SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-18001
WILLIAM LYON HOMES
(Exact name of registrant as specified in its charter)
Delaware | 33-0864902 | |
(State or jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
4490 Von Karman Avenue | 92660 | |
Newport Beach, California | (Zip Code) | |
(Address of principal executive offices) |
(949) 833-3600
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class of Common Stock | Outstanding at May 10, 2002 | |
Common stock, par value $.01 | 10,257,449 |
INDEX
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements: | ||
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4 | ||
5 | ||
6 | ||
7 | ||
19 | ||
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27 | ||
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27 | ||
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28 |
2
Item 1. Financial Statements.
WILLIAM LYON HOMES
CONSOLIDATED BALANCE SHEETS
(in thousands except number of shares and par value per share)
ASSETS | ||||||
March 31, 2002 | December 31, 2001 | |||||
(unaudited) | ||||||
Cash and cash equivalents | $ | 17,380 | $ | 19,751 | ||
Receivables | 15,308 | 26,224 | ||||
Real estate inventories | 364,508 | 294,678 | ||||
Investments in and advances to unconsolidated joint ventures — Note 2 | 55,963 | 66,753 | ||||
Property and equipment, less accumulated depreciation of $4,631 and $4,309 at March 31, 2002 and December 31, 2001, respectively | 2,566 | 2,171 | ||||
Deferred loan costs | 2,683 | 2,831 | ||||
Goodwill — Note 1 | 5,896 | 5,896 | ||||
Other assets | 9,296 | 15,405 | ||||
$ | 473,600 | $ | 433,709 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Accounts payable | $ | 26,333 | $ | 19,346 | ||
Accrued expenses | 23,865 | 42,276 | ||||
Notes payable | 204,404 | 151,191 | ||||
12 1/2% Senior Notes due July 1, 2003 — Note 3 | 70,279 | 70,279 | ||||
324,881 | 283,092 | |||||
Stockholders’ equity — Notes 1 and 5 | ||||||
Common stock, par value $.01 per share; 30,000,000 shares authorized; 10,289,683 and 10,619,399 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively | 103 | 106 | ||||
Additional paid-in capital | 122,027 | 127,035 | ||||
Retained earnings | 26,589 | 23,476 | ||||
148,719 | 150,617 | |||||
$ | 473,600 | $ | 433,709 | |||
See accompanying notes.
3
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per common share amounts)
(unaudited)
Three Months Ended March 31, | ||||||||
2002 | 2001 | |||||||
Operating revenue | ||||||||
Home sales | $ | 90,149 | $ | 65,401 | ||||
Lots, land and other sales | — | 7,054 | ||||||
Management fees | 1,516 | 1,670 | ||||||
91,665 | 74,125 | |||||||
Operating costs | ||||||||
Cost of sales — homes | (77,094 | ) | (55,021 | ) | ||||
Cost of sales — lots, land and other | (191 | ) | (3,902 | ) | ||||
Sales and marketing | (4,698 | ) | (3,681 | ) | ||||
General and administrative | (7,953 | ) | (8,783 | ) | ||||
Amortization of goodwill — Note 1 | — | (311 | ) | |||||
(89,936 | ) | (71,698 | ) | |||||
Equity in income of unconsolidated joint ventures — Note 2 | 1,905 | 3,805 | ||||||
Operating income | 3,634 | 6,232 | ||||||
Interest expense, net of amounts capitalized | — | (227 | ) | |||||
Other income (expense), net | 156 | 788 | ||||||
Income before income taxes | 3,790 | 6,793 | ||||||
Provision for income taxes — Note 1 | (677 | ) | (712 | ) | ||||
Net income | $ | 3,113 | $ | 6,081 | ||||
Earnings per common share — Note 1 | ||||||||
Basic | $ | 0.30 | $ | 0.58 | ||||
Diluted | $ | 0.29 | $ | 0.57 | ||||
See accompanying notes.
4
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2002
(in thousands)
(unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Total | |||||||||||||||
Shares | Amount | |||||||||||||||||
Balance — December 31, 2001 | 10,619 | $ | 106 | $ | 127,035 | $ | 23,476 | $ | 150,617 | |||||||||
Issuance of common stock upon exercise of stock options — Note 5 | 53 | 1 | 422 | — | 423 | |||||||||||||
Purchase and retirement of common stock — Note 5 | (382 | ) | (4 | ) | (5,430 | ) | — | (5,434 | ) | |||||||||
Net income | — | — | — | 3,113 | 3,113 | |||||||||||||
Balance — March 31, 2002 | 10,290 | $ | 103 | $ | 122,027 | $ | 26,589 | $ | 148,719 | |||||||||
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2002 | 2001 | |||||||
Operating activities | ||||||||
Net income | $ | 3,113 | $ | 6,081 | ||||
Adjustments to reconcile net income to net cash used in operating activities | ||||||||
Depreciation and amortization | 304 | 620 | ||||||
Equity in income of unconsolidated joint ventures | (1,905 | ) | (3,805 | ) | ||||
Provision for income taxes | 677 | 712 | ||||||
Net changes in operating assets and liabilities: | ||||||||
Receivables | 7,315 | 4,161 | ||||||
Real estate inventories | (53,499 | ) | (41,572 | ) | ||||
Deferred loan costs | 148 | (10 | ) | |||||
Other assets | 6,109 | 4,940 | ||||||
Accounts payable | 6,987 | (309 | ) | |||||
Accrued expenses | (19,088 | ) | (13,474 | ) | ||||
Net cash used in operating activities | (49,839 | ) | (42,656 | ) | ||||
Investing activities | ||||||||
Investments in and advances to unconsolidated joint ventures | (10,811 | ) | (1,759 | ) | ||||
Distributions from unconsolidated joint ventures | 18,139 | 4,036 | ||||||
Mortgage notes receivable originations/issuances | (36,394 | ) | (35,138 | ) | ||||
Mortgage notes receivable sales/repayments | 45,362 | 35,138 | ||||||
Purchases of property and equipment | (699 | ) | (179 | ) | ||||
Net cash provided by investing activities | 15,597 | 2,098 | ||||||
Financing activities | ||||||||
Proceeds from borrowing on notes payable | 164,825 | 137,736 | ||||||
Principal payments on notes payable | (127,943 | ) | (97,971 | ) | ||||
Repurchase of 12 1/2% Senior Notes | — | (1,581 | ) | |||||
Common stock issued for exercised options | 423 | — | ||||||
Common stock purchased and retired | (5,434 | ) | — | |||||
Net cash provided by financing activities | 31,871 | 38,184 | ||||||
Net decrease in cash and cash equivalents | (2,371 | ) | (2,374 | ) | ||||
Cash and cash equivalents — beginning of period | 19,751 | 14,711 | ||||||
Cash and cash equivalents — end of period | $ | 17,380 | $ | 12,337 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during the period for interest, net of amounts capitalized | $ | 1,338 | $ | 2,431 | ||||
Contribution of land to unconsolidated joint venture | $ | — | $ | 1,100 | ||||
Issuance of notes payable for land acquisitions | $ | 16,331 | $ | — | ||||
See accompanying notes.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Basis of Presentation
William Lyon Homes, a Delaware corporation, and subsidiaries (the “Company”) are primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona and Nevada.
The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
The interim consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with accounting principles generally accepted in the United States have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries and joint ventures. Investments in joint ventures in which the Company has a 50% or less ownership interest are accounted for using the equity method. 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 Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. For internal reporting purposes, the Company is organized into five geographic home building regions and its mortgage origination operation. Because each of the Company’s geographic home building regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building regions have been aggregated into a single home building segment.
The Company evaluates performance and allocates resources primarily based on the operating income of individual home building projects. Operating income of individual home building projects is defined by the Company as sales of homes, lots and land; less cost of sales, impairment losses on real estate, sales and marketing, and general and administrative expenses. Accordingly, operating income excludes certain items included in the determination of net income. All other segment measurements are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
Management fees represent fees earned in the current period from unconsolidated joint ventures in accordance with joint venture and/or operating agreements.
The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002 was being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets (“Statement No. 142”), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired. As of March 31, 2002, there have been no indicators of impairment related to the Company’s goodwill.
