SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

For the transition period from                     to                     

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Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to: our abilitythe availability of labor and homebuilding materials and increased construction cycle times; adverse weather conditions, including but not limited to realize the anticipated benefits fromcontinued drought in California and the acquisitionSouthwest; the Company’s financial leverage and level of the residential homebuilding business of Polygon Northwest Homes; our abilityindebtedness and any inability to integrate successfully the Polygon Northwest Homes operationscomply with our existing operations; any adverse effect on our business operations, or those of Polygon Northwest Homes, following consummation of the acquisition;financial and other covenants under its debt instruments; continued volatility and worsening in general economic conditions either internationally, nationally or in regions in which we operate;the Company operates; conditions in the Company’s recently entered markets and recently acquired operations; worsening in markets for residential housing; the impact of construction defect, product liability and home warranty claims, including the adequacy of self-insurance accruals, and the applicability and sufficiency of the Company’s insurance coverage; decline in real estate values resulting in impairment of ourthe Company’s real estate assets; volatility in the banking industry and credit markets; uncertainties in the capital and securities markets; terrorism or other hostilities involving the United States; building moratorium or “slow-growth” or “no-growth” initiatives that could be implemented in states in which the Company operates; changes in mortgage and other interest rates; conditions in the capital, credit and financial markets, including mortgage lending standards and the availability of mortgage financing; volatility in the banking industry and credit markets; the timing of receipt of regulatory approvals and the opening of projects; the Company's inability to develop its communities successfully and in a timely manner; the Company's geographic concentration in the Western U.S. region; whether an ownership change occurred that could, under certain circumstances, have resulted in the limitation of our ability to offset prior years’ taxable income with net operating losses; changes in generally accepted accounting principles or interpretations of those principles; changes in prices of homebuilding materials; the availability of labor and homebuilding materials; adverse weather conditions, including the continuing drought in California; competition for home sales from other sellers of new and resale homes; cancellations and ourthe Company’s ability to realize our backlog; building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future in the states in which we operate;convert its backlog into deliveries; the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements; changes in governmental laws and regulations; inabilitywhether the Company is able to comply with financial and other covenants under our debt instruments; whether we are able topay off or refinance the outstanding balances of ourits debt obligations at their maturity; anticipated tax refunds; limitations on ourthe Company’s ability to utilize ourits tax attributes; limitations on ourwhether an ownership change occurred that could, under certain circumstances, have resulted in the limitation of the Company’s ability to reverse any remaining portionoffset prior years’ taxable income with net operating losses; the timing of our valuation allowance with respect to our deferred tax assets; terrorism or other hostilities involving the United States; the impactreceipt of construction defect, product liability and home warranty claims, including the adequacy of self-insurance accruals,regulatory approvals and the applicability and sufficiencyopening of our insurance coverage; andprojects; the availability and cost of land for future development.development; and other factors, risks and uncertainties. These and other risks and uncertainties are more fully described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014,2015, as well as those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our past performance

In this interim report on Form 10-Q, unless otherwise stated or past or present economic conditions in our housing markets are not indicative of future performance or conditions. Investors are urged notthe context otherwise requires, the “Company,” “we,” “our,” and “us” refer to place undue reliance on forward-looking statements.William Lyon Homes, a Delaware corporation, and its subsidiaries. In addition, we undertake no obligationunless otherwise stated or the context otherwise requires, “Parent” refers to update or revise forward-looking statementsWilliam Lyon Homes, and “California Lyon” refers to reflect changed assumptions, the occurrenceWilliam Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of anticipated or unanticipated events or changes to projections over time unless required by federal securities laws.Parent.

WILLIAM LYON HOMES

See accompanying notes to condensed consolidated financial statements

See accompanying notes to condensed consolidated financial statements

Note 1—Basis of Presentation and Significant Accounting Policies

William Lyon Homes, a Delaware corporation (“Parent” and together with its subsidiaries, the “Company”), is primarily engaged in designing, constructing, marketing and selling single-family detached and attached homes in California, Arizona, Nevada, Colorado (under the Village Homes brand), Washington and Oregon (each under the Polygon Northwest Homes brand).

