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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, 2004
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 other 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 November 1, 2004 | |
Common stock, par value $.01 | 9,891,236 |
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WILLIAM LYON HOMES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
WILLIAM LYON HOMES
(in thousands except number of shares and par value per share)
ASSETS | ||||||
September 30, 2004 | December 31, 2003 | |||||
(unaudited) | ||||||
(Note 2) | ||||||
Cash and cash equivalents | $ | 40,115 | $ | 24,137 | ||
Receivables | 28,147 | 46,211 | ||||
Real estate inventories — Notes 2 and 3 | 1,179,310 | 698,047 | ||||
Investments in and advances to unconsolidated joint ventures — Note 3 | 15,940 | 45,613 | ||||
Property and equipment, less accumulated depreciation of $7,305 and $6,517 at September 30, 2004 and December 31, 2003, respectively | 18,206 | 1,625 | ||||
Deferred loan costs | 11,865 | 9,041 | ||||
Goodwill — Note 1 | 5,896 | 5,896 | ||||
Other assets | 16,999 | 19,036 | ||||
$ | 1,316,478 | $ | 849,606 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Accounts payable | $ | 57,627 | $ | 35,697 | ||
Accrued expenses | 99,542 | 92,636 | ||||
Notes payable | 232,991 | 80,331 | ||||
10 3/4% Senior Notes due April 1, 2013 — Note 4 | 246,585 | 246,406 | ||||
7 1/2% Senior Notes due February 15, 2014 — Note 4 | 150,000 | — | ||||
786,745 | 455,070 | |||||
Minority interest in consolidated entities — Notes 2 and 3 | 182,105 | 142,496 | ||||
Stockholders’ equity — Note 6 | ||||||
Common stock, par value $.01 per share; 30,000,000 shares authorized; 9,891,236 and 9,787,440 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively | 99 | 98 | ||||
Additional paid-in capital | 110,911 | 106,818 | ||||
Retained earnings | 236,618 | 145,124 | ||||
347,628 | 252,040 | |||||
$ | 1,316,478 | $ | 849,606 | |||
See accompanying notes.
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WILLIAM LYON HOMES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per common share amounts)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Note 2) | (Note 2) | |||||||||||||||
Operating revenue | ||||||||||||||||
Home sales | $ | 474,322 | $ | 212,598 | $ | 1,095,930 | $ | 422,702 | ||||||||
Lots, land and other sales | 628 | — | 18,051 | 17,000 | ||||||||||||
Management fees | — | 1,462 | — | 5,553 | ||||||||||||
474,950 | 214,060 | 1,113,981 | 445,255 | |||||||||||||
Operating costs | ||||||||||||||||
Cost of sales — homes | (348,606 | ) | (176,553 | ) | (831,870 | ) | (350,370 | ) | ||||||||
Cost of sales — lots, land and other | (785 | ) | (36 | ) | (14,611 | ) | (10,838 | ) | ||||||||
Sales and marketing | (14,273 | ) | (8,104 | ) | (37,565 | ) | (18,402 | ) | ||||||||
General and administrative | (23,536 | ) | (10,488 | ) | (54,254 | ) | (31,654 | ) | ||||||||
Other | (658 | ) | (472 | ) | (1,425 | ) | (1,394 | ) | ||||||||
(387,858 | ) | (195,653 | ) | (939,725 | ) | (412,658 | ) | |||||||||
Equity in (loss) income of unconsolidated joint ventures — Note 3 | (268 | ) | 4,658 | (451 | ) | 19,734 | ||||||||||
Minority equity in (income) loss of consolidated entities — Note 2 | (13,858 | ) | 35 | (24,770 | ) | 47 | ||||||||||
Operating income | 72,966 | 23,100 | 149,035 | 52,378 | ||||||||||||
Other income, net | 1,244 | 1,301 | 2,949 | 3,620 | ||||||||||||
Income before provision for income taxes | 74,210 | 24,401 | 151,984 | 55,998 | ||||||||||||
Provision for income taxes — Note 1 | (29,273 | ) | (9,534 | ) | (60,490 | ) | (22,457 | ) | ||||||||
Net income | $ | 44,937 | $ | 14,867 | $ | 91,494 | $ | 33,541 | ||||||||
Earnings per common share — Note 1 | ||||||||||||||||
Basic | $ | 4.54 | $ | 1.52 | $ | 9.29 | $ | 3.43 | ||||||||
Diluted | $ | 4.51 | $ | 1.49 | $ | 9.22 | $ | 3.37 | ||||||||
See accompanying notes.
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WILLIAM LYON HOMES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2004
(in thousands)
(unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Total | |||||||||||
Shares | Amount | |||||||||||||
Balance — December 31, 2003 | 9,787 | $ | 98 | $ | 106,818 | $ | 145,124 | $ | 252,040 | |||||
Issuance of common stock upon exercise of stock options and related income tax benefit — Note 6 | 104 | 1 | 4,093 | — | 4,094 | |||||||||
Net income | — | — | — | 91,494 | 91,494 | |||||||||
Balance — September 30, 2004 | 9,891 | $ | 99 | $ | 110,911 | $ | 236,618 | $ | 347,628 | |||||
See accompanying notes.