7
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
As of December 31, 2000, the Company had substantial net operating loss carryforwards for Federal tax purposes which were utilized to reduce taxable income during the year ended December 31, 2001. As a result of the reduction in the valuation allowance associated with such utilized net operating loss carryforwards, the Company’s overall effective tax rate for the quarter ended March 31, 2001 was approximately 10.5%. At December 31, 2001, the Company had net operating loss carryforwards for Federal tax purposes of approximately $8,466,000 which expire in 2009. In addition, unused recognized built-in losses in the amount of $23,891,000 are available to offset future income and expire between 2009 and 2011. Beginning in 2002, the utilization of these losses is limited to $3,235,000 of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduces the Company’s estimated overall effective tax rate for the year ending December 31, 2002 from approximately 38.3% to approximately 17.8%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited in the event of an “ownership change” under Federal tax laws and regulations.
Earnings per share amounts for all periods presented conform to Financial Accounting Standards Board Statement No. 128, “Earnings Per Share.” Basic and diluted earnings per common share for the three months ended March 31, 2002 are based on 10,522,102 and 10,819,250 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the three months ended March 31, 2001 are based on 10,570,223 and 10,638,827 weighted average shares of common stock outstanding, respectively.
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of March 31, 2002 and December 31, 2001 and revenues and expenses for the periods presented. Accordingly, actual results could differ materially from those estimates in the near-term.
8
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 2 — Investments in and Advances to Unconsolidated Joint Ventures
The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned and, accordingly, the financial statements of such joint ventures are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method. Condensed combined financial information of these joint ventures as of March 31, 2002 and December 31, 2001 and for the three months ended March 31, 2002 and 2001 is summarized as follows:
CONDENSED COMBINED BALANCE SHEETS
(in thousands)
March 31, 2002 | December 31, 2001 | |||||
(unaudited) | ||||||
ASSETS | ||||||
Cash and cash equivalents | $ | 10,431 | $ | 9,404 | ||
Receivables | 735 | 5,711 | ||||
Real estate inventories | 279,550 | 294,698 | ||||
Other assets | 58 | — | ||||
$ | 290,774 | $ | 309,813 | |||
LIABILITIES AND OWNERS’ CAPITAL | ||||||
Accounts payable | $ | 15,708 | $ | 21,931 | ||
Accrued expenses | 4,292 | 4,288 | ||||
Notes payable | 73,934 | 72,344 | ||||
Advances from William Lyon Homes | 5,838 | 11,768 | ||||
99,772 | 110,331 | |||||
Owners’ capital | ||||||
William Lyon Homes | 50,125 | 54,985 | ||||
Others | 140,877 | 144,497 | ||||
191,002 | 199,482 | |||||
$ | 290,774 | $ | 309,813 | |||
9
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED COMBINED STATEMENTS OF INCOME
(in thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2002 | 2001 | |||||||
Operating revenue | ||||||||
Home sales | $ | 49,958 | $ | 51,169 | ||||
Land sale | 17,079 | — | ||||||
67,037 | 51,169 | |||||||
Operating costs | ||||||||
Cost of sales — homes | (42,976 | ) | (41,695 | ) | ||||
Cost of sales — land | (13,542 | ) | — | |||||
Sales and marketing | (2,431 | ) | (1,802 | ) | ||||
Operating income | 8,088 | 7,672 | ||||||
Other (expense) income, net | (47 | ) | 70 | |||||
Net income | $ | 8,041 | $ | 7,742 | ||||
Allocation to owners | ||||||||
William Lyon Homes | $ | 1,905 | $ | 3,805 | ||||
Others | 6,136 | 3,937 | ||||||
$ | 8,041 | $ | 7,742 | |||||
During the quarter ended March 31, 2002, one of the joint ventures in which the Company is a member completed a land sale to the Company for $17,079,000 resulting in a profit of approximately $3,537,000, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.
Note 3 — 12 1/2% Senior Notes
The 12 1/2% Senior Notes are obligations of William Lyon Homes, a Delaware corporation (“Delaware Lyon”), and are unconditionally guaranteed on a senior basis by William Lyon Homes, Inc., a California corporation and a wholly-owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has granted liens on substantially all of its assets as security for its obligations under certain revolving credit
facilities and other loans. Because the William Lyon Homes, Inc. guarantee is not secured, holders of the Senior Notes are effectively junior to borrowings under the revolving credit facilities with respect to such assets. Delaware Lyon and its consolidated subsidiaries are referred to collectively herein as the “Company.” Interest on the Senior Notes is payable on January 1 and July 1 of each year.
Supplemental consolidating financial information of the Company, specifically including information for William Lyon Homes, Inc. is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of William Lyon Homes, Inc. are not provided, as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of assets held and the operations of the combined groups.
10
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING BALANCE SHEET
March 31, 2002
(in thousands)
Unconsolidated | ||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | 15,117 | $ | 2,263 | $ | — | $ | 17,380 | ||||||
Receivables | — | 7,484 | 7,824 | — | 15,308 | |||||||||||
Real estate inventories | — | 357,019 | 7,489 | — | 364,508 | |||||||||||
Investments in and advances to unconsolidated joint ventures | — | 14,768 | 41,195 | — | 55,963 | |||||||||||
Property and equipment, net | — | 2,358 | 208 | — | 2,566 | |||||||||||
Deferred loan costs | 1,641 | 1,042 | — | — | 2,683 | |||||||||||
Goodwill | — | 5,896 | — | — | 5,896 | |||||||||||
Other assets | — | 9,209 | 87 | — | 9,296 | |||||||||||
Investments in subsidiaries | 146,021 | 50,271 | — | (196,292 | ) | — | ||||||||||
Intercompany receivables | 79,308 | 7,972 | — | (87,280 | ) | — | ||||||||||
$ | 226,970 | $ | 471,136 | $ | 59,066 | $ | (283,572 | ) | $ | 473,600 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Accounts payable | $ | — | $ | 26,134 | $ | 199 | $ | — | $ | 26,333 | ||||||
Accrued expenses | — | 22,000 | 1,865 | — | 23,865 | |||||||||||
Notes payable | — | 201,363 | 3,041 | — | 204,404 | |||||||||||
12 1/2% Senior Notes | 70,279 | — | — | — | 70,279 | |||||||||||
Intercompany payables | 7,972 | 79,308 | — | (87,280 | ) | — | ||||||||||
Total liabilities | 78,251 | 328,805 | 5,105 | (87,280 | ) | 324,881 | ||||||||||
Stockholders’ equity | 148,719 | 142,331 | 53,961 | (196,292 | ) | 148,719 | ||||||||||
$ | 226,970 | $ | 471,136 | $ | 59,066 | $ | (283,572 | ) | $ | 473,600 | ||||||
11
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING BALANCE SHEET
December 31, 2001
(in thousands)
Unconsolidated | ||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | 17,270 | $ | 2,481 | $ | — | $ | 19,751 | ||||||
Receivables | — | 9,736 | 16,488 | — | 26,224 | |||||||||||
Real estate inventories | — | 287,275 | 7,403 | — | 294,678 | |||||||||||
Investments in and advances to unconsolidated joint ventures | — | 25,359 | 41,394 | — | 66,753 | |||||||||||
Property and equipment, net | — | 1,944 | 227 | — | 2,171 | |||||||||||
Deferred loan costs | 1,993 | 838 | — | — | 2,831 | |||||||||||
Goodwill | — | 5,896 | — | — | 5,896 | |||||||||||
Other assets | — | 15,348 | 57 | — | 15,405 | |||||||||||
Investments in subsidiaries | 147,567 | 49,174 | — | (196,741 | ) | — | ||||||||||
Intercompany receivables | 79,308 | 7,972 | — | (87,280 | ) | — | ||||||||||
$ | 228,868 | $ | 420,812 | $ | 68,050 | $ | (284,021 | ) | $ | 433,709 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Accounts payable | $ | — | $ | 19,114 | $ | 232 | $ | — | $ | 19,346 | ||||||
Accrued expenses | — | 39,740 | 2,536 | — | 42,276 | |||||||||||
Notes payable | — | 139,168 | 12,023 | — | 151,191 | |||||||||||
