Table of Contents
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 September 30, 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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 October 25, 2002 | |
Common stock, par value $.01 | 9,725,247 |
Table of Contents
INDEX
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements: | ||
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
22 | ||
38 | ||
38 | ||
39 | ||
39 | ||
39 | ||
39 | ||
39 | ||
39 | ||
39 | ||
40 |
2
Table of Contents
Item 1. Financial Statements.
WILLIAM LYON HOMES
CONSOLIDATED BALANCE SHEETS
(in thousands except number of shares and par value per share)
ASSETS | ||||||
September 30, 2002 | December 31, 2001 | |||||
(unaudited) | ||||||
Cash and cash equivalents | $ | 12,585 | $ | 19,751 | ||
Receivables | 18,486 | 26,224 | ||||
Real estate inventories — Note 2 | 521,396 | 307,335 | ||||
Investments in and advances to unconsolidated joint ventures — Note 2 | 40,861 | 66,753 | ||||
Property and equipment, less accumulated depreciation of $5,225 and $4,309 at September 30, 2002 and December 31, 2001, respectively | 2,328 | 2,171 | ||||
Deferred loan costs | 2,387 | 2,831 | ||||
Goodwill — Note 1 | 5,896 | 5,896 | ||||
Other assets | 4,891 | 2,748 | ||||
$ | 608,830 | $ | 433,709 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Accounts payable | $ | 35,846 | $ | 19,346 | ||
Accrued expenses | 39,773 | 41,492 | ||||
Notes payable | 216,262 | 151,191 | ||||
12 1/2% Senior Notes due July 1, 2003 — Note 3 | 70,279 | 70,279 | ||||
362,160 | 282,308 | |||||
Minority interest in consolidated joint ventures — Note 2 | 86,088 | 784 | ||||
Stockholders’ equity — Notes 1 and 5 | ||||||
Common stock, par value $.01 per share; 30,000,000 shares authorized; 10,327,247 and 10,619,399 shares issued at September 30, 2002 and December 31, 2001, respectively; 9,925,347 and 10,619,399 shares outstanding at September 30, 2002 and December 31, 2001, respectively | 99 | 106 | ||||
Additional paid-in capital | 113,112 | 127,035 | ||||
Retained earnings | 47,371 | 23,476 | ||||
160,582 | 150,617 | |||||
$ | 608,830 | $ | 433,709 | |||
See accompanying notes.
3
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per common share amounts)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Operating revenue | ||||||||||||||||
Home sales | $ | 176,351 | $ | 107,629 | $ | 393,386 | $ | 278,252 | ||||||||
Lots, land and other sales | 6,647 | — | 7,178 | 7,054 | ||||||||||||
Management fees | 2,371 | 1,864 | 5,925 | 4,962 | ||||||||||||
185,369 | 109,493 | 406,489 | 290,268 | |||||||||||||
Operating costs | ||||||||||||||||
Cost of sales — homes | (149,967 | ) | (89,413 | ) | (337,088 | ) | (231,977 | ) | ||||||||
Cost of sales — lots, land and other | (6,687 | ) | (188 | ) | (7,556 | ) | (4,380 | ) | ||||||||
Sales and marketing | (5,968 | ) | (4,598 | ) | (15,873 | ) | (12,956 | ) | ||||||||
General and administrative | (10,049 | ) | (8,416 | ) | (25,645 | ) | (25,318 | ) | ||||||||
Amortization of goodwill — Note 1 | — | (310 | ) | — | (931 | ) | ||||||||||
(172,671 | ) | (102,925 | ) | (386,162 | ) | (275,562 | ) | |||||||||
Equity in income of unconsolidated joint ventures — Note 2 | 5,178 | 4,789 | 10,686 | 12,087 | ||||||||||||
Operating income | 17,876 | 11,357 | 31,013 | 26,793 | ||||||||||||
Interest expense, net of amounts capitalized | — | — | — | (227 | ) | |||||||||||
Other income, net | 1,086 | 1,789 | 1,597 | 4,128 | ||||||||||||
Income before provision for income taxes | 18,962 | 13,146 | 32,610 | 30,694 | ||||||||||||
Provision for income taxes — Note 1 | (5,212 | ) | (1,468 | ) | (8,715 | ) | (3,317 | ) | ||||||||
Net income | $ | 13,750 | $ | 11,678 | $ | 23,895 | $ | 27,377 | ||||||||
Earnings per common share — Note 1 | ||||||||||||||||
Basic | $ | 1.34 | $ | 1.10 | $ | 2.31 | $ | 2.59 | ||||||||
Diluted | $ | 1.30 | $ | 1.08 | $ | 2.25 | $ | 2.55 | ||||||||
See accompanying notes.
4
Table of Contents
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 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 | 124 | 1 | 1,087 | — | 1,088 | |||||||||||||
Purchase and retirement of common stock — Note 5 | (416 | ) | (4 | ) | (6,065 | ) | — | (6,069 | ) | |||||||||
Purchase of common stock for treasury — Note 5 | (402 | ) | (4 | ) | (8,945 | ) | — | (8,949 | ) | |||||||||
Net income | — | — | — | 23,895 | 23,895 | |||||||||||||
Balance — September 30, 2002 | 9,925 | $ | 99 | $ | 113,112 | $ | 47,371 | $ | 160,582 | |||||||||
See accompanying notes.
5
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, | ||||||||
2002 | 2001 | |||||||
Operating activities | ||||||||
Net income | $ | 23,895 | $ | 27,377 | ||||
Adjustments to reconcile net income to net cash used in operating activities | ||||||||
Depreciation and amortization | 966 | 1,906 | ||||||
Equity in income of unconsolidated joint ventures | (10,686 | ) | (12,087 | ) | ||||
Provision for income taxes | 8,715 | 3,317 | ||||||
Net changes in operating assets and liabilities: | ||||||||
Receivables | 3,192 | 7,482 | ||||||
Real estate inventories | (77,654 | ) | (84,560 | ) | ||||
Deferred loan costs | 444 | (2,107 | ) | |||||
Other assets | (2,143 | ) | 1,379 | |||||
Accounts payable | 9,674 | 2,039 | ||||||
Accrued expenses | (10,565 | ) | (9,482 | ) | ||||
Net cash used in operating activities | (54,162 | ) | (64,736 | ) | ||||
Investing activities | ||||||||
Investments in and advances to unconsolidated joint ventures | (5,895 | ) | (18,154 | ) | ||||
Distributions from unconsolidated joint ventures | 24,269 | 15,330 | ||||||
Mortgage notes receivable originations/issuances | (217,101 | ) | (136,941 | ) | ||||
Mortgage notes receivable sales/repayments | 221,647 | 136,457 | ||||||
Purchases of property and equipment | (1,123 | ) | (480 | ) | ||||
Net cash provided by (used in) investing activities | 21,797 | (3,788 | ) | |||||
Financing activities | ||||||||
Proceeds from borrowing on notes payable | 638,570 | 491,948 | ||||||
Principal payments on notes payable | (599,441 | ) | (425,576 | ) | ||||
Repurchase of 12 1/2% Senior Notes | — | (51,637 | ) | |||||
Reissuance of 12 1/2% Senior Notes | — | 44,715 | ||||||
Common stock issued for exercised options | 1,088 | 159 | ||||||
Common stock purchased | (15,018 | ) | — | |||||
Net cash provided by financing activities | 25,199 | 59,609 | ||||||
Net decrease in cash and cash equivalents | (7,166 | ) | (8,915 | ) | ||||
Cash and cash equivalents — beginning of period | 19,751 | 14,711 | ||||||
Cash and cash equivalents — end of period | $ | 12,585 | $ | 5,796 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during the period for interest, net of amounts capitalized | $ | 312 | $ | 1,158 | ||||
Contribution of land to unconsolidated joint venture | $ | 2,000 | $ | 1,100 | ||||
Issuance of notes payable for land acquisitions | $ | 25,942 | $ | 20,293 | ||||
See accompanying notes.
6
Table of Contents
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 and nine months ended September 30, 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
7
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
that goodwill was not impaired. As of September 30, 2002, there have been no indicators of impairment related to the Company’s goodwill. If Statement No. 142 had been adopted effective January 1, 2001, the pro forma impact of the nonamortization of goodwill on the results for 2001 would have been as follows (in thousands except per share data):
Three Months Ended September 30, 2001 | Nine Months Ended September 30, 2001 | |||||
Net income, as reported | $ | 11,678 | $ | 27,377 | ||
Amortization of goodwill, net of tax | 275 | 830 | ||||
Net income, as adjusted | $ | 11,953 | $ | 28,207 | ||
Net income per share, as adjusted: | ||||||
Basic | $ | 1.13 | $ | 2.67 | ||
Diluted | $ | 1.11 | $ | 2.63 | ||
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 three and nine months ended September 30, 2001 was approximately 11.2% and 10.8%, respectively. 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. 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 39.2% to 26.7%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.
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 September 30, 2002 are based on 10,272,526 and 10,547,213 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the nine months ended September 30, 2002 are based on 10,359,996 and 10,637,464 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the three months ended September 30, 2001 are based on 10,588,560 and 10,804,075 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the nine months ended September 30, 2001 are based on 10,578,344 and 10,728,291 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 September 30, 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.
Certain balances included in the December 31, 2001 consolidated balance sheet have been reclassified in order to conform to current period presentation.