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WILLIAM LYON HOMES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, | ||||||||
2004 | 2003 | |||||||
(Note 2) | ||||||||
Operating activities | ||||||||
Net income | $ | 91,494 | $ | 33,541 | ||||
Adjustments to reconcile net income to net cash used in operating activities | ||||||||
Depreciation and amortization | 788 | 868 | ||||||
Equity in loss (income) of unconsolidated joint ventures | 451 | (19,734 | ) | |||||
Minority equity in income (loss) of consolidated entities | 24,770 | (47 | ) | |||||
Provision for income taxes | 60,490 | 22,457 | ||||||
Net changes in operating assets and liabilities: | ||||||||
Receivables | 20,323 | 8,522 | ||||||
Real estate inventories | (320,961 | ) | (264,470 | ) | ||||
Deferred loan costs | (387 | ) | (7,568 | ) | ||||
Other assets | 2,037 | (3,556 | ) | |||||
Accounts payable | 15,651 | 20,240 | ||||||
Accrued expenses | (53,182 | ) | (7,226 | ) | ||||
Net cash used in operating activities | (158,526 | ) | (216,973 | ) | ||||
Investing activities | ||||||||
Investments in and advances to unconsolidated joint ventures | (8,200 | ) | (6,956 | ) | ||||
Distributions of income from unconsolidated joint ventures | — | 23,857 | ||||||
Distributions of capital from unconsolidated joint ventures | 11,118 | 21,245 | ||||||
Purchases of property and equipment | (17,369 | ) | (283 | ) | ||||
Net cash (used in) provided by investing activities | (14,451 | ) | 37,863 | |||||
Financing activities | ||||||||
Proceeds from borrowing on notes payable | 1,257,449 | 717,957 | ||||||
Principal payments on notes payable | (1,195,040 | ) | (730,713 | ) | ||||
Repayment of 12 1/2% Senior Notes | — | (70,279 | ) | |||||
Issuance of 10 3/4% Senior Notes | — | 246,233 | ||||||
Issuance of 7 1/2% Senior Notes | 147,563 | — | ||||||
Minority interest contributions (distributions), net | (21,949 | ) | 28,776 | |||||
Common stock issued for exercised options | 932 | 1,835 | ||||||
Common stock purchased | — | (7,180 | ) | |||||
Net cash provided by financing activities | 188,955 | 186,629 | ||||||
Net increase in cash and cash equivalents | 15,978 | 7,519 | ||||||
Cash and cash equivalents — beginning of period | 24,137 | 16,694 | ||||||
Cash and cash equivalents — end of period | $ | 40,115 | $ | 24,213 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during the period for interest, net of amounts capitalized | $ | (7,656 | ) | $ | (13,317 | ) | ||
Income tax benefit credited to additional paid-in capital in connection with stock option exercises | $ | 3,162 | $ | — | ||||
Non-cash effect of consolidation of previously unconsolidated joint ventures | $ | 26,304 | $ | — | ||||
See accompanying notes.
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Basis of Presentation and Significant Accounting Policies
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 U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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, 2003, as amended.
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 U.S. generally accepted accounting principles have been included. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of September 30, 2004 and December 31, 2003 and revenues and expenses for the periods presented. Accordingly, actual results could differ materially from those estimates in the near-term.
Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation.
The consolidated financial statements include the accounts of the Company and all majority-owned and controlled subsidiaries and joint ventures, and certain joint ventures and other entities which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). Investments in joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary 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 is defined by the Company as operating revenue less operating costs plus equity in income of unconsolidated joint ventures less minority equity in income of consolidated entities. Accordingly, operating income excludes certain income and expense 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, 2003, as amended.
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Management fees represent fees earned 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 is subject to impairment tests in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets. As of September 30, 2004, the Company believes there have been no indicators of impairment related to the Company’s goodwill.
A provision for warranty costs relating to the Company’s limited warranty plans is included in cost of sales at the time the home sale is recorded. The Company generally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. Factors that affect the Company’s warranty liability include the number of homes under warranty, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. Changes in the Company’s warranty liability during the nine months ended September 30 are as follows (in thousands):
September 30, | ||||||||
2004 | 2003 | |||||||
Warranty liability, beginning of period | $ | 7,267 | $ | 4,287 | ||||
Warranty liability from consolidated entities as of January 1, 2004—Note 2 | 1,664 | — | ||||||
Warranty provision during period | 10,027 | 3,370 | ||||||
Warranty settlements during period | (7,997 | ) | (4,162 | ) | ||||
Warranty liability, end of period | $ | 10,961 | $ | 3,495 | ||||
At December 31, 2003 the Company had net operating loss carryforwards for Federal tax purposes of approximately $1,994,000 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 offset $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 Company’s ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.
Earnings per share amounts for all periods presented conform to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128,Earnings Per Share. Basic and diluted earnings per common share for the three months ended September 30, 2004 are based on 9,888,915 and 9,965,762 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the nine months ended September 30, 2004 are based on 9,847,040 and 9,923,776 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the three months ended September 30, 2003 are based on 9,808,252 and 9,993,462 weighted average shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the nine months ended September 30, 2003 are based on 9,790,804 and 9,961,762 weighted average shares of common stock outstanding, respectively.
At September 30, 2004, the Company had stock plans, which are described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
common stock on the date of grant. The following table illustrates the effect on net income and earnings per common share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation, to stock-based employee plans (in thousands, except per common share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||
Net income, as reported | $ | 44,937 | $ | 14,867 | $ | 91,494 | $ | 33,541 | |||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | — | (18 | ) | (22 | ) | (362 | ) | ||||||||
Net income, as adjusted | $ | 44,937 | $ | 14,849 | $ | 91,472 | $ | 33,179 | |||||||
Earnings per common share: | |||||||||||||||
Basic — as reported | $ | 4.54 | $ | 1.52 | $ | 9.29 | $ | 3.43 | |||||||
Basic — as adjusted | $ | 4.54 | $ | 1.51 | $ | 9.29 | $ | 3.39 | |||||||
Diluted — as reported | $ | 4.51 | $ | 1.49 | $ | 9.22 | $ | 3.37 | |||||||
Diluted — as adjusted | $ | 4.51 | $ | 1.49 | $ | 9.22 | $ | 3.33 | |||||||
Note 2 — Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”) which addresses the consolidation of variable interest entities (“VIEs”). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applied immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation was applied to the Company as of January 1, 2004. The adoption of Interpretation No. 46 has not affected the Company’s consolidated net income. Prior period information has not been restated to conform to the presentation in the current period.
Under Interpretation No. 46, a VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to Interpretation No. 46, an enterprise that absorbs a majority of the expected losses or residual returns of the VIE is considered the primary beneficiary and must consolidate the VIE.
Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 7) or (iii) enters into arrangements with a financial partner for the formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected losses if they occur. For each VIE created, the Company will
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
compute expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE will be consolidated with the Company’s financial statements.
Based on the Company’s analysis of arrangements created after January 31, 2003, no VIEs had been created for the period from February 1, 2003 through September 30, 2003 with respect to option agreements or land banking arrangements as identified under clauses (i) and (ii) of the previous paragraph. At September 30, 2003, three joint ventures and one land banking arrangement created after January 31, 2003 have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these three joint ventures and one land banking arrangement have been consolidated with the Company’s financial statements as of September 30, 2003 and for the three and nine months ended September 30, 2003. At December 31, 2003, certain joint ventures and one land banking arrangement created after January 31, 2003 had been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures and land banking arrangement were consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended. Effective January 1, 2004, certain additional joint ventures and land banking arrangements created prior to February 1, 2003 have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures and land banking arrangements have been consolidated with the Company’s financial statements as of January 1, 2004 and for the three and nine months ended September 30, 2004. Supplemental consolidating financial information of the Company, specifically including information for the joint ventures and land banking arrangements consolidated under Interpretation No. 46 and for two joint ventures which were previously consolidated (see Note 2), is presented below to provide additional information as to the nature of assets held and the operations of the consolidated entities. Investments in consolidated joint ventures in the separate financial statements of wholly-owned entities are presented below using the equity method of accounting. Consolidated real estate inventories include land deposits under option agreements or land banking arrangements (excluding the consolidated land banking arrangements as previously described in this paragraph) of $37,136,000 and $37,293,000 at September 30, 2004 and December 31, 2003, respectively.