12 1/2% Senior Notes | 70,279 | — | — | — | 70,279 | |||||||||||
Intercompany payables | 7,972 | 79,308 | — | (87,280 | ) | — | ||||||||||
Total liabilities | 78,251 | 277,330 | 14,791 | (87,280 | ) | 283,092 | ||||||||||
Stockholders’ equity | 150,617 | 143,482 | 53,259 | (196,741 | ) | 150,617 | ||||||||||
$ | 228,868 | $ | 420,812 | $ | 68,050 | $ | (284,021 | ) | $ | 433,709 | ||||||
12
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Three Months Ended March 31, 2002
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | |||||||||||||||
Operating revenue | |||||||||||||||||||
Sales | $ | — | $ | 78,246 | $ | 11,903 | $ | — | $ | 90,149 | |||||||||
Management fees | — | 1,066 | 450 | — | 1,516 | ||||||||||||||
— | 79,312 | 12,353 | — | 91,665 | |||||||||||||||
Operating costs | |||||||||||||||||||
Costs of sales | — | (66,580 | ) | (10,705 | ) | — | (77,285 | ) | |||||||||||
Sales and marketing | — | (3,987 | ) | (711 | ) | — | (4,698 | ) | |||||||||||
General and administrative | — | (7,854 | ) | (99 | ) | — | (7,953 | ) | |||||||||||
— | (78,421 | ) | (11,515 | ) | — | (89,936 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | — | 719 | 1,186 | — | 1,905 | ||||||||||||||
Income from subsidiaries | 3,113 | 2,052 | — | (5,165 | ) | — | |||||||||||||
Operating income | 3,113 | 3,662 | 2,024 | (5,165 | ) | 3,634 | |||||||||||||
Other income (expense), net | — | (323 | ) | 479 | — | 156 | |||||||||||||
Income before income taxes | 3,113 | 3,339 | 2,503 | (5,165 | ) | 3,790 | |||||||||||||
Provision for income taxes | — | (677 | ) | — | — | (677 | ) | ||||||||||||
Net income | $ | 3,113 | $ | 2,662 | $ | 2,503 | $ | (5,165 | ) | $ | 3,113 | ||||||||
13
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Three Months Ended March 31, 2001
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | |||||||||||||||
Operating revenue | |||||||||||||||||||
Sales | $ | — | $ | 64,527 | $ | 7,928 | $ | — | $ | 72,455 | |||||||||
Management fees | — | 688 | 982 | — | 1,670 | ||||||||||||||
— | 65,215 | 8,910 | — | 74,125 | |||||||||||||||
Operating costs | |||||||||||||||||||
Costs of sales | — | (51,702 | ) | (7,221 | ) | — | (58,923 | ) | |||||||||||
Sales and marketing | — | (3,262 | ) | (419 | ) | — | (3,681 | ) | |||||||||||
General and administrative | — | (8,718 | ) | (65 | ) | — | (8,783 | ) | |||||||||||
Amortization of goodwill | — | (311 | ) | — | — | (311 | ) | ||||||||||||
— | (63,993 | ) | (7,705 | ) | — | (71,698 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | — | 507 | 3,298 | — | 3,805 | ||||||||||||||
Income from subsidiaries | 6,081 | 4,810 | — | (10,891 | ) | — | |||||||||||||
Operating income | 6,081 | 6,539 | 4,503 | (10,891 | ) | 6,232 | |||||||||||||
Interest expense, net of amounts capitalized | — | (227 | ) | — | — | (227 | ) | ||||||||||||
Other income (expense), net | — | 419 | 369 | — | 788 | ||||||||||||||
Income before income taxes | 6,081 | 6,731 | 4,872 | (10,891 | ) | 6,793 | |||||||||||||
Provision for income taxes | — | (712 | ) | — | — | (712 | ) | ||||||||||||
Net income | $ | 6,081 | $ | 6,019 | $ | 4,872 | $ | (10,891 | ) | $ | 6,081 | ||||||||
14
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2002
(in thousands)
Unconsolidated | ||||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||
Operating activities | ||||||||||||||||||||
Net income | $ | 3,113 | $ | 2,662 | $ | 2,503 | $ | (5,165 | ) | $ | 3,113 | |||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | — | 276 | 28 | — | 304 | |||||||||||||||
Equity in income of unconsolidated joint ventures | — | (719 | ) | (1,186 | ) | — | (1,905 | ) | ||||||||||||
Equity in earnings of subsidiaries | (3,113 | ) | (2,052 | ) | — | 5,165 | — | |||||||||||||
Provision for income taxes | — | 677 | — | — | 677 | |||||||||||||||
Net changes in operating assets and liabilities: | ||||||||||||||||||||
Receivables | — | 2,266 | 5,049 | — | 7,315 | |||||||||||||||
Intercompany receivables/payables | (352 | ) | 352 | — | — | — | ||||||||||||||
Real estate inventories | — | (53,413 | ) | (86 | ) | — | (53,499 | ) | ||||||||||||
Deferred loan costs | 352 | (204 | ) | — | — | 148 | ||||||||||||||
Other assets | — | 6,139 | (30 | ) | — | 6,109 | ||||||||||||||
Accounts payable | — | 7,020 | (33 | ) | — | 6,987 | ||||||||||||||
Accrued expenses | — | (18,417 | ) | (671 | ) | — | (19,088 | ) | ||||||||||||
Net cash (used in) provided by operating activities | — | (55,413 | ) | 5,574 | — | (49,839 | ) | |||||||||||||
Investing activities | ||||||||||||||||||||
Net change in investment in unconsolidated joint ventures | — | 11,310 | (3,982 | ) | — | 7,328 | ||||||||||||||
Payments on (issuance of) notes receivable, net | — | (14 | ) | 8,982 | — | 8,968 | ||||||||||||||
Purchases of property and equipment | — | (690 | ) | (9 | ) | — | (699 | ) | ||||||||||||
Investment in subsidiaries | — | 955 | — | (955 | ) | — | ||||||||||||||
Advances to affiliates | 5,011 | — | — | (5,011 | ) | — | ||||||||||||||
Net cash provided by investing activities | 5,011 | 11,561 | 4,991 | (5,966 | ) | 15,597 | ||||||||||||||
Financing activities | ||||||||||||||||||||
Proceeds from borrowings on notes payable | — | 128,446 | 36,379 | — | 164,825 | |||||||||||||||
Principal payments on notes payable | — | (82,582 | ) | (45,361 | ) | — | (127,943 | ) | ||||||||||||
Distributions to/contributions from shareholders | — | (3,813 | ) | (1,801 | ) | 5,614 | — | |||||||||||||
Common stock issued for exercised options | 423 | — | — | — | 423 | |||||||||||||||
Common stock purchased and retired | (5,434 | ) | — | — | — | (5,434 | ) | |||||||||||||
Advances to affiliates | — | (352 | ) | — | 352 | — | ||||||||||||||
Net cash (used in) provided by financing activities | (5,011 | ) | 41,699 | (10,783 | ) | 5,966 | 31,871 | |||||||||||||
Net decrease in cash and cash equivalents | — | (2,153 | ) | (218 | ) | — | (2,371 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | — | 17,270 | 2,481 | — | 19,751 | |||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 15,117 | $ | 2,263 | $ | — | $ | 17,380 | ||||||||||
15
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2001
(in thousands)
Unconsolidated | ||||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||
Operating activities | ||||||||||||||||||||
Net income | $ | 6,081 | $ | 6,019 | $ | 4,872 | $ | (10,891 | ) | $ | 6,081 | |||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | — | 591 | 29 | — | 620 | |||||||||||||||
Equity in income of unconsolidated joint ventures | — | (507 | ) | (3,298 | ) | — | (3,805 | ) | ||||||||||||
Equity in earnings of subsidiaries | (6,081 | ) | (4,810 | ) | — | 10,891 | — | |||||||||||||
Provision for income taxes | — | 712 | — | — | 712 | |||||||||||||||
Net changes in operating assets and liabilities: | ||||||||||||||||||||
Receivables | — | 841 | 3,320 | — | 4,161 | |||||||||||||||
Intercompany receivables/payables | (99 | ) | 99 | — | — | — | ||||||||||||||
Real estate inventories | — | (41,884 | ) | 312 | — | (41,572 | ) | |||||||||||||
Deferred loan costs | 99 | (109 | ) | — | — | (10 | ) | |||||||||||||
Other assets | — | 4,921 | 19 | — | 4,940 | |||||||||||||||
Accounts payable | — | (240 | ) | (69 | ) | — | (309 | ) | ||||||||||||
Accrued expenses | — | (13,153 | ) | (321 | ) | — | (13,474 | ) | ||||||||||||
Net cash (used in) provided by operating activities | — | (47,520 | ) | 4,864 | — | (42,656 | ) | |||||||||||||
Investing activities | ||||||||||||||||||||
Net change in investment in unconsolidated joint ventures | — | (1,518 | ) | 3,795 | — | 2,277 | ||||||||||||||
Purchases of property and equipment | — | (163 | ) | (16 | ) | — | (179 | ) | ||||||||||||
Investment in subsidiaries | — | 8,842 | — | (8,842 | ) | — | ||||||||||||||
Advances to affiliates | 1,581 | — | — | (1,581 | ) | — | ||||||||||||||
Net cash provided by investing activities | 1,581 | 7,161 | 3,779 | (10,423 | ) | 2,098 | ||||||||||||||
Financing activities | ||||||||||||||||||||
Proceeds from borrowings on notes payable | — | 102,599 | 35,137 | — | 137,736 | |||||||||||||||
Principal payments on notes payable | — | (62,833 | ) | (35,138 | ) | — | (97,971 | ) | ||||||||||||