8
Table of Contents
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 not controlled by the Company 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. Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and the joint venture partners as specified in the applicable partnership or operating agreements. Condensed combined financial information of these joint ventures as of September 30, 2002 and December 31, 2001 and for the three and nine months ended September 30, 2002 and 2001 is summarized as follows:
CONDENSED COMBINED BALANCE SHEETS
(in thousands)
September 30, 2002 | December 31, 2001 | |||||
(unaudited) | ||||||
ASSETS | ||||||
Cash and cash equivalents | $ | 17,654 | $ | 9,404 | ||
Receivables | 5,187 | 5,711 | ||||
Real estate inventories | 211,696 | 294,698 | ||||
$ | 234,537 | $ | 309,813 | |||
LIABILITIES AND OWNERS’ CAPITAL | ||||||
Accounts payable | $ | 18,855 | $ | 21,931 | ||
Accrued expenses | 5,723 | 4,288 | ||||
Notes payable | 94,413 | 72,344 | ||||
Advances from William Lyon Homes | 4,393 | 11,768 | ||||
123,384 | 110,331 | |||||
Owners’ capital | ||||||
William Lyon Homes | 36,468 | 54,985 | ||||
Others | 74,685 | 144,497 | ||||
111,153 | 199,482 | |||||
$ | 234,537 | $ | 309,813 | |||
9
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED COMBINED STATEMENTS OF INCOME
(in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Operating revenue | ||||||||||||||||
Home sales | $ | 79,230 | $ | 63,774 | $ | 196,541 | $ | 173,308 | ||||||||
Land sale | — | — | 17,079 | — | ||||||||||||
79,230 | 63,774 | 213,620 | 173,308 | |||||||||||||
Operating costs | ||||||||||||||||
Cost of sales — homes | (65,598 | ) | (50,976 | ) | (165,579 | ) | (140,373 | ) | ||||||||
Cost of sales — land | — | — | (13,542 | ) | — | |||||||||||
Sales and marketing | (2,380 | ) | (2,406 | ) | (7,111 | ) | (6,305 | ) | ||||||||
Operating income | 11,252 | 10,392 | 27,388 | 26,630 | ||||||||||||
Other income, net | 73 | 89 | 43 | 205 | ||||||||||||
Net income | $ | 11,325 | $ | 10,481 | $ | 27,431 | $ | 26,835 | ||||||||
Allocation to owners | ||||||||||||||||
William Lyon Homes | $ | 5,178 | $ | 4,789 | $ | 10,686 | $ | 12,087 | ||||||||
Others | 6,147 | 5,692 | 16,745 | 14,748 | ||||||||||||
$ | 11,325 | $ | 10,481 | $ | 27,431 | $ | 26,835 | |||||||||
Certain joint ventures have obtained financing from construction lenders which amounted to $94,413,000 at September 30, 2002. All of the joint ventures that have obtained such financing are in the form of limited partnerships of which the Company is the general partner. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company, as general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided completion guarantees and repayment guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees only become effective upon repayment of the outstanding 12 1/2% Senior Notes.
During the nine months ended September 30, 2002, one of the joint ventures in which the Company is a general partner 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.
During the three months ended September 30, 2002, one of the Company’s existing unconsolidated joint ventures (“Existing Venture”) was restructured such that the Company is required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture (estimated to be $178,578,000, including an estimated preferred return of $36,911,000). During the three months ended September 30, 2002, the first 242 lots were purchased from the Existing Venture for $62,467,000, which includes a $12,493,000 preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (“New Venture”) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74,210,000 plus a 13 1/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been consolidated with the Company’s financial statements as of September 30, 2002, including real estate inventories of $112,465,000 and minority interest in consolidated joint ventures of $85,304,000. The intercompany sale and related profit from the 242 lots have been eliminated in consolidation.
10
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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.
CONSOLIDATING BALANCE SHEET
September 30, 2002
(in thousands)
Unconsolidated | ||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | 9,825 | $ | 2,760 | $ | — | $ | 12,585 | ||||||
Receivables | — | 8,644 | 9,842 | — | 18,486 | |||||||||||
Real estate inventories | — | 513,029 | 8,367 | — | 521,396 | |||||||||||
Investments in and advances to unconsolidated joint ventures | — | 40,666 | 195 | — | 40,861 | |||||||||||
Property and equipment, net | — | 2,128 | 200 | — | 2,328 | |||||||||||
Deferred loan costs | 1,397 | 990 | — | — | 2,387 | |||||||||||
Goodwill | — | 5,896 | — | — | 5,896 | |||||||||||
Other assets | — | 4,211 | 680 | — | 4,891 | |||||||||||
Investments in subsidiaries | 158,128 | 5,145 | — | (163,273 | ) | — | ||||||||||
Intercompany receivables | 79,308 | 7,972 | — | (87,280 | ) | — | ||||||||||
$ | 238,833 | $ | 598,506 | $ | 22,044 | $ | (250,553 | ) | $ | 608,830 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Accounts payable | $ | — | $ | 35,684 | $ | 162 | $ | — | $ | 35,846 | ||||||
Accrued expenses | — | 38,509 | 1,264 | — | 39,773 | |||||||||||
Notes payable | — | 206,118 | 10,144 | — | 216,262 | |||||||||||
12 1/2% Senior Notes | 70,279 | — | — | — | 70,279 | |||||||||||
Intercompany payables | 7,972 | 79,308 | — | (87,280 | ) | — | ||||||||||
Total liabilities | 78,251 | 359,619 | 11,570 | (87,280 | ) | 362,160 | ||||||||||
Minority interest in consolidated joint ventures | — | 85,304 | 784 | — | 86,088 | |||||||||||
Stockholders’ equity | 160,582 | 153,583 | 9,690 | (163,273 | ) | 160,582 | ||||||||||
$ | 238,833 | $ | 598,506 | $ | 22,044 | $ | (250,553 | ) | $ | 608,830 | ||||||
11
Table of Contents
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 | — | 299,932 | 7,403 | — | 307,335 | |||||||||||
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 | — | 2,691 | 57 | — | 2,748 | |||||||||||
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 | 1,752 | — | 41,492 | |||||||||||
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 | 14,007 | (87,280 | ) | 282,308 | ||||||||||
Minority interest in consolidated joint ventures | — | — | 784 | — | 784 | |||||||||||
Stockholders’ equity | 150,617 | 143,482 | 53,259 | (196,741 | ) | 150,617 | ||||||||||
$ | 228,868 | $ | 420,812 | $ | 68,050 | $ | (284,021 | ) | $ | 433,709 | ||||||
12
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 2002
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | |||||||||||||||
Operating revenue | |||||||||||||||||||
Sales | $ | — | $ | 169,369 | $ | 13,629 | $ | — | $ | 182,998 | |||||||||
Management fees | — | 1,686 | 685 | — | 2,371 | ||||||||||||||
— | 171,055 | 14,314 | — | 185,369 | |||||||||||||||
Operating costs | |||||||||||||||||||
Cost of sales | — | (144,881 | ) | (11,773 | ) | — | (156,654 | ) | |||||||||||
Sales and marketing | — | (5,182 | ) | (786 | ) | — | (5,968 | ) | |||||||||||
General and administrative | — | (9,995 | ) | (54 | ) | — | (10,049 | ) | |||||||||||
— | (160,058 | ) | (12,613 | ) | — | (172,671 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | — | 3,060 | 2,118 | — | 5,178 | ||||||||||||||
Income from subsidiaries | 13,750 | 3,851 | — | (17,601 | ) | — | |||||||||||||
Operating income | 13,750 | 17,908 | 3,819 | (17,601 | ) | 17,876 | |||||||||||||
Other income, net | — | 73 | 1,013 | — | 1,086 | ||||||||||||||
Income before provision for income taxes | 13,750 | 17,981 | 4,832 | (17,601 | ) | 18,962 | |||||||||||||
Provision for income taxes | — | (5,212 | ) | — | — | (5,212 | ) | ||||||||||||
Net income | $ | 13,750 | $ | 12,769 | $ | 4,832 | $ | (17,601 | ) | $ | 13,750 | ||||||||
13
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 2001
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | |||||||||||||||
Operating revenue | |||||||||||||||||||
Sales | $ | — | $ | 97,175 | $ | 10,454 | $ | — | $ | 107,629 | |||||||||
Management fees | — | 1,194 | 670 | — | 1,864 | ||||||||||||||
— | 98,369 | 11,124 | — | 109,493 | |||||||||||||||
Operating costs | |||||||||||||||||||
Cost of sales | — | (79,831 | ) | (9,770 | ) | — | (89,601 | ) | |||||||||||
Sales and marketing | — | (4,027 | ) | (571 | ) | — | (4,598 | ) | |||||||||||
General and administrative | — | (8,349 | ) | (67 | ) | — | (8,416 | ) | |||||||||||
Amortization of goodwill | — | (310 | ) | — | — | (310 | ) | ||||||||||||
— | (92,517 | ) | (10,408 | ) | — | (102,925 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | — | 931 | 3,858 | — | 4,789 | ||||||||||||||
Income from subsidiaries | 11,678 | 5,090 | — | (16,768 | ) | — | |||||||||||||
Operating income | 11,678 | 11,873 | 4,574 | (16,768 | ) | 11,357 | |||||||||||||
Other income, net | — | 546 | 1,243 | — | 1,789 | ||||||||||||||
Income before provision for income taxes | 11,678 | 12,419 | 5,817 | (16,768 | ) | 13,146 | |||||||||||||
Provision for income taxes | — | (1,468 | ) | — | — | (1,468 | ) | ||||||||||||
Net income | $ | 11,678 | $ | 10,951 | $ | 5,817 | $ | (16,768 | ) | $ | 11,678 | ||||||||
14
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 2002
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | |||||||||||||||
Operating revenue | |||||||||||||||||||