The joint ventures which have been determined to be VIEs are each engaged in homebuilding and land development activities. Certain of these joint ventures have not obtained construction financing from outside lenders, but are financing their activities through equity contributions from each of the joint venture partners. Creditors of these VIEs have no recourse against the general credit of the Company. Income allocations and cash distributions to the Company are based on predetermined formulas between the Company and the joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and return of partners’ capital, approximately 50% of the profits and cash flows from the joint ventures.
The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged takedowns, thereby 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 equal to 20% or less 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. These land banking arrangements help the Company manage the financial and market risk associated with land
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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. Interpretation No. 46 requires the consolidation of the assets, liabilities and operations of two of the Company’s land banking arrangements including, as of September 30, 2004, real estate inventories of $32,898,000, and notes payable of $929,000. Summary information with respect to the Company’s consolidated land banking arrangements is as follows as of September 30, 2004 (dollars in thousands):
Total number of consolidated land banking projects | 2 | ||
Total number of lots | 508 | ||
Total purchase price | $ | 77,543 | |
Balance of lots still under option and not purchased: | |||
Number of lots | 226 | ||
Purchase price | $ | 38,177 | |
Forfeited deposits and penalties if lots were not purchased | $ | 12,592 | |
One of the land banking arrangements which has been determined to be a VIE was entered into effective on September 29, 2003. Under this arrangement, the Company transferred to an entity owned by a third party the Company’s right to purchase certain real estate assets (lots) from a joint venture whose financial statements have previously been consolidated with the Company’s financial statements (see Note 3). Concurrently, the Company entered into an option agreement with the entity owned by a third party whereby the Company agreed to acquire lots in staged takedowns through August 15, 2005. The Company made a non-refundable deposit of $14,418,000 and the entity owned by a third party made an equity contribution of $42,214,000 to purchase the lots from the joint venture for a total price of $56,632,000 (which included a $16,441,000 preferred return to the outside partner of the joint venture). The Company is under no obligation to purchase the lots, but would forfeit remaining deposits if the lots were not purchased. The Company does not have legal title to the entity owned by a third party and has not guaranteed its liabilities. The total purchase price under the option agreement is $60,848,550 plus a 10��1/4% preferred return on invested capital to the outside third party. The property consists of 128 single-family lots and 22 high-density lots on which the Company will construct 128 single-family homes on the single-family lots and 44 duplex condominium units on the high-density lots. The homes are expected to be constructed and sold in phases over a two-to-three year period with approximate base sales prices ranging from $805,000 to $1,090,000. As of September 30, 2004, 83 lots have been taken down and ten homes have closed. The intercompany sales and related profits have been eliminated in consolidation.
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP
(in thousands)
September 30, 2004 | ||||||||||||||||
Consolidated Entities | ||||||||||||||||
Wholly- Owned | Variable Interest Entities Under Interpretation No. 46 | Joint Ventures Previously | Eliminating Entries | Consolidated Total | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 24,943 | $ | 15,118 | $ | 54 | $ | — | $ | 40,115 | ||||||
Receivables | 26,717 | 1,430 | — | — | 28,147 | |||||||||||
Real estate inventories | 821,750 | 357,221 | 339 | — | 1,179,310 | |||||||||||
Investments in and advances to unconsolidated joint ventures | 15,940 | — | — | — | 15,940 | |||||||||||
Investments in consolidated entities | 97,293 | — | — | (97,293 | ) | — | ||||||||||
Other assets | 52,966 | — | — | — | 52,966 | |||||||||||
Intercompany receivables | — | — | 3,785 | (3,785 | ) | — | ||||||||||
$ | 1,039,609 | $ | 373,769 | $ | 4,178 | $ | (101,078 | ) | $ | 1,316,478 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Accounts payable and accrued expenses | $ | 131,184 | $ | 25,772 | $ | 213 | $ | — | $ | 157,169 | ||||||
Notes payable | 163,493 | 69,498 | — | — | 232,991 | |||||||||||
10 3/4% Senior Notes due April 1, 2013 | 246,585 | — | — | — | 246,585 | |||||||||||
7 1/2% Senior Notes due February 15, 2014 | 150,000 | — | — | — | 150,000 | |||||||||||
Intercompany payables | 719 | 3,066 | — | (3,785 | ) | — | ||||||||||
Total liabilities | 691,981 | 98,336 | $ | 213 | (3,785 | ) | 786,745 | |||||||||
Minority interest in consolidated entities | — | — | — | 182,105 | 182,105 | |||||||||||
Owners’ capital | ||||||||||||||||
William Lyon Homes | — | 96,012 | 1,281 | (97,293 | ) | — | ||||||||||
Others | — | 179,421 | 2,684 | (182,105 | ) | — | ||||||||||
Stockholders’ equity | 347,628 | — | — | — | 347,628 | |||||||||||
$ | 1,039,609 | $ | 373,769 | $ | 4,178 | $ | (101,078 | ) | $ | 1,316,478 | ||||||
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP
(in thousands)
December 31, 2003 | ||||||||||||||||
Consolidated Entities | ||||||||||||||||
Wholly- Owned | Variable Interest Entities Under Interpretation No. 46 | Joint Previously Consolidated | Eliminating Entries | Consolidated Total | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 18,893 | $ | 4,775 | $ | 469 | $ | — | $ | 24,137 | ||||||
Receivables | 43,719 | 2,492 | — | — | 46,211 | |||||||||||
Real estate inventories | 515,984 | 153,968 | 28,095 | — | 698,047 | |||||||||||
Investments in and advances to unconsolidated joint ventures | 45,613 | — | — | — | 45,613 | |||||||||||
Investments in consolidated entities | 40,694 | — | — | (40,694 | ) | — | ||||||||||
Other assets | 35,598 | — | — | — | 35,598 | |||||||||||