Repurchase of 12 1/2% Senior Notes | (1,581 | ) | — | — | — | (1,581 | ) | |||||||||||||
Distributions to/contributions from shareholders | — | (53 | ) | (8,722 | ) | 8,775 | — | |||||||||||||
Advances from affiliates | — | (1,648 | ) | — | 1,648 | — | ||||||||||||||
Net cash (used in) provided by financing activities | (1,581 | ) | 38,065 | (8,723 | ) | 10,423 | 38,184 | |||||||||||||
Net decrease in cash and cash equivalents | — | (2,294 | ) | (80 | ) | — | (2,374 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | — | 12,746 | 1,965 | — | 14,711 | |||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 10,452 | $ | 1,885 | $ | — | $ | 12,337 | ||||||||||
16
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 4 — Related Party Transactions
On October 26, 2000, the Company’s Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by William Lyon and William H. Lyon. The terms of the purchase agreement provided for an initial option payment of $1,000,000 and a rolling option takedown of the lots. Phase takedowns of approximately 20 lots each are anticipated to occur at two to three month intervals for each of several product types through September 2004. In addition, one-half of the net profits, as defined, in excess of six percent from the development are to be paid to the seller. During the three months ended March 31, 2001, the Company purchased 40 lots under this agreement for a total purchase price of $601,000. This land acquisition qualifies as an affiliate transaction under the Company’s 12 1/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (“Indenture”). Pursuant to the terms of the Indenture, the Company has determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company has delivered to the Trustee under the Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition has been approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company has delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.
The Company purchased land for a total purchase price of $17,079,000 during the three months ended March 31, 2002 from one of its unconsolidated joint ventures.
For the three months ended March 31, 2002 and 2001, the Company incurred reimbursable on-site labor costs of $41,000 and $46,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $13,000 was due to the Company at March 31, 2002.
For the three months ended March 31, 2002 and 2001, the Company incurred charges of $182,000 and $182,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.
During the three months ended March 31, 2002 and 2001, the Company incurred charges of $41,000 and $62,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon.
Note 5 — Stockholders’ Equity
On September 20, 2001 the Company announced that the Company’s Board of Directors had authorized a program to repurchase up to 20% of the Company’s outstanding common shares. Under the plan, the stock will be purchased in the open market or privately negotiated transactions from time to time in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The timing and amounts of any purchases will be as determined by the Company’s management from time to time or may be suspended at any time or from time to time without prior notice, depending on market conditions and other factors they deem relevant. The repurchased shares may be held as treasury stock and used for general corporate purposes or cancelled. As of March 31, 2002, 382,500 shares had been purchased and cancelled under this program in the amount of $5,434,000.
17
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
During the three months ended March 31, 2002, certain officers and directors exercised options to purchase 36,206 shares of the Company’s common stock at a price of $8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan, 13,912 shares of the Company’s common stock at a price of $5.00 per share in accordance with the Company’s 1991 Stock Option Plan, as amended, and 2,666 shares of the Company’s common stock at a price of $14.375 per share in accordance with the Company’s 1991 Stock Option Plan, as amended.
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WILLIAM LYON HOMES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1, as well as the information presented in the Annual Report on Form 10-K for the year ended December 31, 2001.
Results of Operations
Overview and Recent Results
Selected financial and operating information for the Company and its unconsolidated joint ventures as of and for the periods presented is as follows:
Three Months Ended March 31, | ||||||||||||||||||||||||
2002 | 2001 | |||||||||||||||||||||||
Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | |||||||||||||||||||
Selected Financial Information (dollars in thousands) | ||||||||||||||||||||||||
Units closed | 301 | 104 | 405 | 286 | 114 | 400 | ||||||||||||||||||
Home sales revenue | $ | 90,149 | $ | 49,958 | $ | 140,107 | $ | 65,401 | $ | 51,169 | $ | 116,570 | ||||||||||||
Cost of sales | (77,094 | ) | (42,976 | ) | (120,070 | ) | (55,021 | ) | (41,695 | ) | (96,716 | ) | ||||||||||||
Gross margin | $ | 13,055 | $ | 6,982 | $ | 20,037 | $ | 10,380 | $ | 9,474 | $ | 19,854 | ||||||||||||
Gross margin percentage | 14.5 | % | 14.0 | % | 14.3 | % | 15.9 | % | 18.5 | % | 17.0 | % | ||||||||||||
Number of homes closed | ||||||||||||||||||||||||
California | 153 | 104 | 257 | 153 | 114 | 267 | ||||||||||||||||||
Arizona | 63 | 0 | 63 | 51 | 0 | 51 | ||||||||||||||||||
Nevada | 85 | 0 | 85 | 82 | 0 | 82 | ||||||||||||||||||
Total | 301 | 104 | 405 | 286 | 114 | 400 | ||||||||||||||||||
Average sales price | ||||||||||||||||||||||||
California | $ | 370,200 | $ | 480,400 | $ | 414,800 | $ | 264,600 | $ | 448,900 | $ | 343,300 | ||||||||||||
Arizona | 188,900 | 0 | 188,900 | 145,000 | 0 | 145,000 | ||||||||||||||||||
Nevada | 254,300 | 0 | 254,300 | 213,600 | 0 | 213,600 | ||||||||||||||||||
Total | $ | 299,500 | $ | 480,400 | $ | 345,900 | $ | 228,700 | $ | 448,900 | $ | 291,400 | ||||||||||||
Number of net new home orders | ||||||||||||||||||||||||
California | 451 | 296 | 747 | 312 | 187 | 499 | ||||||||||||||||||
Arizona | 85 | 0 | 85 | 84 | 0 | 84 | ||||||||||||||||||
Nevada | 103 | 0 | 103 | 158 | 0 | 158 | ||||||||||||||||||
Total | 639 | 296 | 935 | 554 | 187 | 741 | ||||||||||||||||||
Average number of sales locations during period | ||||||||||||||||||||||||
California | 18 | 13 | 31 | 15 | 10 | 25 | ||||||||||||||||||
Arizona | 8 | 0 | 8 | 5 | 0 | 5 | ||||||||||||||||||
Nevada | 5 | 0 | 5 | 7 | 0 | 7 | ||||||||||||||||||
Total | 31 | 13 | 44 | 27 | 10 | 37 | ||||||||||||||||||
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Three Months Ended March 31, | ||||||||||||||||||
2002 | 2001 | |||||||||||||||||
Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | |||||||||||||
Backlog of homes sold but not closed at end of period | ||||||||||||||||||
California | 497 | 289 | 786 | 365 | 257 | 622 | ||||||||||||
Arizona | 140 | 0 | 140 | 113 | 0 | 113 | ||||||||||||
Nevada | 146 | 0 | 146 | 173 | 0 | 173 | ||||||||||||
Total | 783 | 289 | 1,072 | 651 | 257 | 908 | ||||||||||||
Dollar amount of homes sold but not closed at end of period (dollars in thousands) | ||||||||||||||||||
California | $ | 185,124 | $ | 135,787 | $ | 320,911 | $ | 98,895 | $ | 108,493 | $ | 207,388 | ||||||
Arizona | 30,700 | 0 | 30,700 | 16,084 | 0 | 16,084 | ||||||||||||
Nevada | 42,790 | 0 | 42,790 | 36,606 | 0 | 36,606 | ||||||||||||
Total | $ | 258,614 | $ | 135,787 | $ | 394,401 | $ | 151,585 | $ | 108,493 | $ | 260,078 | ||||||
As of March 31, | ||||||||||||||||||
2002 | 2001 | |||||||||||||||||
Lots owned and controlled | ||||||||||||||||||
California | 5,083 | 5,404 | ||||||||||||||||
Arizona | 2,748 | 1,584 | ||||||||||||||||
Nevada | 1,450 | 904 | ||||||||||||||||
Total | 9,281 | 7,892 | ||||||||||||||||
Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed as of March 31, 2002 was $394.4 million, as compared to $260.1 million as of March 31, 2001 and $176.5 million as of December 31, 2001. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 24% during 2001 and 13% during the three months ended March 31, 2002 and 18% during the three months ended March 31, 2001.