Sales | $ | — | $ | 360,803 | $ | 39,761 | $ | — | $ | 400,564 | |||||||||
Management fees | — | 4,267 | 1,658 | — | 5,925 | ||||||||||||||
— | 365,070 | 41,419 | — | 406,489 | |||||||||||||||
Operating costs | |||||||||||||||||||
Cost of sales | — | (309,629 | ) | (35,015 | ) | — | (344,644 | ) | |||||||||||
Sales and marketing | — | (13,658 | ) | (2,215 | ) | — | (15,873 | ) | |||||||||||
General and administrative | — | (25,395 | ) | (250 | ) | — | (25,645 | ) | |||||||||||
— | (348,682 | ) | (37,480 | ) | — | (386,162 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | — | 6,094 | 4,592 | — | 10,686 | ||||||||||||||
Income from subsidiaries | 23,895 | 8,727 | — | (32,622 | ) | — | |||||||||||||
Operating income | 23,895 | 31,209 | 8,531 | (32,622 | ) | 31,013 | |||||||||||||
Other (expense) income, net | — | (1,454 | ) | 3,051 | — | 1,597 | |||||||||||||
Income before provision for income taxes | 23,895 | 29,755 | 11,582 | (32,622 | ) | 32,610 | |||||||||||||
Provision for income taxes | — | (8,715 | ) | — | — | (8,715 | ) | ||||||||||||
Net income | $ | 23,895 | $ | 21,040 | $ | 11,582 | $ | (32,622 | ) | $ | 23,895 | ||||||||
15
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 2001
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | |||||||||||||||
Operating revenue | |||||||||||||||||||
Sales | $ | — | $ | 256,191 | $ | 29,115 | $ | — | $ | 285,306 | |||||||||
Management fees | — | 2,750 | 2,212 | — | 4,962 | ||||||||||||||
— | 258,941 | 31,327 | — | 290,268 | |||||||||||||||
Operating costs | |||||||||||||||||||
Cost of sales | — | (209,664 | ) | (26,693 | ) | — | (236,357 | ) | |||||||||||
Sales and marketing | — | (11,396 | ) | (1,560 | ) | — | (12,956 | ) | |||||||||||
General and administrative | — | (25,112 | ) | (206 | ) | — | (25,318 | ) | |||||||||||
Amortization of goodwill | — | (931 | ) | — | — | (931 | ) | ||||||||||||
— | (247,103 | ) | (28,459 | ) | — | (275,562 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | — | 2,872 | 9,215 | — | 12,087 | ||||||||||||||
Income from subsidiaries | 27,377 | 13,292 | — | (40,669 | ) | — | |||||||||||||
Operating income | 27,377 | 28,002 | 12,083 | (40,669 | ) | 26,793 | |||||||||||||
Interest expense, net of amounts capitalized | — | (227 | ) | — | — | (227 | ) | ||||||||||||
Other income, net | — | 1,438 | 2,690 | — | 4,128 | ||||||||||||||
Income before provision for income taxes | 27,377 | 29,213 | 14,773 | (40,669 | ) | 30,694 | |||||||||||||
Provision for income taxes | — | (3,317 | ) | — | — | (3,317 | ) | ||||||||||||
Net income | $ | 27,377 | $ | 25,896 | $ | 14,773 | $ | (40,669 | ) | $ | 27,377 | ||||||||
16
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2002
(in thousands)
Unconsolidated | ||||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||
Operating activities | ||||||||||||||||||||
Net income | $ | 23,895 | $ | 21,040 | $ | 11,582 | $ | (32,622 | ) | $ | 23,895 | |||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | — | 879 | 87 | — | 966 | |||||||||||||||
Equity in income of unconsolidated joint ventures | — | (6,094 | ) | (4,592 | ) | — | (10,686 | ) | ||||||||||||
Equity in earnings of subsidiaries | (23,895 | ) | (8,727 | ) | — | 32,622 | — | |||||||||||||
Provision for income taxes | — | 8,715 | — | — | 8,715 | |||||||||||||||
Net changes in operating assets and liabilities: | ||||||||||||||||||||
Receivables | — | 471 | 2,721 | — | 3,192 | |||||||||||||||
Intercompany receivables/payables | (596 | ) | 596 | — | — | — | ||||||||||||||
Real estate inventories | — | (76,690 | ) | (964 | ) | — | (77,654 | ) | ||||||||||||
Deferred loan costs | 596 | (152 | ) | — | — | 444 | ||||||||||||||
Other assets | — | (1,520 | ) | (623 | ) | — | (2,143 | ) | ||||||||||||
Accounts payable | — | 9,744 | (70 | ) | — | 9,674 | ||||||||||||||
Accrued expenses | — | (10,077 | ) | (488 | ) | — | (10,565 | ) | ||||||||||||
Net cash (used in) provided by operating activities | — | (61,815 | ) | 7,653 | — | (54,162 | ) | |||||||||||||
Investing activities | ||||||||||||||||||||
Net change in investment in unconsolidated joint ventures | — | (27,417 | ) | 45,791 | — | 18,374 | ||||||||||||||
Payments on (issuance of) notes receivable, net | — | 621 | 3,925 | — | 4,546 | |||||||||||||||
Purchases of property and equipment | — | (1,063 | ) | (60 | ) | — | (1,123 | ) | ||||||||||||
Investment in subsidiaries | — | 52,756 | — | (52,756 | ) | — | ||||||||||||||
Advances to affiliates | 13,930 | — | — | (13,930 | ) | — | ||||||||||||||
Net cash provided by investing activities | 13,930 | 24,897 | 49,656 | (66,686 | ) | 21,797 | ||||||||||||||
Financing activities | ||||||||||||||||||||
Proceeds from borrowings on notes payable | — | 421,484 | 217,086 | — | 638,570 | |||||||||||||||
Principal payments on notes payable | — | (380,476 | ) | (218,965 | ) | — | (599,441 | ) | ||||||||||||
Distributions to/contributions from shareholders | — | (10,939 | ) | (55,151 | ) | 66,090 | — | |||||||||||||
Common stock issued for exercised options | 1,088 | — | — | — | 1,088 | |||||||||||||||
Common stock purchased | (15,018 | ) | — | — | — | (15,018 | ) | |||||||||||||
Advances to affiliates | — | (596 | ) | — | 596 | — | ||||||||||||||
Net cash (used in) provided by financing activities | (13,930 | ) | 29,473 | (57,030 | ) | 66,686 | 25,199 | |||||||||||||
Net (decrease) increase in cash and cash equivalents | — | (7,445 | ) | 279 | — | (7,166 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | — | 17,270 | 2,481 | — | 19,751 | |||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 9,825 | $ | 2,760 | $ | — | $ | 12,585 | ||||||||||
17
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2001
(in thousands)
Unconsolidated | ||||||||||||||||||||
Delaware Lyon | William Lyon Homes, Inc. | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||
Operating activities | ||||||||||||||||||||
Net income | $ | 27,377 | $ | 25,896 | $ | 14,773 | $ | (40,669 | ) | $ | 27,377 | |||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | — | 1,816 | 90 | — | 1,906 | |||||||||||||||
Equity in income of unconsolidated joint ventures | — | (2,872 | ) | (9,215 | ) | — | (12,087 | ) | ||||||||||||
Equity in earnings of subsidiaries | (27,377 | ) | (13,292 | ) | — | 40,669 | — | |||||||||||||
Provision for income taxes | — | 3,317 | — | — | 3,317 | |||||||||||||||
Net changes in operating assets and liabilities: | ||||||||||||||||||||
Receivables | — | 2,020 | 5,462 | — | 7,482 | |||||||||||||||
Intercompany receivables/payables | 2,471 | (2,471 | ) | — | — | — | ||||||||||||||
Real estate inventories | — | (85,000 | ) | 440 | — | (84,560 | ) | |||||||||||||
Deferred loan costs | (2,471 | ) | 364 | — | — | (2,107 | ) | |||||||||||||
Other assets | — | 1,353 | 26 | — | 1,379 | |||||||||||||||
Accounts payable | — | 2,092 | (53 | ) | — | 2,039 | ||||||||||||||
Accrued expenses | — | (8,671 | ) | (811 | ) | — | (9,482 | ) | ||||||||||||
Net cash (used in) provided by operating activities | — | (75,448 | ) | 10,712 | — | (64,736 | ) | |||||||||||||
Investing activities | ||||||||||||||||||||
Net change in investment in unconsolidated joint ventures | — | (1,645 | ) | (1,179 | ) | — | (2,824 | ) | ||||||||||||
Payments on (issuance of) notes receivable, net | — | — | (484 | ) | — | (484 | ) | |||||||||||||
Purchases of property and equipment | — | (410 | ) | (70 | ) | — | (480 | ) | ||||||||||||
Investment in subsidiaries | — | 6,649 | — | (6,649 | ) | — | ||||||||||||||
Advances from affiliates | 6,763 | — | — | (6,763 | ) | — | ||||||||||||||
Net cash provided by (used in) investing activities | 6,763 | 4,594 | (1,733 | ) | (13,412 | ) | (3,788 | ) | ||||||||||||
Financing activities | ||||||||||||||||||||
Proceeds from borrowings on notes payable | — | 357,054 | 134,894 | — | 491,948 | |||||||||||||||
Principal payments on notes payable | — | (289,122 | ) | (136,454 | ) | — | (425,576 | ) | ||||||||||||
Repurchase of 12 1/2% Senior Notes | (51,637 | ) | — | — | — | (51,637 | ) | |||||||||||||
Reissuance of 12 1/2% Senior Notes | 44,715 | — | — | — | 44,715 | |||||||||||||||
Distributions to/contributions from shareholders | — | 1,369 | (7,614 | ) | 6,245 | — | ||||||||||||||
Common stock issued for exercised options | 159 | — | — | — | 159 | |||||||||||||||
Advances to affiliates | — | (7,167 | ) | — | 7,167 | — | ||||||||||||||
Net cash (used in) provided by financing activities | (6,763 | ) | 62,134 | (9,174 | ) | 13,412 | 59,609 | |||||||||||||
Net decrease in cash and cash equivalents | — | (8,720 | ) | (195 | ) | — | (8,915 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | — | 12,746 | 1,965 | — | 14,711 | |||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 4,026 | $ | 1,770 | $ | — | $ | 5,796 | ||||||||||
18
Table of Contents
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, of which $459,000 has been paid to date. During the three months and nine months ended September 30, 2002, the Company purchased 20 and 33 lots, respectively, under this agreement for a total purchase price of $523,000 and $734,000, respectively. During the nine months ended September 30, 2001, the Company purchased 104 lots under this agreement for a total purchase price of $1,975,000. 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.