Intercompany receivables | 3,420 | — | — | (3,420 | ) | — | ||||||||||
$ | 703,921 | $ | 161,235 | $ | 28,564 | $ | (44,114 | ) | $ | 849,606 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Accounts payable and accrued expenses | $ | 125,144 | $ | 3,010 | $ | 179 | $ | — | $ | 128,333 | ||||||
Notes payable | 80,331 | — | — | — | 80,331 | |||||||||||
10 3/4% Senior Notes due April 1, 2013 | 246,406 | — | — | — | 246,406 | |||||||||||
Intercompany payables | — | 2,894 | 526 | (3,420 | ) | — | ||||||||||
Total liabilities | 451,881 | 5,904 | 705 | (3,420 | ) | 455,070 | ||||||||||
Minority interest in consolidated entities | — | — | — | 142,496 | 142,496 | |||||||||||
Owners’ capital | ||||||||||||||||
William Lyon Homes | — | 35,467 | 5,227 | (40,694 | ) | — | ||||||||||
Others | — | 119,864 | 22,632 | (142,496 | ) | — | ||||||||||
Stockholders’ equity | 252,040 | — | — | — | 252,040 | |||||||||||
$ | 703,921 | $ | 161,235 | $ | 28,564 | $ | (44,114 | ) | $ | 849,606 | ||||||
13
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP
(in thousands)
Three Months Ended September 30, 2004 | ||||||||||||||||||||
Wholly- Owned | Consolidated Entities | Eliminating Entries | Consolidated Total | |||||||||||||||||
Variable Interest Entities Under Interpretation No. 46 | Joint Ventures Previously Consolidated | |||||||||||||||||||
Operating revenue | ||||||||||||||||||||
Sales | $ | 321,719 | $ | 153,231 | $ | 6,103 | $ | (6,103 | ) | $ | 474,950 | |||||||||
Management fees | 4,598 | — | — | (4,598 | ) | — | ||||||||||||||
326,317 | 153,231 | 6,103 | (10,701 | ) | 474,950 | |||||||||||||||
Operating costs | ||||||||||||||||||||
Cost of sales | (239,550 | ) | (114,439 | ) | (6,103 | ) | 10,701 | (349,391 | ) | |||||||||||
Sales and marketing | (9,470 | ) | (4,803 | ) | — | — | (14,273 | ) | ||||||||||||
General and administrative | (23,536 | ) | — | — | — | (23,536 | ) | |||||||||||||
Other | (658 | ) | — | — | — | (658 | ) | |||||||||||||
(273,214 | ) | (119,242 | ) | (6,103 | ) | 10,701 | (387,858 | ) | ||||||||||||
Equity in loss of unconsolidated joint ventures | (268 | ) | — | — | — | (268 | ) | |||||||||||||
Equity in income of consolidated entities | 20,149 | — | — | (20,149 | ) | — | ||||||||||||||
Minority equity in income of consolidated entities | — | — | — | (13,858 | ) | (13,858 | ) | |||||||||||||
Operating income | 72,984 | 33,989 | — | (34,007 | ) | 72,966 | ||||||||||||||
Other income, net | 1,226 | 18 | — | — | 1,244 | |||||||||||||||
Income before provision for income taxes | 74,210 | 34,007 | — | (34,007 | ) | 74,210 | ||||||||||||||
Provision for income taxes | (29,273 | ) | — | — | — | (29,273 | ) | |||||||||||||
Net income | $ | 44,937 | $ | 34,007 | $ | — | $ | (34,007 | ) | $ | 44,937 | |||||||||
14
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP
(in thousands)
Three Months Ended September 30, 2003 | ||||||||||||||||||||
Consolidated Entities | ||||||||||||||||||||
Wholly- Owned | Variable Interest Interpretation No. 46 | Joint Ventures Consolidated | Elimination Entries | Consolidated Total | ||||||||||||||||
Operating revenue | ||||||||||||||||||||
Sales | $ | 212,598 | $ | — | $ | 97,443 | $ | (97,443 | ) | $ | 212,598 | |||||||||
Management fees | 1,462 | — | — | — | 1,462 | |||||||||||||||
214,060 | — | 97,443 | (97,443 | ) | 214,060 | |||||||||||||||
Operating costs | ||||||||||||||||||||
Cost of sales | (176,589 | ) | — | (75,700 | ) | 75,700 | (176,589 | ) | ||||||||||||
Sales and marketing | (7,803 | ) | (239 | ) | (62 | ) | — | (8,104 | ) | |||||||||||
General and administrative | (10,488 | ) | — | — | — | (10,488 | ) | |||||||||||||
Other | (472 | ) | — | — | — | (472 | ) | |||||||||||||
(195,352 | ) | (239 | ) | (75,762 | ) | 75,700 | (195,653 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | 4,658 | — | — | — | 4,658 | |||||||||||||||
Equity in loss of consolidated entities | (260 | ) | — | — | 260 | — | ||||||||||||||
Minority equity in loss (income) of consolidated entities | — | 35 | (21,743 | ) | 21,743 | 35 | ||||||||||||||
Operating income (loss) | 23,106 | (204 | ) | (62 | ) | 260 | 23,100 | |||||||||||||
Other income, net | 1,295 | — | 6 | — | 1,301 | |||||||||||||||
Income (loss) before provision for income taxes | 24,401 | (204 | ) | (56 | ) | 260 | 24,401 | |||||||||||||
Provision for income taxes | (9,534 | ) | — | — | — | (9,534 | ) | |||||||||||||
Net income (loss) | $ | 14,867 | $ | (204 | ) | $ | (56 | ) | $ | 260 | $ | 14,867 | ||||||||
15
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP
(in thousands)
Nine Months Ended September 30, 2004 | ||||||||||||||||||||
Wholly- Owned | Consolidated Entities | Eliminating Entries | Consolidated Total | |||||||||||||||||
Variable Interest Entities Under Interpretation No. 46 | Joint Ventures Previously Consolidated | |||||||||||||||||||
Operating revenue | ||||||||||||||||||||
Sales | $ | 817,834 | $ | 296,147 | $ | 28,474 | $ | (28,474 | ) | $ | 1,113,981 | |||||||||
Management fees | 8,789 | — | — | (8,789 | ) | — | ||||||||||||||
826,623 | 296,147 | 28,474 | (37,263 | ) | 1,113,981 | |||||||||||||||
Operating costs | ||||||||||||||||||||
Cost of sales | (627,569 | ) | (227,701 | ) | (28,474 | ) | 37,263 | (846,481 | ) | |||||||||||
Sales and marketing | (27,403 | ) | (10,162 | ) | — | — | (37,565 | ) | ||||||||||||
General and administrative | (54,254 | ) | — | — | — | (54,254 | ) | |||||||||||||
Other | (1,425 | ) | — | — | — | (1,425 | ) | |||||||||||||
(710,651 | ) | (237,863 | ) | (28,474 | ) | 37,263 | (939,725 | ) | ||||||||||||
Equity in loss of unconsolidated joint ventures | (451 | ) | — | — | — | (451 | ) | |||||||||||||
Equity in income of consolidated entities | 33,561 | — | — | (33,561 | ) | — | ||||||||||||||
Minority equity in income of consolidated entities | — | — | — | (24,770 | ) | (24,770 | ) | |||||||||||||
Operating income | 149,082 | 58,284 | — | (58,331 | ) | 149,035 | ||||||||||||||
Other income, net | 2,902 | 47 | — | — | 2,949 | |||||||||||||||
Income before provision for income taxes | 151,984 | 58,331 | — | (58,331 | ) | 151,984 | ||||||||||||||
Provision for income taxes | (60,490 | ) | — | — | — | (60,490 | ) | |||||||||||||
Net income | $ | 91,494 | $ | 58,331 | $ | — | $ | (58,331 | ) | $ | 91,494 | |||||||||
16
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP
(in thousands)
Nine Months Ended September 30, 2003 | ||||||||||||||||||||
Consolidated Entities | ||||||||||||||||||||
Wholly- Owned | Variable Interest Interpretation No. 46 | Joint Consolidated | Elimination Entries | Consolidated Total | ||||||||||||||||
Operating revenue | ||||||||||||||||||||
Sales | $ | 439,702 | $ | — | $ | 120,684 | $ | (120,684 | ) | $ | 439,702 | |||||||||
Management fees | 5,553 | — | — | — | 5,553 | |||||||||||||||
445,255 | — | 120,684 | (120,684 | ) | 445,255 | |||||||||||||||
Operating costs | ||||||||||||||||||||
Cost of sales | (361,208 | ) | — | (98,941 | ) | 98,941 | (361,208 | ) | ||||||||||||
Sales and marketing | (17,743 | ) | (349 | ) | (310 | ) | — | (18,402 | ) | |||||||||||
General and administrative | (31,654 | ) | — | — | — | (31,654 | ) | |||||||||||||
Other | (1,394 | ) | — | — | — | (1,394 | ) | |||||||||||||
(411,999 | ) | (349 | ) | (99,251 | ) | 98,941 | (412,658 | ) | ||||||||||||
Equity in income of unconsolidated joint ventures | 19,734 | — | — | — | 19,734 | |||||||||||||||
Equity in loss of consolidated entities | (587 | ) | — | — | 587 | — | ||||||||||||||
Minority equity in loss (income) of consolidated entities | — | 47 | (21,743 | ) | 21,743 | 47 | ||||||||||||||
Operating income (loss) | 52,403 | (302 | ) | (310 | ) | 587 | 52,378 | |||||||||||||
Other income, net | 3,595 | 6 | 19 | — | 3,620 | |||||||||||||||
Income (loss) before provision for income taxes | 55,998 | (296 | ) | (291 | ) | 587 | 55,998 | |||||||||||||
Provision for income taxes | (22,457 | ) | — | — | — | (22,457 | ) | |||||||||||||
Net income (loss) | $ | 33,541 | $ | (296 | ) | $ | (291 | ) | $ | 587 | $ | 33,541 | ||||||||
17
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 3 — 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. The consolidated financial statements of the Company include the accounts of the Company, all majority-owned and controlled subsidiaries and certain joint ventures which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). The financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method. Condensed combined financial information of these unconsolidated joint ventures as of September 30, 2004 and December 31, 2003 is summarized as follows:
CONDENSED COMBINED BALANCE SHEETS
(in thousands)
September 30, 2004 | December 31, 2003 | |||||
(unaudited) | ||||||
(Note 2) | ||||||
ASSETS | ||||||
Cash and cash equivalents | $ | 663 | $ | 4,973 | ||
Receivables | 387 | 2,339 | ||||
Real estate inventories | 36,645 | 187,048 | ||||
Investment in unconsolidated joint venture | 24,063 | 22,804 | ||||
Other assets | 97 | — | ||||
$ | 61,855 | $ | 217,164 | |||
LIABILITIES AND OWNERS’ CAPITAL | ||||||
Accounts payable | $ | 2,767 | $ | 6,408 | ||
Accrued expenses | — | 2,645 | ||||
Amounts payable to William Lyon Homes | — | 115 | ||||
Notes payable | 26,426 | 111,273 | ||||
Advances from William Lyon Homes | 210 | 2,668 | ||||
29,403 | 123,109 | |||||
Owners’ capital | ||||||
William Lyon Homes | 15,730 | 42,945 | ||||
Others | 16,722 | 51,110 | ||||
32,452 | 94,055 | |||||
$ | 61,855 | $ | 217,164 | |||
18
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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, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Note 2) | (Note 2) | |||||||||||||||
Operating revenue | ||||||||||||||||
Home sales | $ | — | $ | 51,338 | $ | — | $ | 190,677 | ||||||||
Land sales | — | — | — | 8,440 | ||||||||||||
— | 51,338 | — | 199,117 | |||||||||||||
Operating costs | ||||||||||||||||
Cost of sales — homes | — | (39,538 | ) | — | (147,215 | ) | ||||||||||
Cost of sales — land | — | — | — | (8,132 | ) | |||||||||||
Sales and marketing | (51 | ) | (1,711 | ) | (72 | ) | (5,806 | ) | ||||||||
Operating (loss) income | (51 | ) | 10,089 | (72 | ) | 37,964 | ||||||||||
Other expense, net | (484 | ) | (556 | ) | (829 | ) | (756 | ) | ||||||||
Net (loss) income | $ | (535 | ) | $ | 9,533 | $ | (901 | ) | $ | 37,208 | ||||||
Allocation to owners | ||||||||||||||||
William Lyon Homes | $ | (268 | ) | $ | 4,658 | $ | (451 | ) | $ | 19,734 | ||||||
Others | (267 | ) | 4,875 | (450 | ) | 17,474 | ||||||||||
$ | (535 | ) | $ | 9,533 | $ | (901 | ) | $ | 37,208 | |||||||
Income allocations and cash distributions to the Company are based on predetermined formulas between the Company and the joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners’ priority returns and return of partners’ capital, approximately 50% of the profits and cash flows from joint ventures.
During the year ended December 31, 2002, one of the Company’s joint ventures (“Existing Venture”) was restructured such that the Company was 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. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64,468,000, which included 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 was required to and did 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 was 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. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19,765,000, which included a $3,953,000 preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement (see Note 2 for additional information regarding the Company’s land banking arrangements). During the year ended December 31, 2003, an additional 219 lots were purchased from the Existing Venture for $74,896,000, which included a $21,743,000 preferred return to the outside partner of the Existing Venture. These purchases included (1) 172 lots which were purchased from the Existing Venture under a land banking arrangement (see Note 2) for $56,632,000, which included a $16,441,000 preferred return
19
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
to the outside partner of the Existing Venture and (2) 47 lots which were purchased by the New Venture from the Existing Venture for $18,264,000, which included a $5,302,000 preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2003, the Company purchased 175 lots from the New Venture for $54,543,000, all of which was paid to the outside partner as a return of capital. During the three and nine months ended September 30, 2004, the Company purchased 15 and 88 lots, respectively from the New Venture for $6,103,000 and $28,474,000, respectively. The intercompany sales and related profits have been eliminated in consolidation.