The number of net new home orders for the quarter ended March 31, 2002 increased 26% to 935 units from 741 for the first quarter of 2001. For the first quarter of 2002, the number of net new home orders increased 94% to 935 from 483 units in the fourth quarter of 2001. The number of homes closed in the first quarter of 2002 increased 1% to 405 from 400 in the first quarter of 2001. The backlog of homes sold but not closed as of March 31, 2002 was 1,072, up 18% from 908 units a year earlier, and up 98% from 542 units at December 31, 2001.
The Company believes that the increase in the number of net new home orders and the decrease in the cancellation rate during the first quarter of 2002, as described above, are indications of an improving economy in 2002 after the economic slow-down in the latter part of 2001 which had become more uncertain following the unprecedented and tragic events of September 11, 2001. In addition, in most of the markets in which the Company operates, the demand for housing exceeds the current supply of housing.
In general, housing demand is adversely affected by increases in interest rates and housing prices. Interest rates, the length of time that assets remain in inventory, and the proportion of inventory that is financed affect the Company’s interest cost. If the Company is unable to raise sales prices sufficiently to compensate for higher costs or if mortgage interest rates increase significantly, affecting prospective buyers’ ability to adequately finance home purchases, the Company’s sales, gross margins and operating results may be adversely impacted.
20
Comparison of Three Months Ended March 31, 2002 to Three Months Ended March 31, 2001
Operating revenue for the three months ended March 31, 2002 was $91.7 million, an increase of $17.6 million (23.8%) from operating revenue of $74.1 million for the three months ended March 31, 2001. Revenue from sales of homes increased $24.7 million (37.8%) to $90.1 million in the 2002 period from $65.4 million in the 2001 period. This increase was primarily due to an increase in the number of wholly-owned units closed to 301 in the 2002 period from 286 in the 2001 period, along with an increase in the average sales prices of wholly-owned units due to product mix to $299,500 in the 2002 period from $228,700 in the 2001 period. Management fee income decreased by $0.2 million to $1.5 million in the 2002 period from $1.7 million in the 2001 period primarily due to a decrease in the number of unconsolidated joint venture units closed to 104 in the 2002 period from 114 in the 2001 period.
Total operating income decreased from $6.2 million in the 2001 period to $3.6 million in the 2002 period. The excess of revenue from sales of homes over the related cost of sales increased by $2.7 million to $13.1 million in the 2002 period from $10.4 million in the 2001 period primarily due to an increase in the number of wholly-owned units closed to 301 units in the 2002 period from 286 units in the 2001 period, together with an increase in the average sales prices of wholly-owned units due to product mix to $299,500 in the 2002 period from $228,700 in the 2001 period, offset by a decline in gross margins of 1.4% to 14.5% in the 2002 period from 15.9% in the 2001 period. The decline in the year-over-year gross margin percentage reflects the impact of slower economic conditions experienced during much of 2001. The Company’s revenues and total operating income are affected by the proportion of units sold by the Company and those sold by unconsolidated joint ventures. While the average sales price of homes sold by joint ventures has been higher than the average sales price of wholly-owned units, the Company generally receives, after priority returns and capital distributions, approximately 50% of the profits and losses and cash flows from joint ventures. The Company recognized $7.1 million in operating revenues from lots, land and other sales (primarily two commercial land sales) in the 2001 period compared to no operating revenues in the 2002 period. The cost of sales related to such revenues decreased from $3.9 million in the 2001 period to $0.2 million in the 2002 period. Sales and marketing expenses increased by $1.0 million to $4.7 million in the 2002 period from $3.7 million in the 2001 period primarily due to the increased sales volume. General and administrative expenses decreased by $0.8 million to $8.0 million in the 2002 period from $8.8 million in the 2001 period, primarily as a result of a decrease in accrued bonuses related to lower earnings. Equity in income of unconsolidated joint ventures amounting to $1.9 million was recognized in the 2002 period, down from $3.8 million in the comparable period for 2001, primarily as a result of decreased margins realized by the unconsolidated joint ventures, along with a decrease in the number of units closed to 104 in the 2002 period from 114 in the 2001 period. During the quarter ended March 31, 2002, one of the joint ventures in which the Company is a member completed a land sale to the Company for $17.1 million resulting in a profit of approximately $3.5 million, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.
Total interest incurred increased $0.2 million (3.7%) from $5.4 million in the 2001 period to $5.6 million in the 2002 period primarily as a result of an increase in the average principal balance of notes payable in the 2002 period compared to the 2001 period, offset by decreases in interest rates. All interest incurred was capitalized in the 2002 period while $0.2 million of interest incurred was expensed in the 2001 period.
Other income (expense), net decreased to $0.2 million in the 2002 period from $0.8 million in the 2001 period primarily as a result of decreased income from the Company’s design center and mortgage company operations.
As a result of the foregoing factors, as well as the increase discussed below in the Company’s effective tax rate from 10.5% in the 2001 period to 17.8% in the 2002 period, the Company’s net income decreased from $6.1 million in the 2001 period to $3.1 million in the 2002 period.
Financial Condition and Liquidity
The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate and from outside borrowings and by joint venture financing with venture partners that provide a substantial portion of the capital required for certain projects. The Company currently maintains the
21
following major credit facilities: 12 1/2% Senior Notes (the “Senior Notes”), secured revolving credit facilities (“Revolving Credit Facilities”) and an unsecured revolving line of credit with a commercial bank (“Unsecured Revolving Line”). The Company also finances certain projects with construction loans secured by real estate inventories and finances certain land acquisitions with seller-provided financing.
The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future performance which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions, mortgage and other interest rates, weather, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, availability of labor and homebuilding materials, changes in governmental laws and regulations, and the availability and cost of land for future development.
Senior Notes
The 12 1/2% Senior Notes due July 1, 2003 (the “Senior Notes”) are obligations of William Lyon Homes, a Delaware corporation (“Delaware Lyon”), and are unconditionally guaranteed on a senior basis by William Lyon Homes, Inc., a California corporation and a wholly-owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has granted liens on substantially all of its assets as security for its obligations under the Revolving Credit Facilities and other loans. Because the William Lyon Homes, Inc. guarantee is not secured, holders of the Senior Notes are effectively junior to borrowings under the Revolving Credit Facilities with respect to such assets. Interest on the Senior Notes is payable on January 1 and July 1 of each year.
The Senior Notes are senior obligations of Delaware Lyon and rank pari passu in right of payment to all existing and future unsecured indebtedness of Delaware Lyon, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the Senior Notes.