On July 9, 2002, the Company’s Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 144 lots, through a land banking arrangement, for a total purchase price of $16,660,000 from an entity that purchased the lots from William Lyon. The terms of the purchase agreement provide for an initial deposit of $3,300,000 (paid on July 23, 2002) and monthly option payments of 11.5% on the seller’s outstanding investment. Such option payments entitle the Company to phase takedowns of approximately 14 lots each, which are anticipated to occur at one to two month intervals through December 2003. As of September 30, 2002, no lots have been purchased under this agreement. Had the Company purchased the property directly, the acquisition would qualify as an affiliate transaction under the Indenture. Even though the Company’s agreement is not with William Lyon, the Company has chosen to treat it as an affiliate transaction. 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 nine months ended September 30, 2002 from one of its unconsolidated joint ventures, resulting in a profit to the joint venture of approximately $3,500,000, all of which was allocated to the Company’s outside partner as preferred return in accordance with the joint venture agreement.
19
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
For the three months ended September 30, 2002 and 2001, the Company incurred reimbursable on-site labor costs of $47,000 and $72,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon. For the nine months ended September 30, 2002 and 2001, the Company incurred reimbursable on-site labor costs of $124,000 and $165,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $34,000 was due to the Company at September 30, 2002.
For the three months ended September 30, 2002 and 2001, the Company incurred charges of $182,000 related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary. For the nine months ended September 30, 2002 and 2001, the Company incurred charges of $547,000 related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.
During the three months ended September 30, 2002 and 2001, the Company incurred charges of $24,000 and $36,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon. During the nine months ended September 30, 2002 and 2001, the Company incurred charges of $132,000 and $98,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon.
In June 2001, General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust for which his son William H. Lyon is a beneficiary, purchased at par $30,000,000 of the 12 1/2% Senior Notes. William H. Lyon is also an employee and a Director of the Company. Effective in July 2001, William H. McFarland, another member of the Company’s Board of Directors, purchased at par $1,000,000 of the 12 1/2% Senior Notes. In parity with holders consenting during the consent solicitation, these Directors received a consent fee of 4% of the principal balance and consented to the amendments effected by the Company’s consent solicitation statement dated February 28, 2001.
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 September 30, 2002, 416,400 shares had been purchased and retired under this program in the amount of $6,069,000. As of September 30, 2002, 401,900 shares had been purchased and held as treasury stock in the amount of $8,949,000. In October 2002, an additional 200,100 shares were purchased and held as treasury stock in the amount of $4,552,000.
During the three months ended September 30, 2002, an officer exercised options to purchase 3,333 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.
During the nine months ended September 30, 2002, certain officers and directors exercised options to purchase 99,004 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, 3,334 shares of the Company’s common stock at a price of $13.00 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan, 13,912 shares of the
20
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 7,998 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.
During the nine months ended September 30, 2001, certain officers and directors exercised options to purchase 18,337 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.
Note 6—Commitments and Contingencies
The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit, typically less than 20% of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. The financial statements of these entities are not consolidated with the Company’s consolidated financial statements. The deposits and penalties related to such land banking projects have been recorded in the accompanying balance sheet. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. Summary information with respect to the Company’s land banking arrangements is as follows:
As of September 30, 2002 | |||
(unaudited) | |||
(dollars in thousands) | |||
Total number of land banking projects | 5 | ||
Total number of lots | 884 | ||
Total purchase price | $ | 72,680 | |
Balance of lots still under option and not purchased: | |||
Number of lots | 818 | ||
Purchase price | $ | 71,041 | |
Forfeited deposits and penalties if lots were not purchased | $ | 14,778 | |
On November 1, 2002, the Company entered into an additional land banking arrangement for a project totaling 336 lots for a purchase price of $16,694,000. All of the lots were still under option and not purchased at that date. The Company is under no obligation to purchase the lots, but, as of November 1, 2002, would forfeit $3,840,000 in deposits and penalties if the lots were not purchased.
21
Table of Contents
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. As used herein, “on a combined basis” means the total of operations in wholly-owned projects and in unconsolidated joint ventures.
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 September 30, | ||||||||||||||||||||||||
2002 | 2001 | |||||||||||||||||||||||
Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | |||||||||||||||||||
Selected Financial Information (dollars in thousands) | ||||||||||||||||||||||||
Homes closed | 498 | 170 | 668 | 461 | 134 | 595 | ||||||||||||||||||
Home sales revenue | $ | 176,351 | $ | 79,230 | $ | 255,581 | $ | 107,629 | $ | 63,774 | $ | 171,403 | ||||||||||||
Cost of sales | (149,967 | ) | (65,598 | ) | (215,565 | ) | (89,413 | ) | (50,976 | ) | (140,389 | ) | ||||||||||||
Gross margin | $ | 26,384 | $ | 13,632 | $ | 40,016 | $ | 18,216 | $ | 12,798 | $ | 31,014 | ||||||||||||
Gross margin percentage | 15.0 | % | 17.2 | % | 15.7 | % | 16.9 | % | 20.1 | % | 18.1 | % | ||||||||||||
Number of homes closed | ||||||||||||||||||||||||
California | 344 | 170 | 514 | 247 | 134 | 381 | ||||||||||||||||||
Arizona | 63 | — | 63 | 76 | — | 76 | ||||||||||||||||||
Nevada | 91 | — | 91 | 138 | — | 138 | ||||||||||||||||||
Total | 498 | 170 | 668 | 461 | 134 | 595 | ||||||||||||||||||
Average sales price | ||||||||||||||||||||||||
California | $ | 379,800 | $ | 466,100 | $ | 408,400 | $ | 273,500 | $ | 475,900 | $ | 344,700 | ||||||||||||
Arizona | 225,800 | — | 225,800 | 137,600 | — | 137,600 | ||||||||||||||||||
Nevada | 345,700 | — | 345,700 | 214,600 | — | 214,600 | ||||||||||||||||||
Total | $ | 354,100 | $ | 466,100 | $ | 382,600 | $ | 233,500 | $ | 475,900 | $ | 288,100 | ||||||||||||
Number of net new home orders | ||||||||||||||||||||||||
California | 201 | 190 | 391 | 199 | 153 | 352 | ||||||||||||||||||
Arizona | 66 | — | 66 | 97 | — | 97 | ||||||||||||||||||
Nevada | 42 | — | 42 | 101 | — | 101 | ||||||||||||||||||
Total | 309 | 190 | 499 | 397 | 153 | 550 | ||||||||||||||||||
Average number of sales locations during period | ||||||||||||||||||||||||
California | 13 | 10 | 23 | 14 | 14 | 28 | ||||||||||||||||||
Arizona | 5 | — | 5 | 7 | — | 7 | ||||||||||||||||||
Nevada | 3 | — | 3 | 6 | — | 6 | ||||||||||||||||||
Total | 21 | 10 | 31 | 27 | 14 | 41 | ||||||||||||||||||
22
Table of Contents
As of September 30, | ||||||||||||||||||
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 | 441 | 449 | 890 | 366 | 333 | 699 | ||||||||||||
Arizona | 154 | — | 154 | 161 | — | 161 | ||||||||||||
Nevada | 65 | — | 65 | 169 | — | 169 | ||||||||||||
Total | 660 | 449 | 1,109 | 696 | 333 | 1,029 | ||||||||||||
Dollar amount of homes sold but not closed at end of period (dollars in thousands) | ||||||||||||||||||
California | $ | 188,949 | $ | 208,002 | $ | 396,951 | $ | 113,718 | $ | 149,677 | $ | 263,395 | ||||||
Arizona | 33,008 | — | 33,008 | 28,792 | — | 28,792 | ||||||||||||
Nevada | 25,257 | — | 25,257 | 36,288 | — | 36,288 | ||||||||||||
Total | $ | 247,214 | $ | 208,002 | $ | 455,216 | $ | 178,798 | $ | 149,677 | $ | 328,475 | ||||||
Lots controlled at end of period | ||||||||||||||||||
Owned lots | ||||||||||||||||||
California | 2,194 | 1,023 | 3,217 | 1,526 | 1,937 | 3,463 | ||||||||||||
Arizona | 1,018 | — | 1,018 | 519 | 171 | 690 | ||||||||||||
Nevada | 1,596 | — | 1,596 | 454 | — | 454 | ||||||||||||
Total | 4,808 | 1,023 | 5,831 | 2,499 | 2,108 | 4,607 | ||||||||||||
Optioned lots(1) | ||||||||||||||||||
California | 2,987 | 2,600 | ||||||||||||||||
Arizona | 4,475 | 1,882 | ||||||||||||||||
Nevada | 54 | 442 | ||||||||||||||||
Total | 7,516 | 4,924 | ||||||||||||||||
Total lots controlled | ||||||||||||||||||
California | 6,204 | 6,063 | ||||||||||||||||
Arizona | 5,493 | 2,572 | ||||||||||||||||
Nevada | 1,650 | 896 | ||||||||||||||||
Total | 13,347 | 9,531 | ||||||||||||||||
(1) | Optioned lots may be purchased by the Company as wholly-owned projects or may be purchased by newly formed unconsolidated joint ventures. |
23
Table of Contents
Nine Months Ended September 30, | ||||||||||||||||||||||||
2002 | 2001 | |||||||||||||||||||||||
Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | Company Wholly-owned | Unconsolidated Joint Ventures | Combined Total | |||||||||||||||||||
Selected Financial Information (dollars in thousands) | ||||||||||||||||||||||||
Homes closed | 1,211 | 424 | 1,635 | 1,212 | 384 | 1,596 | ||||||||||||||||||
Home sales revenue | $ | 393,386 | $ | 196,541 | $ | 589,927 | $ | 278,252 | $ | 173,308 | $ | 451,560 | ||||||||||||
Cost of sales | (337,088 | ) | (165,579 | ) | (502,667 | ) | (231,977 | ) | (140,373 | ) | (372,350 | ) | ||||||||||||
Gross margin | $ | 56,298 | $ | 30,962 | $ | 87,260 | $ | 46,275 | $ | 32,935 | $ | 79,210 | ||||||||||||
Gross margin percentage | 14.3 | % | 15.8 | % | 14.8 | % | 16.6 | % | 19.0 | % | 17.5 | % | ||||||||||||
Number of homes closed | ||||||||||||||||||||||||
California | 736 | 424 | 1,160 | 656 | 384 | 1,040 | ||||||||||||||||||
Arizona | 189 | — | 189 | 201 | — | 201 | ||||||||||||||||||
Nevada | 286 | — | 286 | 355 | — | 355 | ||||||||||||||||||
Total | 1,211 | 424 | 1,635 | 1,212 | 384 | 1,596 | ||||||||||||||||||
Average sales price | ||||||||||||||||||||||||
California | $ | 372,100 | $ | 463,500 | $ | 405,500 | $ | 265,300 | $ | 451,300 | $ | 334,000 | ||||||||||||
Arizona | 210,400 | — | 210,400 | 142,200 | — | 142,200 | ||||||||||||||||||
Nevada | 279,000 | — | 279,000 | 213,000 | — | 213,000 | ||||||||||||||||||
Total | $ | 324,800 | $ | 463,500 | $ | 360,800 | $ | 229,600 | $ | 451,300 | $ | 282,900 | ||||||||||||
Number of net new home orders | ||||||||||||||||||||||||
California | 978 | 776 | 1,754 | 816 | 533 | 1,349 | ||||||||||||||||||
Arizona | 225 | — | 225 | 282 | — | 282 | ||||||||||||||||||
Nevada | 223 | — | 223 | 427 | — | 427 | ||||||||||||||||||
Total | 1,426 | 776 | 2,202 | 1,525 | 533 | 2,058 | ||||||||||||||||||
Average number of sales locations during period | ||||||||||||||||||||||||
California | 15 | 11 | 26 | 14 | 12 | 26 | ||||||||||||||||||
Arizona | 7 | — | 7 | 6 | — | 6 | ||||||||||||||||||
Nevada | 4 | — | 4 | 7 | — | 7 | ||||||||||||||||||
Total | 26 | 11 | 37 | 27 | 12 | 39 | ||||||||||||||||||
On a combined basis, the number of net new home orders for the nine months ended September 30, 2002 increased 7% to 2,202 homes from 2,058 homes for the nine months ended September 30, 2001. The number of homes closed on a combined basis for the nine months ended September 30, 2002 increased 2% to 1,635 homes from 1,596 homes for the nine months ended September 30, 2001. On a combined basis, the backlog of homes sold but not closed as of September 30, 2002 was 1,109, up 8% from 1,029 homes a year earlier, and down 13% from 1,278 homes at June 30, 2002.
Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined basis as of September 30, 2002 was $455.2 million, up 39% from $328.5��million as of September 30, 2001 and down 8% from $492.9 million as of June 30, 2002. 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 17% during the nine months ended September 30, 2002. The inventory of completed and unsold homes was 25 homes as of September 30, 2002.
The Company believes that the increase in the number of net new home orders and the decrease in the cancellation rate during the first nine months of 2002, as described above, are indications of an improving economy in 2002 after the economic slow-down in the latter half 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.
24
Table of Contents
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.
Comparison of Three Months Ended September 30, 2002 to Three Months Ended September 30, 2001
Operating revenue for the three months ended September 30, 2002 was $185.4 million, an increase of $75.9 million, or 69%, from operating revenue of $109.5 million for the three months ended September 30, 2001. Revenue from sales of homes increased $68.8 million, or 64%, to $176.4 million in the 2002 period from $107.6 million in the 2001 period. This increase was primarily due to an increase in the average sales price of wholly-owned homes due to product mix to $354,100 in the 2002 period from $233,500 in the 2001 period, along with an increase in the number of wholly-owned homes closed to 498 in the 2002 period from 461 in the 2001 period. Revenue from sale of lots, land and other sales was $6.6 million in the 2002 period with no corresponding amount for the 2001 period due to the bulk sale of 114 lots in the Company’s Arizona Division. Management fee income increased by $0.5 million to $2.4 million in the 2002 period from $1.9 million in the 2001 period primarily due to an increase in the number of unconsolidated joint venture units closed to 170 in the 2002 period from 134 in the 2001 period, offset by a decrease in the average sales prices for homes closed in the unconsolidated joint ventures to $466,100 in the 2002 period from $475,900 in the 2001 period.
Total operating income increased from $11.4 million in the 2001 period to $17.9 million in the 2002 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $8.2 million to $26.4 million in the 2002 period from $18.2 million in the 2001 period primarily due to (i) an increase in the number of wholly-owned homes closed to 498 homes in the 2002 period from 461 homes in the 2001 period, and (ii) an increase in the average sales prices of wholly-owned homes due to product mix to $354,100 in the 2002 period from $233,500 in the 2001 period, offset by a decline in gross margin percentages of 1.9% to 15.0% in the 2002 period from 16.9% in the 2001 period. The decline in the period-over-period gross margin percentage reflects the impact of slower economic conditions experienced during the latter half of 2001. Sales and marketing expenses increased by $1.4 million to $6.0 million in the 2002 period from $4.6 million in the 2001 period primarily due to marketing fees paid to developers of master-planned communities and sales commissions. General and administrative expenses increased by $1.6 million to $10.0 million in the 2002 period from $8.4 million in the 2001 period, primarily as a result of an increase in accrued bonuses related to higher earnings. Equity in income of unconsolidated joint ventures amounting to $5.2 million was recognized in the 2002 period, up from $4.8 million in the comparable period for 2001, primarily as a result of an increase in the number of homes closed to 170 in the 2002 period from 134 in the 2001 period, offset by a decline in the gross margin percentages of 2.9% to 17.2% in the 2002 period from 20.1% in the 2001 period. The decline in period-over-period gross margin percentage reflects the impact of slower economic conditions experienced during the latter half of 2001.
Total interest incurred increased $0.8 million, or 14%, from $5.6 million in the 2001 period to $6.4 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 and 2001 periods.
Other income, net decreased to $1.1 million in the 2002 period from $1.8 million in the 2001 period primarily as a result of initial start-up losses realized by a golf course operation at one of the Company’s projects offset by increases in mortgage company operations.
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 three months ended September 30, 2001 was approximately 11.2%.
25
Table of Contents
At December 31, 2001, the Company had net operating loss carryforwards for federal tax purposes of approximately $8.5 million, which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to $3.2 million 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 39.2% to 26.7%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of the Company’s future taxable income and may be limited under certain circumstances.
As a result of the foregoing factors, the Company’s net income increased from $11.7 million in the 2001 period to $13.8 million in the 2002 period.
Comparison of Nine Months Ended September 30, 2002 to Nine Months Ended September 30, 2001
Operating revenue for the nine months ended September 30, 2002 was $406.5 million, an increase of $116.2 million, or 40%, from operating revenue of $290.3 million for the nine months ended September 30, 2001. Revenue from sales of homes increased $115.1 million, or 41%, to $393.4 million in the 2002 period from $278.3 million in the 2001 period. This increase was primarily due to an increase in the average sales prices of wholly-owned homes due to product mix to $324,800 in the 2002 period from $229,600 in the 2001 period. Management fee income increased by $0.9 million to $5.9 million in the 2002 period from $5.0 million in the 2001 period primarily due to an increase in the number of unconsolidated joint venture units closed to 424 in the 2002 period from 384 in the 2001 period and an increase in the average sales prices for homes closed in the unconsolidated joint ventures to $463,500 in the 2002 period from $451,300 in the 2001 period.
Total operating income increased from $26.8 million in the 2001 period to $31.0 million in the 2002 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $10.0 million to $56.3 million in the 2002 period from $46.3 million in the 2001 period primarily due to an increase in the average sales prices of wholly-owned homes due to product mix to $324,800 in the 2002 period from $229,600 in the 2001 period, offset by a decline in gross margin percentages of 2.3% to 14.3% in the 2002 period from 16.6% in the 2001 period. The decline in the period-over-period gross margin percentage reflects the impact of slower economic conditions experienced during the latter half of 2001. 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 $7.2 million in the 2002 period (primarily the bulk sale of 114 residential lots). The cost of sales related to such revenues increased from $4.4 million in the 2001 period to $7.6 million in the 2002 period. Sales and marketing expenses increased by $2.9 million to $15.9 million in the 2002 period from $13.0 million in the 2001 period primarily due to marketing fees paid to developers of master-planned communities and sales commissions. General and administrative expenses increased by $0.3 million to $25.6 million in the 2002 period from $25.3 million in the 2001 period, primarily as a result of an increase in accrued bonuses related to higher pre-tax earnings. Equity in income of unconsolidated joint ventures amounting to $10.7 million was recognized in the 2002 period, down from $12.1 million in the comparable period for 2001, primarily as a result of a decline in gross margin percentages of 3.2% to 15.8% in the 2002 period from 19.0% in the 2001 period. The decline in period-over-period gross margin percentage reflects the impact of slower economic conditions experienced during the latter half of 2001. During the nine months ended September 30, 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 $0.8 million, or 5%, from $16.8 million in the 2001 period to $17.6 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.
26
Table of Contents
Other income, net decreased to $1.6 million in the 2002 period from $4.1 million in the 2001 period primarily as a result of initial start-up losses realized by a golf course operation at one of the Company’s projects offset by increases in mortgage company operations.
As discussed above, 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 nine months ended September 30, 2001 was approximately 10.8%.
As a result of the foregoing factors, the Company's net income decreased from $27.4 million in the 2001 period to $23.9 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, outside borrowings and by forming new joint ventures with venture partners that provide a substantial portion of the capital required for certain projects. The Company currently has outstanding 12 1/2% Senior Notes (the “Senior Notes”) and maintains the following major credit facilities: 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 and land acquisitions with construction loans secured by real estate inventories, seller provided financing and land banking transactions.
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.
On August 16, 2002, the Company and certain of its subsidiaries filed a registration statement with the Securities and Exchange Commission with respect to the registration of $200 million in aggregate principal amount of senior notes proposed to be issued by William Lyon Homes, Inc., a wholly owned subsidiary of the Company, and guaranteed by the Company and certain of its other subsidiaries. As a result of market conditions and prevailing interest rates, the Company is continuing to evaluate whether or not to proceed with this note offering at this time. If these factors change, the Company may proceed with the offering. However, there can be no assurance that it will do so and if it does that it will be on the same terms and conditions described in the registration statement currently on file with the Securities and Exchange Commission.