During the year ended December 31, 2003, the Company’s wholly-owned subsidiary William Lyon Homes Inc., a California corporation, (“California Lyon”), and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. The development process is anticipated to be completed by early in 2005 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of the lots. California Lyon has a 12 1/2% indirect, minority interest in the Development LLCs, which are the borrowers under two secured lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon owned by the applicable Development LLCs, as well as pledges of all net sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed loan-to-value ratios. The maximum commitment amount under the line of credit that closed in January 2003 (“First Line of Credit”) is $35,000,000. Subject to specified terms and conditions, California Lyon and the other direct and indirect members of the Development LLC that is the borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLC’s indebtedness under the First Line of Credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLC’s performance under its environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. The First Line of Credit matures in January 2005, but may be extended to July 2005, subject to specified terms and conditions. The maximum commitment amount under the line of credit that closed in March 2003 (“Second Line of Credit”) is $105,000,000. The Second Line of Credit matures in March 2005, but may be extended to September 2005, subject to specified terms and conditions. Although the guarantee obligations of the other direct and indirect members of the Development LLC that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of Credit. However, California Lyon has posted letters of credit equal to approximately $24,566,000 to secure its obligations as well as the Development LLCs’ obligations to the banks under both lines of credit. Further, California Lyon and the other direct and indirect members of the Development LLCs, including certain affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related guarantees and letters of credit. California Lyon’s parent company, William Lyon Homes, a Delaware corporation (“Delaware Lyon”) has entered into joinder agreements to be jointly and severally liable for California Lyon’s obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with the members’ percentage interests in the Development LLCs’ distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks in certain specified circumstances, such as those involving the default, willful misconduct or gross negligence of California Lyon. As of September 30, 2004 the outstanding indebtedness under the First Line of Credit was $35,000,000 and the outstanding indebtedness under the Second Line of Credit was $105,000,000.
20
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 4 — Senior Notes
10 3/4% Senior Notes
The Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation (“California Lyon”), filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250,000,000 of Senior Notes which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246,233,000. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net of the unamortized discount in the accompanying consolidated balance sheet.
The 10 3/4% Senior Notes due April 1, 2013 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”), which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. Interest on the 10 3/4% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
Except as set forth in the Indenture governing the 10 3/4% Senior Notes (“10 3/4% Senior Notes Indenture”), the 10 3/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 10 3/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.
Upon a change of control as described in the 10 3/4% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
If the Company’s consolidated tangible net worth falls below $75,000,000 for any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of the notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.
California Lyon is 100% owned by Delaware Lyon. Each subsidiary guarantor is 100% owned by California Lyon or Delaware Lyon. All guarantees are full and unconditional and all guarantees are joint and several. There are no significant restrictions on the ability of Delaware Lyon or any guarantor to obtain funds from subsidiaries by dividend or loan.
The 10 3/4% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyon’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of Delaware Lyon’s or California Lyon’s assets. These covenants are subject to a number of important exceptions and qualifications as described in the 10 3/4% Senior Notes Indenture.
21
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The foregoing summary is not a complete description of the terms of the 10 3/4% Senior Notes and is qualified in its entirety by reference to the 10 3/4% Senior Notes Indenture.
The net proceeds of the offering were used as follows (in thousands):
Repayment of revolving credit facilities | $ | 104,354 | |
Repayment of 12 1/2% Senior Notes | 70,279 | ||
Repayment of construction notes payable | 28,000 | ||
Repayment of purchase money notes payable — land acquisitions | 26,000 | ||
Repayment of unsecured line of credit | 9,500 | ||
Underwriting discount | 6,875 | ||
Offering costs | 1,225 | ||
$ | 246,233 | ||
7 1/2% Senior Notes
On February 6, 2004, the Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) closed its offering of $150,000,000 principal amount of 7 1/2% Senior Notes due 2014. The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes have not and will not be registered under the Securities Act of 1933 and, unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes (“Exchange Notes”) having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150,000,000 aggregate principal amount of 7 1/2% Senior Notes due 2014, which are not registered under the Securities Act of 1933, for a like amount of its new 7 1/2% Senior Notes due 2014, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated July 16, 2004. The exchange offer was completed for the full principal amount of the 7 1/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. California Lyon will not receive any proceeds from the exchange offer and the exchange will not be a taxable event for U.S. federal income tax purposes. The new notes have been listed on the New York Stock Exchange.
The 7 1/2% Senior Notes due February 15, 2014 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by Delaware Lyon and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. Interest on the 7 1/2% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Except as set forth in the Indenture governing the 7 1/2% Senior Notes (“7 1/2% Senior Notes Indenture”), the 7 1/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 7 1/2% Senior Notes will be
22
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.
Upon a change of control as described in the 7 1/2% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
If the Company’s consolidated tangible net worth falls below $75,000,000 for any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of the notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.
California Lyon is 100% owned by Delaware Lyon. Each subsidiary guarantor is 100% owned by California Lyon or Delaware Lyon. All guarantees are full and unconditional and all guarantees are joint and several. There are no significant restrictions on the ability of Delaware Lyon or any guarantor to obtain funds from subsidiaries by dividend or loan.
The 7 1/2% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyon’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of Delaware Lyon’s and California Lyon’s assets. These covenants are subject to a number of important exceptions and qualifications as described in the 7 1/2% Senior Notes Indenture.
The foregoing summary is not a complete description of the 7 1/2% Senior Notes and is qualified in its entirety by reference to the 7 1/2% Senior Notes Indenture.
The net proceeds of the offering were used to repay $70,000,000 of the outstanding balance on the revolving credit facilities and $21,500,000 of a construction note payable, together with $300,000 of accrued interest. The remaining proceeds were used to pay fees and commissions related to the offering and for other general corporate purposes.
At September 30, 2004, the Company had approximately $163,493,000 of secured indebtedness (excluding approximately $69,498,000 of secured indebtedness of consolidated entities—see Note 2) and approximately $159,071,000 of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.
Supplemental consolidating financial information of the Company, specifically including information for California Lyon, the issuer of the 10 3/4% Senior Notes and the 7 1/2% Senior Notes, and Delaware Lyon and the guarantor subsidiaries is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of California Lyon and the guarantor subsidiaries 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.