Delaware Lyon is required to offer to repurchase certain Senior Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest to the date of repurchase if Delaware Lyon’s Consolidated Tangible Net Worth is less than $60.0 million on the last day of each of any two consecutive fiscal quarters, as well as from the proceeds of certain asset sales.
Upon certain changes of control as described in the Indenture, Delaware Lyon must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase.
The Indenture governing the Senior Notes restricts Delaware Lyon and certain of its subsidiaries with respect to, among other things: (1) the payment of dividends on and redemptions of capital stock, (2) the incurrence of indebtedness or the issuance of preferred stock, (3) the creation of certain liens, (4) consolidation or mergers with or transfers of all or substantially all of its assets and (5) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.
The Company will in all likelihood be required to refinance the Senior Notes at the maturity date of July 1, 2003 and no assurances can be given that the Company will be successful in that regard.
Revolving Credit Facilities
The Revolving Credit Facilities have an aggregate maximum loan commitment of $180.0 million and mature at various dates beginning in 2002 through September 2004. The collateral for the loans provided by the Revolving Credit Facilities includes specific real estate assets funded by such respective Revolving Credit Facilities. Although the aggregate maximum loan commitment for these loans is $180.0 million, the credit facilities have limitations on the amounts which can be borrowed at any time based on assets which are included in the credit facilities and the specified borrowings permitted under borrowing base calculations. The undrawn availability at March 31, 2002 was $16.7 million and the principal outstanding under the Revolving Credit Facilities at March 31, 2002 was $127.3 million.
22
Pursuant to the terms of the Revolving Credit Facilities, outstanding advances bear interest at various rates which approximate the prime rate. The Revolving Credit Facilities include financial covenants which may limit the amount which may be borrowed thereunder.
Unsecured Revolving Line
Effective March 8, 2001 the Company obtained an unsecured revolving line of credit with a commercial bank in the amount of $10.0 million. The Unsecured Revolving Line bears interest at prime plus 1% and matures in June 2003. The Unsecured Revolving Line includes financial covenants which may limit the amount which may be borrowed thereunder. As of March 31, 2002, there was no outstanding balance under the Unsecured Revolving Line.
Construction Notes Payable
At March 31, 2002, the Company had construction notes payable amounting to $25.5 million related to various real estate projects. The notes are due as units close or at various dates on or before June 11, 2004 and bear interest at rates of prime plus 0.25% to 19%.
Seller Financing
Another source of financing available to the Company is seller-provided financing for land acquired by the Company. At March 31, 2002, the Company had $49.6 million of notes payable outstanding related to land acquisitions for which seller financing was provided. The notes are due at various dates through December 31, 2003 and bear interest at rates ranging from prime plus 2.0% to 12%.
Revolving Mortgage Warehouse Credit Facility
The Company has a $15.0 million revolving mortgage warehouse credit facility with a bank to fund its mortgage origination operations. An additional $5.0 million is available with approval by the lender. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. Borrowings are secured by the related mortgage loans held for sale. At March 31, 2002 the outstanding balance was $2.0 million. The facility, which has a current maturity date of May 31, 2002, also contains a financial covenant requiring the Company to maintain cash and/or marketable securities on the books of account of its subsidiary, Duxford Financial, Inc., a California corporation (“Duxford”) in an amount equal to no less than $1.0 million and a financial covenant requiring the Company to maintain total assets net of total liabilities and net of amounts receivable from the Company and/or affiliates on the books of account of Duxford in an amount equal to no less than $1.0 million.
Land Banking Arrangements
The Company has entered into land banking arrangements for two projects totaling 204 lots for a purchase price of $8.7 million. As of March 31, 2002, the balance of the lots still under option and unclosed was 118 lots for a purchase price of $4.6 million. The Company is under no obligation to purchase the balance of the lots, but, as of March 31, 2002, would forfeit $2.8 million if the lots were not purchased.
Joint Venture Financing
As of March 31, 2002, the Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned and, accordingly, the financial statements of such joint ventures are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for these joint ventures. Based upon current estimates, substantially all future development and construction costs will be funded by the Company’s venture partners or from the proceeds of construction financing obtained by the joint ventures.
23
As of March 31, 2002, the Company’s investment in and advances to such joint ventures was approximately $56.0 million and the Company’s venture partners’ investment in such joint ventures was approximately $140.9 million. In addition, certain joint ventures have obtained financing from land sellers or construction lenders which amounted to approximately $73.9 million at March 31, 2002.
Assessment District Bonds
In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company’s other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When the Company’s homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments.
Cash Flows — Comparison of Three Months Ended March 31, 2002 to Three Months Ended March 31, 2001
Net cash used in operating activities increased to $49.8 million in the 2002 period from $42.7 million in the 2001 period. The change was primarily as a result of increased expenditures in real estate inventories in the 2002 period.
Net cash provided by investing activities increased to $15.6 million in the 2002 period from $2.1 million in the 2001 period. The change was primarily as a result of increased net cash received from unconsolidated joint ventures and mortgage notes receivable in the 2002 period.
Net cash provided by financing activities decreased to $31.9 million in the 2002 period from $38.2 million in the 2001 period primarily as a result of decreased net borrowings on notes payable and the purchase and retirement of the Company’s common stock.
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Description of Projects
The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding divisions.
Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of March 31, 2002 | Lots Owned as of March 31, 2002 | Homes Closed for the Period Ended March 31, 2002 | Backlog at March 31, 2002(2)(4) | Sales Price Range(3) | |||||||
SOUTHERN CALIFORNIA | ||||||||||||||
Wholly-owned: | ||||||||||||||
Andover — West Irvine (Orange County) | 2001 | 138 | 95 | 43 | 22 | 29 | $284,000 – 321,000 | |||||||
Terraza at Vista del Verde —Yorba Linda (Orange County) | 2001 | 106 | 38 | 68 | 15 | 25 | $527,000 – 587,000 | |||||||
Providence Ranch (Riverside County) | 2002 | 97 | 92 | 5 | 0 | 0 | $210,000 – 245,000 | |||||||
Providence Ranch North (Riverside County) | 2002 | 83 | 0 | 42 | 0 | 33 | $230,000 – 270,000 | |||||||
Cantada — Oxnard (Ventura County) | 2002 | 113 | 54 | 59 | 27 | 49 | $313,000 – 333,000 | |||||||
Monticello — North Park Square (Orange County) | 2002 | 112 | 0 | 104 | 0 | 51 | $285,000 – 335,000 | |||||||
