shares of common stock other than shares currently reserved for issuance under our existing equity incentive plans and upon conversion of our outstanding convertible notes and settlement of our outstanding tangible equity units. Nonetheless, the Board of Directors believes the Reverse Stock Split warranted reconsideration of the total number of shares authorized for future issuance under our Certificate of Incorporation.
As a matter of Delaware law, implementation of the Reverse Stock Split does not require a change in the total number of shares of our common stock authorized under our Certificate of Incorporation. Despite this fact, the Board of Directors carefully considered whether such a change was in the best interests of stockholders. In determining whether to recommend a change to the total number of shares of our common stock authorized under our Certificate of Incorporation, the Board of Directors considered a number of factors including: (i) the number of shares that would be available if we did not reduce our total authorized shares from the current limit of 180 million shares; (ii) the number of shares that would be available if our authorized shares were reduced in the same ratio as the Reverse Stock Split; (iii) the potential for future stock issuances to raise capital, effect acquisitions and/or provide equity incentives to employees; (iv) the proportion of authorized shares remaining available for issuance among our homebuilding peer group; and (v) the impact of potential future stock issuances on our deferred tax assets (as more fully described below).
After weighing these factors, the Board of Directors concluded that the Company’s authorized shares should be reduced from 180 million to 100 million. This level of authorized shares would leave the Company with approximately 66.4 million shares available for issuance after the Reverse Stock Split, or 66% of total authorized shares. The Board believes that this reduction strikes the right balance between having an unnecessarily large number of shares available for issuance, and having too few shares available for issuance, particularly in light of the substantial number of authorized shares available to our homebuilding peers.
• If the Reverse Stock Split were completed in the absence of a reduction in authorized shares, our total shares issued and outstanding, or reserved for issuance, would be approximately 33.6 million, leaving approximately 146.4 million shares, or 81.4% of our authorized total shares available for future issuance.
• At September 4, 2012, we had approximately 123.1 million shares issued and outstanding. In addition, we had approximately 2.2 million shares reserved for issuance under our existing equity incentive plans, which were previously approved by stockholders, and approximately 42.5 million shares reserved for issuance upon conversion of our outstanding convertible notes and settlement of our outstanding tangible equity units. Taken together, we had approximately 167.8 million shares issued and outstanding or reserved for issuance as of September 4, 2012, which means the Company currently has approximately 12.2 million shares, or 6.8% of our authorized total shares available for future issuance. If our total authorized shares were reduced in the same ratio as the Reverse Stock Split, we would have only approximately 2.4 million, or 6.8%, available for future issuance.
• While the Company and the Board of Directors are cognizant of stockholder concerns regarding ownership dilution that would result from future equity issuances, we believe that it is advisable to retain a competitive level of flexibility for future stock issuances as conditions in the housing market strengthen. Future opportunities may arise in which a share issuance is in stockholders’ best interests, including raising additional capital for land acquisitions, expanding through acquisitions or providing incentives to our employees consistent with peer practices, among other alternatives.
• Based on our analysis of available information for publicly traded homebuilders, we believe approximately 60% of their respective total authorized shares remain available for issuance by our publicly traded homebuilding peers on average. This ratio increases to approximately 70% of remaining authorized shares on average when considering only those public homebuilders which, like us, have a market capitalization of less than $2 billion.
• In recent years, we have generated significant net operating losses and unrealized tax losses (collectively, “NOLs”), which have given rise to our total deferred tax assets of $495.7 million, net of certain deferred tax liabilities as of June 30, 2012. Until we generate taxable income, these NOLs are likely to become larger. As long as a future “ownership change” does not occur, which under Section 382 of the Internal Revenue Code is determined in part by taking into account share issuances, we expect to be able to utilize a majority of our deferred tax assets upon achievement of sustained profitability. Because we cannot predict when or to what extent we will return to profitability , we carefully monitor — and will continue to carefully monitor — potential Section 382 ownership shifts, including limiting future share issuances that could limit or eliminate our ability to utilize these tax assets in future years.
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