23
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING BALANCE SHEET
September 30, 2004
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||
ASSETS | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 19,720 | $ | 3,985 | $ | 16,410 | $ | — | $ | 40,115 | |||||||
Receivables | — | 11,246 | 15,274 | 1,627 | — | 28,147 | |||||||||||||
Real estate inventories | — | 856,675 | 1,806 | 320,829 | — | 1,179,310 | |||||||||||||
Investments in and advances to unconsolidated joint ventures | — | 15,940 | — | — | — | 15,940 | |||||||||||||
Property and equipment, net | — | 1,009 | 17,197 | — | — | 18,206 | |||||||||||||
Deferred loan costs | — | 11,865 | — | — | — | 11,865 | |||||||||||||
Goodwill | — | 5,896 | — | — | — | 5,896 | |||||||||||||
Other assets | — | 15,589 | 1,410 | — | — | 16,999 | |||||||||||||
Investments in subsidiaries | 347,628 | 157,091 | — | — | (504,719 | ) | — | ||||||||||||
Intercompany receivables | — | 1,867 | 69,919 | — | (71,786 | ) | — | ||||||||||||
$ | 347,628 | $ | 1,096,898 | $ | 109,591 | $ | 338,866 | $ | (576,505 | ) | $ | 1,316,478 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||
Accounts payable | $ | — | $ | 39,277 | $ | 317 | $ | 18,033 | $ | — | $ | 57,627 | |||||||
Accrued expenses | — | 88,196 | 3,401 | 7,945 | — | 99,542 | |||||||||||||
Notes payable | — | 150,746 | 13,676 | 68,569 | — | 232,991 | |||||||||||||
10 3/4% Senior Notes | — | 246,585 | — | — | — | 246,585 | |||||||||||||
7 1/2% Senior Notes | — | 150,000 | — | — | — | 150,000 | |||||||||||||
Intercompany payables | — | 66,853 | 1,867 | 3,066 | (71,786 | ) | — | ||||||||||||
Total liabilities | — | 741,657 | 19,261 | 97,613 | (71,786 | ) | 786,745 | ||||||||||||
Minority interest in consolidated entities | — | — | — | — | 182,105 | 182,105 | |||||||||||||
Stockholders’ equity | 347,628 | 355,241 | 90,330 | 241,253 | (686,824 | ) | 347,628 | ||||||||||||
$ | 347,628 | $ | 1,096,898 | $ | 109,591 | $ | 338,866 | $ | (576,505 | ) | $ | 1,316,478 | |||||||
24
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING BALANCE SHEET
December 31, 2003
(in thousands)
Unconsolidated | |||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||
ASSETS | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 13,684 | $ | 4,207 | $ | 6,246 | $ | — | $ | 24,137 | |||||||
Receivables | — | 22,215 | 21,213 | 2,783 | — | 46,211 | |||||||||||||
Real estate inventories | — | 538,910 | 1,094 | 158,043 | — | 698,047 | |||||||||||||
Investments in and advances to unconsolidated joint ventures | — | 45,613 | — | — | — | 45,613 | |||||||||||||
Property and equipment, net | — | 800 | 825 | — | — | 1,625 | |||||||||||||
Deferred loan costs | — | 9,041 | — | — | — | 9,041 | |||||||||||||
Goodwill | — | 5,896 | — | — | — | 5,896 | |||||||||||||
Other assets | — | 17,866 | 1,170 | — | — | 19,036 | |||||||||||||
Investments in subsidiaries | 252,040 | 105,495 | — | — | (357,535 | ) | — | ||||||||||||
Intercompany receivables | — | 1,190 | 69,830 | — | (71,020 | ) | — | ||||||||||||
$ | 252,040 | $ | 760,710 | $ | 98,339 | $ | 167,072 | $ | (428,555 | ) | $ | 849,606 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||
Accounts payable | $ | — | $ | 30,635 | $ | 421 | $ | 4,641 | $ | — | $ | 35,697 | |||||||
Accrued expenses | — | 87,779 | 3,909 | 948 | — | 92,636 | |||||||||||||
Notes payable | — | 49,176 | 9,621 | 21,534 | — | 80,331 | |||||||||||||
10 3/4% Senior Notes | — | 246,406 | — | — | — | 246,406 | |||||||||||||
Intercompany payables | — | 69,830 | 1,190 | — | (71,020 | ) | — | ||||||||||||
Total liabilities | — | 483,826 | 15,141 | 27,123 | (71,020 | ) | 455,070 | ||||||||||||
Minority interest in consolidated entities | — | — | — | — | 142,496 | 142,496 | |||||||||||||
Stockholders’ equity | 252,040 | 276,884 | 83,198 | 139,949 | (500,031 | ) | 252,040 | ||||||||||||
$ | 252,040 | $ | 760,710 | $ | 98,339 | $ | 167,072 | $ | (428,555 | ) | $ | 849,606 | |||||||
25
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 2004
(in thousands)
Unconsolidated | |||||||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||||
Operating revenue | |||||||||||||||||||||||
Sales | $ | — | $ | 301,836 | $ | 25,986 | $ | 153,231 | $ | (6,103 | ) | $ | 474,950 | ||||||||||
Management fees | — | 4,598 | — | — | (4,598 | ) | — | ||||||||||||||||
— | 306,434 | 25,986 | 153,231 | (10,701 | ) | 474,950 | |||||||||||||||||
Operating costs | |||||||||||||||||||||||
Cost of sales | — | (224,445 | ) | (21,208 | ) | (114,439 | ) | 10,701 | (349,391 | ) | |||||||||||||
Sales and marketing | — | (8,393 | ) | (1,077 | ) | (4,803 | ) | — | (14,273 | ) | |||||||||||||
General and administrative | — | (23,381 | ) | (155 | ) | — | — | (23,536 | ) | ||||||||||||||
Other | — | — | (658 | ) | — | — | (658 | ) | |||||||||||||||
— | (256,219 | ) | (23,098 | ) | (119,242 | ) | 10,701 | (387,858 | ) | ||||||||||||||
Equity in loss of unconsolidated joint ventures | — | (163 | ) | (105 | ) | — | — | (268 | ) | ||||||||||||||
Income from subsidiaries | 44,937 | 37,102 | — | — | (82,039 | ) | — | ||||||||||||||||
Minority equity in income of consolidated joint ventures | — | — | — | — | (13,858 | ) | (13,858 | ) | |||||||||||||||