The Company will in all likelihood be required to refinance the Senior Notes, the Revolving Credit Facilities and the other loans described below when they mature, and no assurances can be given that the Company will be successful in that regard.
Senior Notes
As of September 30, 2002, the outstanding balance under the Company’s Senior Notes was $70.3 million. On May 1, 2001, the Company completed a consent solicitation with respect to the Senior Notes and received consents from holders of $39.3 million of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although the Company initially intended to accept consents from no more than 50% of holders, the Company elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting holders received a consent fee of 4% of the principal balance. Subsequently, during May and June 2001, the Company also repurchased $31.4 million of the Senior Notes from non-consenting holders.
27
Table of Contents
In June 2001, General William Lyon, the Company’s Chairman and Chief Executive Officer, and a trust for which his son William H. Lyon is a beneficiary, purchased from the Company at par $30.0 million of the Senior Notes. William H. Lyon is one of the Company’s directors and an employee. Effective in July 2001, William H. McFarland, another member of the Company’s board of directors, purchased from the Company at par $1.0 million of the Senior Notes. In parity with holders consenting during the consent solicitation, these directors received a consent fee of 4% of the principal balance and consented to the amendments effected by the Company’s consent solicitation statement dated February 28, 2001.
In July 2001, the Company repaid all of the remaining Senior Notes which matured on July 1, 2001 amounting to $5.9 million.
The Senior Notes due July 1, 2003 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 rankpari 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 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: (i) the payment of dividends on and redemptions of capital stock, (ii) the incurrence of indebtedness or the issuance of preferred stock, (iii) the creation of certain liens, (iv) consolidations or mergers or transfers of all or substantially all of its assets and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.
As of September 30, 2002, the outstanding Senior Notes with a face value of $70.3 million were valued at approximately the face value, in the opinion of the Company’s management.
Revolving Credit Facilities
As of September 30, 2002, the Company has three revolving credit facilities which have an aggregate maximum loan commitment of $215.0 million and mature at various dates. A $100.0 million revolving line of credit matures in September 2006, a $75.0 million bank revolving line of credit matures in June 2003 and a $40.0 million bank revolving line of credit initially “matures” in September 2004, after which the amounts available for borrowing begin to reduce. Each facility is secured by first deeds of trust on real estate for the specific projects funded by each respective facility and pledges of net sale proceeds and related property. Borrowings under the facilities are limited by the availability of sufficient real estate collateral, which is determined constantly throughout the facility period. The composition of the collateral borrowing base is limited to certain parameters in the facility agreement and is based upon the lesser of the direct costs of the real estate collateral (such as land, lots under development, developed lots or homes) or a percentage of the appraised value of the collateral, which varies depending upon the stage of construction. Repayment of advances is upon the earliest of the close of escrow of individual lots and homes within the collateral pool, the maturity date of
28
Table of Contents
individual lots and homes within the collateral pool or the facility maturity date. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of September 30, 2002, $114.1 million was outstanding under these credit facilities, with a weighted-average interest rate of 4.869% at September 30, 2002, and the undrawn availability was $35.7 million as limited by the Company’s borrowing base calculation. The Company has provided an unsecured environmental indemnity in favor of the lender under the $75 million bank line of credit.
Under the revolving credit facilities, the Company is required to comply with a number of covenants, the most restrictive of which require the Company to maintain: (i) a tangible net worth, as defined of $120.0 million, adjusted upwards quarterly by 50% of the Company’s net income after March 31, 2002 and 75% of additional future equity offerings; (ii) a ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1.0; and (iii) minimum liquidity, as defined of at least $10.0 million. These facilities include a number of other covenants with respect to such matters as the posting of cash or letters of credit in certain circumstances, the application or deposit of excess net sales proceeds, maintenance of specified ratios, limitations on investments in joint ventures, maintenance of fixed charge coverages, stock ownership changes, and lot ownership.
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 September 30, 2002, $8.0 million was outstanding under the Unsecured Revolving Line.
Construction Notes Payable
At September 30, 2002, the Company had construction notes payable amounting to $24.7 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 14%, with a weighted-average rate of 6.418% at September 30, 2002.
Seller Financing
Another source of financing available to the Company is seller-provided financing for land acquired by the Company. At September 30, 2002, the Company had $60.3 million of notes payable outstanding related to land acquisitions for which seller financing was provided. The notes are due at various dates through July 1, 2005 and bear interest at rates ranging from prime plus 1.0% to 12.5%, with a weighted-average rate of 8.084% at September 30, 2002.
Revolving Mortgage Warehouse Credit Facility
The Company has a $20.0 million revolving mortgage warehouse credit facility with a bank to fund its mortgage origination operations, $15.0 million of which is committed (lender obligated to lend if stated conditions are satisfied and $5.0 million of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). 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 September 30, 2002 the outstanding balance was $9.1 million. The facility, which has a current maturity date of June 30, 2003, also contains financial covenants requiring the Company’s mortgage company subsidiary to maintain a combined tangible net worth, as defined, of at least $1.5 million, a combined net worth, as defined, meeting or exceeding the greater of $1.5 million and 5% of combined total liabilities, as defined, and maximum liquidity, as defined, meeting or exceeding $1.0 million. This facility is non-recourse and is not guaranteed by the Company.
29
Table of Contents
Land Banking Arrangements
The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, minimizing the use of funds from the Company’s revolving credit facilities and other corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit, typically less than 20% of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. The financial statements of these entities are not consolidated with the Company’s consolidated financial statements. The deposits and penalties related to such land banking projects have been recorded in the accompanying balance sheet. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. Summary information with respect to the Company’s land banking arrangements is as follows:
As of September 30, 2002 | |||
(unaudited) | |||
(dollars in thousands) | |||
Total number of land banking projects | 5 | ||
Total number of lots | 884 | ||
Total purchase price | $ | 72,680 | |
Balance of lots still under option and not purchased: | |||
Number of lots | 818 | ||
Purchase price | $ | 71,041 | |
Forfeited deposits and penalties if lots were not purchased | $ | 14,778 | |
On November 1, 2002, the Company entered into an additional land banking arrangement for a project totaling 336 lots for a purchase price of $16.7 million. All of the lots were still under option and not purchased at that date. The Company is under no obligation to purchase the lots, but, as of November 1, 2002, would forfeit $3.8 million in deposits and penalties if the lots were not purchased.
Joint Venture Financing
As of September 30, 2002, the Company is a general partner or member in 12 active joint ventures involved in the development and sale of residential projects. These joint ventures are 50% or less owned by and not controlled by the Company 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. Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. 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 incurred by the joint ventures will be funded by the Company’s venture partners or from the proceeds of construction financing obtained by the joint ventures.
As of September 30, 2002, the Company’s investment in and advances to such joint ventures was $40.9 million and its venture partners’ investment in such joint ventures was $74.7 million. In addition, seven joint ventures have
30
Table of Contents
obtained financing from construction lenders which amounted to $94.4 million at September 30, 2002. All of the joint ventures that have obtained such financing are in the form of limited partnerships of which the Company is the general partner. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company, as general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided completion guarantees and repayment guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees only become effective upon repayment of the Company’s outstanding 12 1/2% Senior Notes.
Some of the credit facilities contain financial covenants applicable to the Company. Under the most restrictive of these covenants, Delaware Lyon must maintain (i) a minimum tangible net worth, as defined of $120.0 million, adjusted upwards quarterly by 50% of Delaware Lyon’s net income after March 31, 2002; (ii) a ratio of total indebtedness to tangible net worth, each as defined, of less than 3.0 to 1.0; and (iii) minimum liquidity, as defined, of at least $10 million. A number of financial covenants apply to William Lyon Homes, Inc., including covenants requiring maintenance of a specified tangible net worth, specified financial ratios, liquidity, and cash reserves. In addition to typical events of default, some of the limited partnership facilities specify changes in ownership or management and include cross default provisions.
During the three months ended September 30, 2002, one of the Company’s existing unconsolidated joint ventures (“Existing Venture”) was restructured such that the Company is required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture (estimated to be $178.6 million, including an estimated preferred return of $36.9 million). During the three months ended September 30, 2002, the first 242 lots were purchased from the Existing Venture for $62.5 million, which includes a $12.5 million preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (“New Venture”) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74.2 million plus a 13 1/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been consolidated with the Company’s financial statements as of September 30, 2002, including real estate inventories of $112.5 million and minority interest in consolidated joint ventures of $85.3 million. The intercompany sale and related profit from the 242 lots have been eliminated in consolidation.
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 Nine Months Ended September 30, 2002 to Nine Months Ended September 30, 2001
Net cash used in operating activities decreased to $54.2 million in the 2002 period from $64.7 million in the 2001 period. The change was primarily as a result of decreased expenditures in real estate inventories in the 2002 period.
Net cash provided by investing activities was $21.8 million in the 2002 period and net cash used in investing activities was $3.8 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.
31
Table of Contents
Net cash provided by financing activities decreased to $25.2 million in the 2002 period from $59.6 million in the 2001 period primarily as a result of decreased net borrowings on notes payable and the purchase of the Company’s common stock during the 2002 period.
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 as of September 30, 2002.
Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of September 30, 2002 | Backlog at September 30, 2002(2)(3) | Lots Owned as of September 30, 2002(4) | Homes Closed for the Nine Months Ended September 30, 2002 | Sales Price Range(5) | |||||||
SOUTHERN CALIFORNIA | ||||||||||||||
Wholly-owned: | ||||||||||||||
Orange County | ||||||||||||||
Andover—West Irvine | 2001 | 138 | 113 | 25 | 25 | 40 | $299,000 – 331,000 | |||||||
Terraza at Vista del Verde, Yorba Linda | 2001 | 106 | 69 | 32 | 37 | 46 | $565,000 – 615,000 | |||||||
Monticello, Irvine | 2002 | 112 | 64 | 36 | 48 | 64 | $325,000 – 390,000 | |||||||
Montellano at Talega, San Clemente | 2002 | 61 | 12 | 32 | 49 | 12 | $950,000 – 1,030,000 | |||||||
Sterling Glen, Ladera Ranch | 2002 | 102 | 63 | 36 | 39 | 63 | $502,000 – 535,000 | |||||||
Davenport, Ladera Ranch | 2003 | 163 | 0 | 0 | 163 | 0 | $282,000 – 320,000 | |||||||
Weatherhaven, Ladera Ranch | 2002 | 71 | 0 | 9 | 71 | 0 | $440,000 – 505,000 | |||||||
Laurel at Quail Hill, Irvine | 2003 | 83 | 0 | 0 | 21 | 0 | $453,000 – 493,000 | |||||||
Linden at Quail Hill, Irvine | 2003 | 100 | 0 | 0 | 18 | 0 | $470,000 – 515,000 | |||||||
Riverside County | ||||||||||||||
Providence Ranch, Corona | 2002 | 97 | 92 | 0 | 5 | 0 | $270,000 – 280,000 | |||||||
Providence Ranch North, Corona | 2002 | 83 | 37 | 45 | 46 | 37 | $246,000 – 300,000 | |||||||
Ventura County | ||||||||||||||
Cantada, Oxnard | 2002 | 113 | 108 | 5 | 5 | 81 | $343,000 – 363,000 | |||||||
Total wholly-owned | 1,229 | 558 | 220 | 527 | 343 | |||||||||
Unconsolidated joint ventures: | ||||||||||||||
Orange County | ||||||||||||||
Reston, Ladera Ranch | 2000 | 117 | 117 | 0 | 0 | 15 | $365,000 – 425,000 | |||||||
Hampton Road, Ladera Ranch | 2000 | 82 | 81 | 0 | 1 | 18 | $447,000 – 477,000 | |||||||
Compass Pointe, San Clemente | 2000 | 92 | 92 | 0 | 0 | 11 | $540,000 – 575,000 | |||||||
Avalon, Huntington Beach | 2000 | 113 | 113 | 0 | 0 | 4 | $460,000 – 490,000 | |||||||
Beachside, Huntington Beach | 2001 | 86 | 52 | 32 | 34 | 45 | $620,000 – 640,000 | |||||||
Ventura County | ||||||||||||||
Quintana, Thousand Oaks | 2001 | 90 | 39 | 33 | 51 | 31 | $555,000 – 650,000 | |||||||
Coronado, Oxnard | 2002 | 110 | 33 | 37 | 77 | 33 | $435,000 – 460,000 | |||||||
Cantabria, Oxnard | 2002 | 87 | 33 | 45 | 54 | 33 | $350,000 – 370,000 | |||||||
Los Angeles County | ||||||||||||||
Toscana, Moorpark | 2002 | 70 | 0 | 43 | 70 | 0 | $488,000 – 523,000 | |||||||
Westridge, Valencia | 2003 | 87 | 0 | 0 | 87 | 0 | $620,000 – 770,000 | |||||||
Total unconsolidated joint ventures | 934 | 560 | 190 | 374 | 190 | |||||||||
Southern California Region Total | 2,163 | 1,118 | 410 | 901 | 533 | |||||||||
32
Table of Contents
Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of September 30, 2002 | Backlog at September 30, 2002(2)(3) | Lots Owned as of September 30, 2002(4) | Homes Closed for the Nine Months Ended September 30, 2002 | Sales Price Range(5) | |||||||
NORTHERN CALIFORNIA | ||||||||||||||
Wholly-owned: | ||||||||||||||
San Joaquin County | ||||||||||||||
Lyon Villas, Tracy | 1999 | 135 | 105 | 24 | 30 | 21 | $270,000 – 310,000 | |||||||
Lyon Estates, Tracy | 1997 | 120 | 90 | 0 | 30 | 7 | $291,000 – 327,000 | |||||||
Lyon Ironwood, Lathrop | 2000 | 116 | 115 | 1 | 1 | 34 | $209,000 – 263,000 | |||||||
Lyon Estates at Stonebridge, Lathrop | 2001 | 103 | 53 | 38 | 31 | 30 | $275,000 – 315,000 | |||||||
Contra Costa County | ||||||||||||||
Lyon Rhapsody, Brentwood | 2001 | 81 | 74 | 7 | 7 | 31 | $239,000 – 298,000 | |||||||
Olde Ivy, Brentwood | 2003 | 77 | 0 | 0 | 77 | 0 | $285,000 – 328,000 | |||||||
Heartland, Brentwood | 2003 | 75 | 0 | 0 | 75 | 0 | $288,000 – 328,000 | |||||||
Gables, Brentwood | 2003 | 100 | 0 | 0 | 100 | 0 | $298,000 – 378,000 | |||||||
The Bluffs, Hercules | 2003 | 70 | 0 | 0 | 70 | 0 | $576,000 – 641,000 | |||||||
The Shores, Hercules | 2003 | 99 | 0 | 0 | 99 | 0 | $531,000 – 591,000 | |||||||
Overlook, Hercules | 2003 | 133 | 0 | 0 | 133 | 0 | $465,000 – 525,000 | |||||||
Sacramento County | ||||||||||||||
Lyon Palazzo, Natomas | 2001 | 100 | 65 | 35 | 35 | 27 | $273,000 – 322,000 | |||||||
Santa Clara County | ||||||||||||||
The Ranch at Silver Creek, San Jose | 2003 | 538 | 0 | 0 | 538 | 0 | ||||||||
Stanislaus County | ||||||||||||||
Lyon Seasons, Modesto | 2002 | 71 | 16 | 32 | 55 | 16 | $277,000 – 336,000 | |||||||
Total wholly-owned | 1,818 | 518 | 137 | 1,281 | 166 | |||||||||
Unconsolidated joint ventures: | ||||||||||||||
Contra Costa County | ||||||||||||||
Lyon Ridge, Antioch | 1999 | 127 | 127 | 0 | 0 | 1 | $348,000 – 407,000 | |||||||
Lyon Tierra, San Ramon | 2001 | 46 | 46 | 0 | 0 | �� | 15 | $463,000 – 501,000 | ||||||
Lyon Dorado, San Ramon | 2001 | 54 | 39 | 15 | 15 | 18 | $788,000 – 1,003,000 | |||||||
Solano County | ||||||||||||||
Cascade/Paradise Valley, Fairfield | 2003 | 9 | 0 | 0 | 9 | 0 | $586,000 – 626,000 | |||||||
Brook, Fairfield | 2001 | 121 | 71 | 49 | 50 | 48 | $312,000 – 359,000 | |||||||
Falls, Fairfield | 2001 | 102 | 72 | 29 | 30 | 37 | $321,000 – 409,000 | |||||||
El Dorado County | ||||||||||||||
Lyon Casina, El Dorado Hills | 2001 | 123 | 21 | 43 | 102 | 14 | $319,000 – 377,000 | |||||||
Lyon Prima, El Dorado Hills | 2001 | 137 | 20 | 23 | 117 | 15 | $366,000 – 433,000 | |||||||
Total unconsolidated joint ventures | 719 | 396 | 159 | 323 | 148 | |||||||||
Northern California Region Total | 2,537 | 914 | 296 | 1,604 | 314 | |||||||||
33
Table of Contents
Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of September 30, 2002 | Backlog at September 30, 2002(2)(3) | Lots Owned as of September 30, 2002(4) | Homes Closed for the Nine Months Ended September 30, 2002 | Sales Price Range(5) | |||||||
SAN DIEGO | ||||||||||||||
Wholly-owned: | ||||||||||||||
Riverside County | ||||||||||||||
Horsethief Canyon Ranch Series “400”, Corona | 1995 | 554 | 518 | 30 | 36 | 62 | $240,000 – 307,000 | |||||||
Horsethief Canyon Ranch Series “500”, Corona | 1995 | 445 | 445 | 0 | 0 | 35 | $239,000 – 257,000 | |||||||
Vail Ranch, Temecula | 2000 | 152 | 152 | 0 | 0 | 1 | $196,000 – 213,000 | |||||||
Sycamore Ranch, Fallbrook | 1997 | 195 | 141 | 24 | 54 | 24 | $409,000 – 571,000 | |||||||
Three Sisters, Corona | 2003 | 274 | 0 | 0 | 96 | 0 | $353,000 – 448,000 | |||||||
Willow Glen, Temecula | 2003 | 74 | 0 | 0 | 74 | 0 | ||||||||
Tessera, Beaumont | 2003 | 138 | 0 | 0 | 42 | 0 | ||||||||
San Diego County | ||||||||||||||
The Groves, Escondido | 2001 | 93 | 40 | 23 | 42 | 37 | $360,000 – 376,000 | |||||||
The Orchards, Escondido | 2002 | 78 | 22 | 7 | 27 | 22 | $368,000 – 401,000 | |||||||
Vineyards, Escondido | 2002 | 75 | 0 | 0 | 13 | 0 | $376,000 – 416,000 | |||||||
Meadows, Escondido | 2003 | 42 | 0 | 0 | 2 | 0 | $378,000 – 428,000 | |||||||
Loma Real, San Marcos | 2000 | 87 | 87 | 0 | 0 | 18 | $403,000 – 446,000 | |||||||
Los Reyes, San Marcos | 2000 | 68 | 68 | 0 | 0 | 28 | $445,000 – 470,000 | |||||||
Total wholly-owned | 2,275 | 1,473 | 84 | 386 | 227 | |||||||||
Unconsolidated joint ventures: | ||||||||||||||
Mendocino Trails, Chula Vista | 2001 | 83 | 83 | 0 | 0 | 38 | $260,000 – 271,000 | |||||||
Providence, San Diego | 2001 | 123 | 53 | 33 | 70 | 48 | $577,000 – 617,000 | |||||||
Tanglewood, San Diego | 2002 | 161 | 0 | 40 | 161 | 0 | $332,000 – 362,000 | |||||||
Summerwood, San Diego | 2002 | 95 | 0 | 27 | 95 | 0 | $365,000 – 397,000 | |||||||
Total unconsolidated joint ventures | 462 | 136 | 100 | 326 | 86 | |||||||||
San Diego Region Total | 2,737 | 1,609 | 184 | 712 | 313 | |||||||||
ARIZONA | ||||||||||||||
Wholly-owned: | ||||||||||||||
Maricopa County | ||||||||||||||
Sage Creek—Encanto, Avondale | 2000 | 176 | 173 | 3 | 3 | 10 | $110,000 – 123,000 | |||||||
Sage Creek—Arcadia, Avondale | 2000 | 167 | 161 | 6 | 6 | 58 | $137,000 – 160,000 | |||||||
Sage Creek—Solano, Avondale | 2000 | 82 | 82 | 0 | 0 | 23 | $170,000 – 191,000 | |||||||
Mesquite Grove—Parada, Chandler | 2001 | 112 | 27 | 40 | 85 | 25 | $184,000 – 227,000 | |||||||
Mesquite Grove—Estates, Chandler | 2001 | 93 | 23 | 24 | 70 | 21 | $286,000 – 321,000 | |||||||
Power Ranch, Gilbert | 2001 | 103 | 38 | 23 | 65 | 35 | $176,000 – 234,000 | |||||||
Tramonto, Phoenix | 2001 | 76 | 17 | 29 | 59 | 15 | $188,000 – 251,000 | |||||||
Country Place, Tolleson | 2001 | 115 | 4 | 29 | 58 | 2 | $116,000 – 138,000 | |||||||
Mountaingate, Surprise | 2002 | 672 | 0 | 0 | 672 | 0 | ||||||||
Arizona Region Total | 1,596 | 525 | 154 | 1,018 | 189 | |||||||||
34
Table of Contents
Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of September 30, 2002 | Backlog at September 30, 2002(2)(3) | Lots Owned as of September 30, 2002(4) | Homes Closed for the Nine Months Ended September 30, 2002 | Sales Price Range(5) | |||||||
NEVADA | ||||||||||||||
Wholly-owned: | ||||||||||||||
Clark County | ||||||||||||||
Montecito Tesoro, Las Vegas | 2000 | 121 | 121 | 0 | 0 | 1 | $164,000 – 181,000 | |||||||
Montecito Classico, Las Vegas | 2000 | 100 | 100 | 0 | 0 | 28 | $192,000 – 227,000 | |||||||