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and all majority-owned and controlled subsidiaries and joint ventures, and certain joint ventures and other entities which have been determined to be variable interest entities ("VIEs") in which the Company is considered the primary beneficiary (see Note 3)2). The accounting policies of the joint ventures are substantially the same as those of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated financial statements were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to our audited consolidated financial statements as of and for the year ended December 31, 2014,2015, which are included in our 20142015 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report.

Real Estate Inventories

Real estate inventories are carried at cost net of impairment losses, if any. Real estate inventories consist primarily of land deposits, land and land under development, homes completed and under construction, and model homes. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. The Company relieves its real estate inventories through cost of sales for the estimated cost of homes sold. Selling expenses and other marketing costs are expensed in the period incurred. From time to time the Company sells land to third parties. The Company does not consider these sales to be core to its homebuilding business, and any gain or loss recognized on these transactions is recorded in other non-operating income. During the three months ended March 31, 2016 the Company sold a parcel of land to a third party that did not result in any gain or loss.

The Company began accruing for warranty costs for units closed in the Washington and Oregon segments in conjunction with their acquisition (see Note 2) at a set rate per home.home in conjunction with the acquisition of Polygon Northwest Homes during 2014. The Company did not assume any warranty liability for units closed prior to the acquisition date.

Interest incurred under the Company’s debt obligations, as more fully discussed in Note 6, is capitalized to qualifying real estate projects under development. Interest activity for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 are as follows (in thousands):

Construction Services

Financial Instruments

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, restricted cash, receivables, and deposits. The Company typically places its cash and cash equivalents in investment grade short-term instruments. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers. The Company is an issuer of, or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in connection with assessment district bonds. These off-balance sheet financial instruments are described in more detail in Note 12.

Cash and Cash Equivalents

 

Real estate inventories consist of the following (in thousands):

 

Notes Payable

Construction Notes Payable

         

Revolving Line of Credit

On March 27, 2015, William Lyon Homes, Inc., a California corporation ("California Lyon") and Parent entered into an amendment and restatement agreement pursuant to which its existing credit agreement for a revolving credit facility of up to $100 million (the "Revolver") was amended and restated in its entirety (as so amended and restated, the “Amended Facility”). The Amended Facility amends and restates the Revolver and provides for total lending commitments of $130.0 million. In addition, the Amended Facility has an uncommitted accordion feature under which the Company may increase the total principal amount up to a maximum aggregate of $200.0 million under certain circumstances (up from a maximum aggregate of $125.0 million under the previous facility), as well as a sublimit of $50.0 million for letters of credit, and extends the maturity date of the previous facility by one year to August 7, 2017.

The Amended Facility contains various covenants, including financial covenants relating to tangible net worth, leverage, liquidity and interest coverage, as well as a limitation on investments in joint ventures and non-guarantor subsidiaries. The Amended Facility contains customary events of default, subject to cure periods in certain circumstances, including: nonpayment of principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations and warranties; cross default to certain other indebtedness; unpaid judgments; and certain bankruptcy and other insolvency events. The occurrence of any event of default could result in the termination of the commitments under the Amended Facility and permit the lenders to accelerate payment on outstanding borrowings under the Amended Facility and require cash collateralization of outstanding letters of credit. If a change in control (as defined in the Amended Facility) occurs, the lenders may terminate the commitments under the Amended Facility and require that the the Company repay outstanding borrowings under the Amended Facility and cash collateralize outstanding letters of credit. Interest rates on borrowings generally will be based on either LIBOR or a base rate, plus the applicable spread. The commitment fee on the unused portion of the Amended Facility currently accrues at an annual rate of 0.50%. The Company was in compliance with all covenants under the Amended Facility as of September 30, 2015.March 31, 2016.