Montellano at Talega (Orange County) | 2002 | 61 | 0 | 61 | 0 | 29 | $790,000 – 845,000 | |||||||
Sterling Glen at Ladera Ranch (Orange County) | 2002 | 102 | 8 | 94 | 8 | 51 | $442,000 – 475,000 | |||||||
Davenport at Ladera Ranch (Orange County) | 2003 | 164 | 0 | 164 | 0 | 0 | $246,000 – 285,000 | |||||||
Weatherhaven at Ladera Ranch (Orange County) | 2003 | 71 | 0 | 71 | 0 | 0 | $365,000 – 420,000 | |||||||
Total wholly-owned | 1,047 | 287 | 711 | 72 | 267 | |||||||||
Unconsolidated joint ventures: | ||||||||||||||
Reston at Ladera Ranch (Orange County) | 2000 | 117 | 104 | 13 | 2 | 12 | $365,000 – 425,000 | |||||||
Hampton Road at Ladera Ranch (Orange County) | 2000 | 82 | 75 | 7 | 12 | 5 | $447,000 – 477,000 | |||||||
Compass Pointe at Forster Ranch (Orange County) | 2000 | 92 | 89 | 3 | 8 | 3 | $540,000 – 575,000 | |||||||
Avalon at Summerlane (Orange County) | 2000 | 113 | 113 | 0 | 4 | 0 | $460,000 – 490,000 | |||||||
Beachside —Huntington Beach (Orange County) | 2001 | 86 | 30 | 56 | 23 | 37 | $605,000 – 640,000 | |||||||
Quintana (Ventura County) | 2001 | 90 | 11 | 79 | 3 | 27 | $515,000 – 610,000 | |||||||
Coronado — Oxnard (Ventura County) | 2002 | 110 | 0 | 110 | 0 | 23 | $360,000 – 380,000 | |||||||
Cantabria — Oxnard (Ventura County) | 2002 | 87 | 0 | 87 | 0 | 20 | $295,000 – 320,000 | |||||||
Toscana (Los Angeles County) | 2002 | 70 | 0 | 70 | 0 | 0 | $430,000 – 475,000 | |||||||
Total unconsolidated joint ventures | 847 | 422 | 425 | 52 | 127 | |||||||||
SOUTHERN CALIFORNIA REGION TOTAL | 1,894 | 709 | 1,136 | 124 | 394 | |||||||||
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Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of March 31, 2002 | Lots Owned as of March 31, 2002 | Homes Closed for the Period Ended March 31, 2002 | Backlog at March 31, 2002(2)(4) | Sales Price Range (3) | |||||||
NORTHERN CALIFORNIA | ||||||||||||||
Wholly-owned: | ||||||||||||||
Lyon Villas (San Joaquin County) | 1999 | 135 | 84 | 51 | 0 | 19 | $257,000 – 305,000 | |||||||
Lyon Estates (San Joaquin County) | 1997 | 120 | 83 | 37 | 0 | 7 | $291,000 – 327,000 | |||||||
Lyon Ironwood (San Joaquin County) | 2000 | 116 | 83 | 34 | 2 | 30 | $209,000 – 263,000 | |||||||
Lyon Rhapsody (Contra Costa County) | 2001 | 81 | 57 | 24 | 14 | 14 | $236,000 – 295,000 | |||||||
Lyon Estates at Stonebridge (San Joaquin County) | 2001 | 103 | 28 | 36 | 5 | 14 | $261,000 – 301,000 | |||||||
Lyon Palazzo (Sacramento County) | 2001 | 100 | 47 | 53 | 9 | 21 | $266,000 – 304,000 | |||||||
Lyon Seasons (Stanislaus County) | 2002 | 71 | 0 | 71 | 0 | 7 | $269,000 – 314,000 | |||||||
The Legends — Brentwood (Contra Costa County) | ||||||||||||||
Olde Ivy | 2003 | 66 | 0 | 66 | 0 | 0 | $275,000 – 345,000 | |||||||
Heartland | 2003 | 57 | 0 | 57 | 0 | 0 | $280,000 – 335,000 | |||||||
Gables | 2003 | 91 | 0 | 91 | 0 | 0 | $295,000 – 395,000 | |||||||
214 | 0 | 214 | 0 | 0 | ||||||||||
Victoria by the Bay (Contra Costa County) | ||||||||||||||
The Bluffs | 2003 | 70 | 0 | 70 | 0 | 0 | $576,000 – 641,000 | |||||||
The Shores | 2003 | 99 | 0 | 99 | 0 | 0 | $531,000 – 591,000 | |||||||
169 | 0 | 169 | 0 | 0 | ||||||||||
Total wholly-owned | 1,109 | 382 | 689 | 30 | 112 | |||||||||
Unconsolidated joint ventures: | ||||||||||||||
The Ranch at Silver Creek (Santa Clara County) | 2003 | 538 | 0 | 538 | 0 | 0 | ||||||||
Lyon Ridge (Contra (Costa County) | 1999 | 127 | 127 | 0 | 1 | 0 | $348,000 – 407,000 | |||||||
Henry Ranch (Contra Costa County) | ||||||||||||||
Lyon Tierra | 2001 | 46 | 35 | 11 | 4 | 11 | $463,000 – 501,000 | |||||||
Lyon Dorado | 2001 | 54 | 24 | 30 | 3 | 24 | $788,000 – 1,003,000 | |||||||
100 | 59 | 41 | 7 | 35 | ||||||||||
Woodlake Estates (Solano County) | ||||||||||||||
Paradise Valley | 2003 | 9 | 0 | 9 | 0 | 0 | $353,000 – 378,000 | |||||||
Brook | 2001 | 121 | 29 | 92 | 6 | 47 | $299,000 – 332,000 | |||||||
Falls | 2001 | 102 | 40 | 62 | 5 | 20 | $321,000 – 396,000 | |||||||
232 | 69 | 163 | 11 | 67 | ||||||||||
Stonebriar (El Dorado County) | ||||||||||||||
Lyon Casina | 2001 | 123 | 9 | 114 | 2 | 14 | $311,000 – 361,000 | |||||||
Lyon Prima | 2001 | 137 | 12 | 125 | 7 | 5 | $366,000 – 426,000 | |||||||
260 | 21 | 239 | 9 | 19 | ||||||||||
Total unconsolidated joint ventures | 1,257 | 276 | 981 | 28 | 121 | |||||||||
NORTHERN CALIFORNIA REGION TOTAL | 2,366 | 658 | 1,670 | 58 | 233 | |||||||||
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Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of March 31, 2002 | Lots Owned as of March 31, 2002 | Homes Closed for the Period Ended March 31, 2002 | Backlog at March 31, 2002(2)(4) | Sales Price Range (3) | |||||||
SAN DIEGO | ||||||||||||||
Wholly-owned: | ||||||||||||||
Horsethief Canyon Ranch (Riverside County) Previously Closed Products | 1989 | 963 | 963 | 0 | 0 | 0 | ||||||||
Series “400” | 1995 | 554 | 467 | 87 | 11 | 32 | $208,000 – 246,000 | |||||||
Series “500” | 1995 | 445 | 422 | 23 | 12 | 22 | $239,000 – 257,000 | |||||||
1,962 | 1,852 | 110 | 23 | 54 | ||||||||||
Sycamore Ranch (Riverside County) | 1997 | 195 | 122 | 73 | 5 | 13 | $433,000 – 560,000 | |||||||
Vail Ranch (San Diego County) | 2000 | 152 | 151 | 1 | 0 | 1 | $196,000 – 213,000 | |||||||
Hidden Trails (San Diego County) | ||||||||||||||
The Groves (Village A) | 2001 | 93 | 9 | 34 | 6 | 12 | $297,000 – 318,000 | |||||||
The Orchards (Village B) | 2002 | 78 | 0 | 25 | 0 | 13 | $322,000 – 372,000 | |||||||
Vineyards (Village C) | 2002 | 75 | 0 | 3 | 0 | 0 | $376,000 – 416,000 | |||||||
Meadows (Village D) | 2003 | 42 | 0 | 2 | 0 | 0 | $378,000 – 428,000 | |||||||
288 | 9 | 64 | 6 | 25 | ||||||||||
Rancho Dorado (San Diego County) | ||||||||||||||
La Fuente | 2000 | 56 | 56 | 0 | 0 | 0 | $299,000 – 322,000 | |||||||
Loma Real | 2000 | 89 | 75 | 12 | 6 | 10 | $403,000 – 446,000 | |||||||
Los Reyes | 2000 | 66 | 51 | 17 | 11 | 15 | $445,000 – 470,000 | |||||||
211 | 182 | 29 | 17 | 25 | ||||||||||
Three Sisters (San Diego County) | 2003 | 96 | 0 | 96 | 0 | 0 | ||||||||
Total wholly-owned | 2,904 | 2,316 | 373 | 51 | 118 | |||||||||
Unconsolidated joint ventures: | ||||||||||||||
Mendocino Trails (Otay Ranch) (San Diego County) | 2001 | 83 | 59 | 24 | 14 | 20 | $260,000 – 271,000 | |||||||
4S Ranch (San Diego County) | ||||||||||||||
Providence | 2001 | 123 | 15 | 108 | 10 | 21 | $534,000 – 574,000 | |||||||
Tanglewood | 2002 | 161 | 0 | 161 | 0 | 0 | ||||||||
Summerwood | 2002 | 95 | 0 | 95 | 0 | 0 | ||||||||
379 | 15 | 364 | 10 | 21 | ||||||||||
Total unconsolidated joint ventures | 462 | 74 | 388 | 24 | 41 | |||||||||
SAN DIEGO REGION TOTAL | 3,366 | 2,390 | 761 | 75 | 159 | |||||||||
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Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion (1) | Units Closed as of March 31, 2002 | Lots Owned as of March 31, 2002 | Homes Closed for the Period Ended March 31, 2002 | Backlog at March 31, 2002 (2) (4) | Sales Price Range (3) | |||||||
ARIZONA | ||||||||||||||
Wholly-owned: | ||||||||||||||
Sage Creek — Encanto (Maricopa County) | 2000 | 176 | 169 | 7 | 6 | 1 | $110,000 – 123,000 | |||||||
Sage Creek — Arcadia (Maricopa County) | 2000 | 167 | 127 | 40 | 24 | 24 | $137,000 – 160,000 | |||||||
Sage Creek — Solano (Maricopa County) | 2000 | 82 | 70 | 12 | 11 | 9 | $170,000 – 191,000 | |||||||
Mesquite Grove — Small (Maricopa County) | 2001 | 112 | 6 | 106 | 4 | 27 | $183,000 – 224,000 | |||||||
Mesquite Grove — Large (Maricopa County) | 2001 | 93 | 7 | 86 | 5 | 26 | $283,000 – 318,000 | |||||||
Power Ranch (Maricopa County) | 2001 | 103 | 16 | 87 | 13 | 21 | $175,000 – 232,000 | |||||||
Tramonto (Maricopa County) | 2001 | 76 | 2 | 74 | 0 | 26 | $187,000 – 248,000 | |||||||
Tramonto II (Maricopa County) | 2001 | 114 | 0 | 114 | 0 | 0 | ||||||||
Country Place (Maricopa County) | 2001 | 115 | 2 | 36 | 0 | 6 | $116,000 – 136,000 | |||||||
Mountaingate (Maricopa County) | 2002 | 341 | 0 | 341 | 0 | 0 | ||||||||