Glenleigh Gardens at Summerlin, Las Vegas | 2000 | 96 | 96 | 0 | 0 | 22 | $246,000 – 276,000 | |||||||
Springfield at Summerlin, Las Vegas | 2001 | 85 | 85 | 0 | 0 | 41 | $208,000 – 228,000 | |||||||
Topaz Ridge at Summerlin, Las Vegas | 2002 | 89 | 25 | 22 | 21 | 25 | $532,000 – 590,000 | |||||||
Stallion Mountain, Las Vegas | 2001 | 116 | 116 | 0 | 0 | 60 | $157,000 – 179,000 | |||||||
Fairfield at Summerlin, Las Vegas | 2001 | 89 | 71 | 14 | 18 | 62 | $287,000 – 310,000 | |||||||
Annendale, North Las Vegas | 2001 | 194 | 51 | 29 | 143 | 47 | $163,000 – 186,000 | |||||||
Santalina at Summerlin, Las Vegas | 2002 | 74 | 0 | 0 | 74 | 0 | $235,000 – 263,000 | |||||||
Encanto at Summerlin, Las Vegas | 2002 | 79 | 0 | 0 | 79 | 0 | $309,000 – 341,000 | |||||||
Calimesa, North Las Vegas | 2002 | 90 | 0 | 0 | 90 | 0 | $149,000 – 171,000 | |||||||
Iron Mountain, Las Vegas | 2002 | 70 | 0 | 0 | 70 | 0 | $295,000 – 330,000 | |||||||
Vista Verde, Las Vegas | 2003 | 122 | 0 | 0 | 122 | 0 | $225,000 – 255,000 | |||||||
Miraleste, Las Vegas | 2003 | 122 | 0 | 0 | 122 | 0 | $300,000 – 330,000 | |||||||
East 40 Acres, North Las Vegas | 2003 | 140 | 0 | 0 | 140 | 0 | $157,000 – 180,000 | |||||||
North 40 Acres, North Las Vegas | 2003 | 209 | 0 | 0 | 209 | 0 | $144,000 – 171,000 | |||||||
South 20 Acres, North Las Vegas | 2003 | 144 | 0 | 0 | 144 | 0 | $165,000 – 191,000 | |||||||
West 40 Acres, North Las Vegas | 2003 | 364 | 0 | 0 | 364 | 0 | $129,000 – 152,000 | |||||||
Nevada Region Total | 2,304 | 665 | 65 | 1,596 | 286 | |||||||||
Grand Totals: | ||||||||||||||
Wholly-owned | 9,222 | 3,739 | 660 | 4,808 | 1,211 | |||||||||
Unconsolidated joint ventures | 2,115 | 1,092 | 449 | 1,023 | 424 | |||||||||
11,337 | 4,831 | 1,109 | 5,831 | 1,635 | ||||||||||
(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) | Of the total homes subject to pending sales contracts as of September 30, 2002, 1,023 represent homes completed or under construction and 86 represent homes not yet under construction. |
(4) | Lots owned as of September 30, 2002 include lots in backlog at September 30, 2002. |
(5) | Sales price range reflects base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project. |
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 three and nine months ended September 30, 2001 was approximately 11.2% and 10.8%, respectively. At December 31, 2001, the Company had net operating loss carryforwards for Federal tax purposes of approximately $8.5 million which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to $3.2 million 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 39.2% to 26.7%. The Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.
35
Table of Contents
Although the Company’s certificate of incorporation includes transfer restrictions intended to help reduce the risk of an ownership change, transactions could have occurred or may potentially occur that would severely limit the Company’s ability to use the tax benefits associated with its net operating loss carryforwards. The Company learned that one stockholder unknowingly violated the transfer restrictions. The stockholder divested itself of the requisite number of shares in February and March, 2002 so that it was no longer out of compliance with the Company’s certificate of incorporation. Pursuant to the Company’s certificate of incorporation, the transfer restrictions terminated on November 11, 2002.
Neither the amount of the net operating loss carryforwards nor the amount of limitation on such carryforwards claimed by the Company has been audited or otherwise validated by the Internal Revenue Service, and it could challenge either amount the Company has calculated. It is possible that legislation or regulations will be adopted that would limit the Company’s ability to use the tax benefits associated with the current tax net operating loss carryforwards.
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. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, the Company’s most critical accounting policies are real estate inventories and cost of sales; impairment of real estate inventories; and sales and profit recognition. Since December 31, 2001, there have been no changes in the Company’s most critical accounting policies and no material changes in the assumptions and estimates.
Recently Issued Accounting Standards
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.
36
Table of Contents
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 September 30, 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”). This pronouncement supersedes Statement of Financial Accounting Standards No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (“Statement No. 121”) and a portion of APB Opinion No. 30,Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB No. 30”), and was required to be adopted on January 1, 2002. Statement No. 144 retains the fundamental provisions of Statement No. 121 as it relates to assets to be held and used and assets to be sold, but adds provisions for assets to be disposed of other than by sale. It also changes the accounting for the disposal of a segment under APB No. 30 by requiring the operations of any assets with their own identifiable cash flows that are disposed of or held for sale to be removed from operating income and reported as discontinued operations. Treating such assets as discontinued operations would also require the reclassification of the operations of any such assets for any prior periods presented. The Company’s adoption of Statement No. 144 has not had a material impact on its financial condition or the results of its operations.
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (“Statement No. 145”). Statement No. 145 prevents gains or losses on extinguishment of debt not meeting the criteria of APB 30 to be treated as extraordinary. Statement No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. In addition, Statement No. 145 rescinds SFAS No. 44,Accounting for Intangible Assets of Motor Carriers and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. Statement No. 145 is effective for fiscal years beginning after March 15, 2002. Upon adoption of Statement No. 145, the Company’s previously reported extraordinary items related to gain from retirement of debt will be reclassified and not reported as extraordinary items.
The Financial Accounting Standards Board has issued exposure drafts on accounting for special purpose entities (“SPE’s”) and guarantees that, if adopted, could impact the accounting treatment of certain of the Company’s joint venture and land banking arrangements by requiring the consolidation of the assets, liabilities and operations of certain of these arrangements. These changes could have a corresponding effect on various of the Company’s financial ratios and other financial and operational indicators. The Company is not able to predict the outcome of the proposed interpretations or rule changes.
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
37
Table of Contents
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 generally accepted accounting principles or interpretations of those principles, 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.
The Company’s Annual Report on Form 10-K for the year ended December 31, 2001 includes 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.
An evaluation was performed under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, which was completed within 90 days of the filing date of this Form 10-Q, the Company’s principal executive officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
38
Table of Contents
PART II. OTHER INFORMATION
Not applicable.
(a) Exhibits
Exhibit No. | Description | |
10.1 | Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust dated as of September 18, 2002 by and between William Lyon Homes, Inc., a California corporation (“Borrower”), and California Bank & Trust, a California banking corporation (“Lender”). | |
99.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbannes-Oxley Act of 2002 | |
99.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbannes-Oxley Act of 2002 |
(b) Reports on Form 8-K
None
39
Table of Contents
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: November 5, 2002 | By: | /s/ MICHAEL D. GRUBBS | ||||||
MICHAEL D. GRUBBS Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||||||
Date: November 5, 2002 | By: | /s/ W. DOUGLASS HARRIS | ||||||
W. DOUGLASS HARRIS Vice President, Corporate Controller (Principal Accounting Officer) |
40
Table of Contents
CERTIFICATIONS
I, William Lyon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of William Lyon Homes;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002
By: | /s/ WILLIAM LYON | |
William Lyon Chief Executive Officer |
41
Table of Contents
I, Michael D. Grubbs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of William Lyon Homes;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002
By: | /s/ MICHAEL D. GRUBBS | |
Michael D. Grubbs Senior Vice President, Chief Financial Officer and Treasurer |
42