Borrowings under the Amended Facility, the availability of which is subject to a borrowing base formula, are required to be guaranteed by Parent and certain of Parent’s direct and indirect wholly-owned subsidiaries, are secured by a pledge of all equity interests held by such guarantors, and may be used for general corporate purposes. As of September 30,March 31, 2016 and December 31, 2015, the Company had $85.0$49.0 million and $65.0 million outstanding against the Amended Facility, respectively, at an effective raterates of 3.87%3.50% and 3.32%, respectively as well as a letter of credit for $7.3 million. As of December 31, 2014, the Company had no amounts$8.6 million outstanding under the Amended Facility, with the exception of the above mentioned letter of credit.at both dates.

Unless settled earlier at the holder’s option, each purchase contract will automatically settle on December 1, 2017 (the "mandatory settlement date"), and the Company will deliver not more than 5.2247 shares of Class A Common Stock and not less than 4.4465 shares of Class A Common Stock on the mandatory settlement date, subject to adjustment, based upon the applicable settlement rate and applicable market value of Class A Common Stock.

Each amortizing note had an initial principal amount of $18.01, bears interest at the annual rate of 5.50% and has a final installment payment date of December 1, 2017. On each March 1, June 1, September 1 and December 1, commencing on March 1, 2015, William Lyon Homes will pay equal quarterly installments of $1.6250 on each amortizing note (except for the March 1, 2015 installment payment, which was $1.8056 per amortizing note). Each installment will constitute a payment of interest and a partial repayment of principal. The amortizing notes rank equally in right of payment to all of the Company's existing and future senior indebtedness, other than borrowings under the Amended Facility and the Company's secured project level financing, which will be senior in right of payment to the obligations under the amortizing notes, in each case to the extent of the value of the assets securing such indebtedness.

Each TEU may be separated into its constituent purchase contract and amortizing note on any business day during the period beginning on, and including, the business day immediately succeeding the date of initial issuance of the Units to, but excluding, the third scheduled trading day immediately preceding the mandatory settlement date. Prior to separation, the purchase contracts and amortizing notes may only be purchased and transferred together as Units. The net proceeds received from the TEU issuance were allocated between the amortizing note and the purchase contract under the relative fair value method, with amounts allocated to the purchase contract classified as additional paid-in capital. As of September 30, 2015March 31, 2016 and December 31, 2014,2015, the amortizing notes had an unamortized carrying value of $15.7$12.4 million and $20.7$14.1 million, respectively.

Senior Notes

As of September 30, 2015,March 31, 2016, the outstanding principal amount of the 5.75% Notes was $150.0$150 million, excluding deferred loan costs of $1.6 million. The 5.75% Notes bear interest at a rate of 5.75% per annum, payable semiannually in arrears on April 15 and October 15, and mature on April 15, 2019. The 5.75% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted subsidiaries. The 5.75% Notes and the related guarantees are California Lyon’s and the guarantors’ unsecured senior obligations and rank equally in right of payment with all of California Lyon’s and the guarantors’ existing and future unsecured senior debt, including California Lyon’s $425 million in aggregate principal amount of 8.5% Senior Notes due 2020 and $350 million in aggregate principal amount of 7.00% Notes, each as described below. The 5.75% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 5.75% Notes and the guarantees are and will be effectively junior to California Lyon’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such debt.

On October 24, 2013, California Lyon completed its private placement with registration rights of an additional $100.0 million in aggregate principal amount of its 8.5% Senior Notes due 2020 (the “additional 8.5 % Notes”, and together with the initial 8.5% notes, the "8.5% Notes" ) at an issue price of 106.5% of their aggregate principal amount, plus accrued interest

The indentures governing the 5.75% Notes, the 8.5% Notes, and the 7.00% Notes contain covenants that limit the ability of Parent, California Lyon, and their restricted subsidiaries to, among other things: (i) incur or guarantee certain additional indebtedness; (ii) pay dividends, distributions, or repurchase equity or make payments in respect of subordinated indebtedness; (iii) make certain investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of the Company’s restricted subsidiaries to pay dividends or transfer assets; (vii) enter into transactions with affiliates; (viii) create unrestricted subsidiaries; and (viii) consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of

The following consolidating financial information includes:

(2) Elimination entries necessary to consolidate Delaware Lyon, with California Lyon and its guarantor and non-guarantor subsidiaries.