ARIZONA REGION TOTAL | 1,379 | 399 | 903 | 63 | 140 | |||||||||
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Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of March 31, 2002 | Lots Owned as of March 31, 2002 | Homes Closed for the Period Ended March 31, 2002 | Backlog at March 31, 2002(2)(4) | Sales Price Range(3) | |||||||
NEVADA | ||||||||||||||
Wholly-owned: | ||||||||||||||
Montecito Tesoro (Clark County) | 2000 | 121 | 121 | 0 | 1 | 0 | $164,000 – 181,000 | |||||||
Montecito Classico (Clark County) | 2000 | 100 | 90 | 10 | 18 | 9 | $192,000 – 227,000 | |||||||
Glenleigh Gardens at Summerlin (Clark County) | 2000 | 96 | 96 | 0 | 22 | 0 | $246,000 – 276,000 | |||||||
Springfield at Summerlin (Clark County) | 2001 | 85 | 59 | 26 | 15 | 21 | $208,000 – 228,000 | |||||||
Topaz Ridge at Summerlin (Clark County) | 2002 | 89 | 0 | 22 | 0 | 24 | $505,000 – 563,000 | |||||||
Stallion Mountain (Clark County) | 2001 | 116 | 65 | 56 | 9 | 22 | $156,000 – 176,000 | |||||||
Fairfield at Summerlin (Clark County) | 2001 | 89 | 29 | 19 | 20 | 32 | $278,000 – 304,000 | |||||||
Annendale (Clark County) | 2001 | 194 | 4 | 190 | 0 | 38 | $153,000 – 176,000 | |||||||
Santalina at Summerlin (Clark County) | 2002 | 74 | 0 | 74 | 0 | 0 | $209,000 – 234,000 | |||||||
Encanto at Summerlin (Clark County) | 2002 | 79 | 0 | 79 | 0 | 0 | $270,000 – 294,000 | |||||||
Lone Mountain & Commerce (Clark County) | 2002 | 90 | 0 | 90 | 0 | 0 | $146,000 – 160,000 | |||||||
NEVADA REGION TOTAL | 1,133 | 464 | 566 | 85 | 146 | |||||||||
GRAND TOTALS: | ||||||||||||||
Wholly-owned | 7,572 | 3,848 | 3,242 | 301 | 783 | |||||||||
Unconsolidated joint ventures | 2,566 | 772 | 1,794 | 104 | 289 | |||||||||
10,138 | 4,620 | 5,036 | 405 | 1,072 | ||||||||||
(1) | The estimated number of homes to be built at completion is subject to change, and there can be no assurance that the Company will build these homes. |
(2) | Backlog consists of homes sold under sales contracts that have not yet closed, and there can be no assurance that closings of sold homes will occur. |
(3) | Sales price range reflects base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project. |
(4) | Of the total homes subject to pending sales contracts as of March 31, 2002, 959 represent homes completed or under construction and 113 represent homes not yet under construction. |
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Net Operating Loss Carryforwards
As of December 31, 2000, the Company had substantial net operating loss carryforwards for Federal tax purposes which were utilized to reduce taxable income during the year ended December 31, 2001. As a result of the reduction in the valuation allowance associated with such utilized net operating loss carryforwards, the Company’s overall effective tax rate for the quarter ended March 31, 2001 was approximately 10.5%. At December 31, 2001, the Company had net operating loss carryforwards for Federal tax purposes of approximately $8,466,000 which expire in 2009. In addition, unused recognized built-in losses in the amount of $23,891,000 are available to offset future income and expire between 2009 and 2011. Beginning in 2002, the utilization of these losses is limited to $3,235,000 of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduces the Company’s estimated overall effective tax rate for the year ending December 31, 2002 from approximately 38.3% to approximately 17.8%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited in the event of an “ownership change” under Federal tax laws and regulations.
Inflation
The Company’s revenues and profitability may be affected by increased inflation rates and other general economic conditions. In periods of high inflation, demand for the Company’s homes may be reduced by increases in mortgage interest rates. Further, the Company’s profits will be affected by its ability to recover through higher sales prices increases in the costs of land, construction, labor and administrative expenses. The Company’s ability to raise prices at such times will depend upon demand and other competitive factors.
Related Party Transactions
See Note 4 of the Notes to Consolidated Financial Statements for a description of the Company’s transactions with related parties.
Critical Accounting Polices
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the reported period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion of the Company’s critical accounting policies is disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. Management still believes that all of the critical accounting policies disclosed therein are the most critical.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by Statement No. 137 and Statement No. 138 (collectively, “Statement No. 133”), which is required to be adopted for fiscal years beginning after June 15, 2000. Statement No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Statement No. 133 had no impact on the Company’s results of operations or financial position for the period ended March 31, 2002.
30
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141,Business Combinations (“Statement No. 141”). This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, “Business Combinations” and Financial Accounting Standards Board Statement No. 38,Accounting for PreacquisitionContingencies of Purchased Enterprises. All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The Company will adopt Statement No. 141 for all business combinations initiated after June 30, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets (“Statement No. 142”), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired. As of March 31, 2002, there have been no indicators of impairment related to the Company’s goodwill.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”), effective for fiscal years beginning after December 15, 2001. Statement No. 144 supersedes Statement of Financial Accounting Standards No. 121. Statement No. 144 did not have a significant impact on the earnings or financial position of the Company upon adoption.
Forward Looking Statements
Investors are cautioned that certain statements contained in this Quarterly Report on Form 10-Q, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined in the Act. Forward-looking statements are based upon expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company, economic and market factors and the homebuilding industry.
Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates (including, but not limited to changes directly or indirectly related to the tragic events of September 11, 2001 and thereafter), whether an ownership change occurs which results in the limitation of the Company’s ability to utilize the tax benefits associated with its net operating loss carryforward, changes in home mortgage interest rates, changes in prices of homebuilding materials, labor shortages, adverse weather conditions, 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, whether the Company is able to refinance the outstanding balances of Senior Notes at their maturity, the timing of receipt of regulatory approvals and the opening of projects and the availability and cost of land for future growth.
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 for detailed disclosure about quantitative and qualitative disclosures about market risk. Quantitative and qualitative disclosures about market risk have not materially changed since December 31, 2001.
31
PART II. OTHER INFORMATION
Not applicable.
32
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 13, 2002 | By: | /s/ MICHAEL D. GRUBBS | ||||||
MICHAEL D. GRUBBS Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||||||
Date: May 13, 2002 | By: | /s/ W. DOUGLASS HARRIS | ||||||
W. DOUGLASS HARRIS Vice President, Corporate Controller (Principal Accounting Officer) |
33