Operating income | 44,937 | 87,154 | 2,783 | 33,989 | (95,897 | ) | 72,966 | ||||||||||||||||
Other income (expense), net | — | (51 | ) | 799 | 496 | — | 1,244 | ||||||||||||||||
Income before provision for income taxes | 44,937 | 87,103 | 3,582 | 34,485 | (95,897 | ) | 74,210 | ||||||||||||||||
Provision for income taxes | — | (29,106 | ) | — | (167 | ) | — | (29,273 | ) | ||||||||||||||
Net income | $ | 44,937 | $ | 57,997 | $ | 3,582 | $ | 34,318 | $ | (95,897 | ) | $ | 44,937 | ||||||||||
26
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 2003
(in thousands)
Unconsolidated | |||||||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||||
Operating revenue | |||||||||||||||||||||||
Sales | $ | — | $ | 193,836 | $ | 18,762 | $ | 97,443 | $ | (97,443 | ) | $ | 212,598 | ||||||||||
Management fees | — | 1,462 | — | — | — | 1,462 | |||||||||||||||||
— | 195,298 | 18,762 | 97,443 | (97,443 | ) | 214,060 | |||||||||||||||||
Operating costs | |||||||||||||||||||||||
Cost of sales | — | (159,904 | ) | (16,685 | ) | (75,700 | ) | 75,700 | (176,589 | ) | |||||||||||||
Sales and marketing | — | (6,943 | ) | (861 | ) | (300 | ) | — | (8,104 | ) | |||||||||||||
General and administrative | — | (10,441 | ) | (47 | ) | — | — | (10,488 | ) | ||||||||||||||
Other | — | — | (472 | ) | — | — | (472 | ) | |||||||||||||||
— | (177,288 | ) | (18,065 | ) | (76,000 | ) | 75,700 | (195,653 | ) | ||||||||||||||
Equity in income of unconsolidated joint ventures | — | 4,658 | — | — | — | 4,658 | |||||||||||||||||
Income from subsidiaries | 14,867 | 570 | — | — | (15,437 | ) | — | ||||||||||||||||
Minority equity in loss (income) of consolidated joint ventures | — | 35 | — | (21,743 | ) | 21,743 | 35 | ||||||||||||||||
Operating income (loss) | 14,867 | 23,273 | 697 | (300 | ) | (15,437 | ) | 23,100 | |||||||||||||||
Other income, net | — | 256 | 882 | 163 | — | 1,301 | |||||||||||||||||
Income (loss) before provision for income taxes | 14,867 | 23,529 | 1,579 | (137 | ) | (15,437 | ) | 24,401 | |||||||||||||||
Provision for income taxes | — | (9,534 | ) | — | — | — | (9,534 | ) | |||||||||||||||
Net income (loss) | $ | 14,867 | $ | 13,995 | $ | 1,579 | $ | (137 | ) | $ | (15,437 | ) | $ | 14,867 | |||||||||
27
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 2004
(in thousands)
Unconsolidated | |||||||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||||
Operating revenue | |||||||||||||||||||||||
Sales | $ | — | $ | 783,312 | $ | 62,996 | $ | 296,147 | $ | (28,474 | ) | $ | 1,113,981 | ||||||||||
Management fees | — | 8,789 | — | — | (8,789 | ) | — | ||||||||||||||||
— | 792,101 | 62,996 | 296,147 | (37,263 | ) | 1,113,981 | |||||||||||||||||
Operating costs | |||||||||||||||||||||||
Cost of sales | — | (603,607 | ) | (52,436 | ) | (227,701 | ) | 37,263 | (846,481 | ) | |||||||||||||
Sales and marketing | — | (24,330 | ) | (3,073 | ) | (10,162 | ) | — | (37,565 | ) | |||||||||||||
General and administrative | — | (53,979 | ) | (275 | ) | — | — | (54,254 | ) | ||||||||||||||
Other | — | — | (1,425 | ) | — | — | (1,425 | ) | |||||||||||||||
— | (681,916 | ) | (57,209 | ) | (237,863 | ) | 37,263 | (939,725 | ) | ||||||||||||||
Equity in income of unconsolidated joint ventures | — | (341 | ) | (110 | ) | — | — | (451 | ) | ||||||||||||||
Income from subsidiaries | 91,494 | 64,709 | — | — | (156,203 | ) | — | ||||||||||||||||
Minority equity in income of consolidated joint ventures | — | — | — | — | (24,770 | ) | (24,770 | ) | |||||||||||||||
Operating income (loss) | 91,494 | 174,553 | 5,677 | 58,284 | (180,973 | ) | 149,035 | ||||||||||||||||
Other income, net | — | 163 | 1,719 | 1,067 | — | 2,949 | |||||||||||||||||
Income (loss) before provision for income taxes | 91,494 | 174,716 | 7,396 | 59,351 | (180,973 | ) | 151,984 | ||||||||||||||||
Provision for income taxes | — | (60,133 | ) | — | (357 | ) | — | (60,490 | ) | ||||||||||||||
Net income (loss) | $ | 91,494 | $ | 114,583 | $ | 7,396 | $ | 58,994 | $ | (180,973 | ) | $ | 91,494 | ||||||||||
28
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 2003
(in thousands)
Unconsolidated | |||||||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | ||||||||||||||||||
Operating revenue | |||||||||||||||||||||||
Sales | $ | — | $ | 392,082 | $ | 47,620 | $ | 120,684 | $ | (120,684 | ) | $ | 439,702 | ||||||||||
Management fees | — | 5,553 | — | — | — | 5,553 | |||||||||||||||||
— | 397,635 | 47,620 | 120,684 | (120,684 | ) | 445,255 | |||||||||||||||||
Operating costs | |||||||||||||||||||||||
Cost of sales | — | (318,937 | ) | (42,271 | ) | (98,941 | ) | 98,941 | (361,208 | ) | |||||||||||||
Sales and marketing | — | (15,637 | ) | (2,105 | ) | (660 | ) | — | (18,402 | ) | |||||||||||||
General and administrative | — | (31,487 | ) | (167 | ) | — | — | (31,654 | ) | ||||||||||||||
Other | — | — | (1,394 | ) | — | — | (1,394 | ) | |||||||||||||||
— | (366,061 | ) | (45,937 | ) | (99,601 | ) | 98,941 | (412,658 | ) | ||||||||||||||
Equity in income of unconsolidated joint ventures | — | 19,734 | — | — | — | 19,734 | |||||||||||||||||
Income from subsidiaries | 33,541 | 1,472 | — | — | (35,013 | ) | — | ||||||||||||||||
Minority equity in loss (income) of consolidated joint ventures | — | 47 | — | (21,696 | ) | 21,696 | 47 | ||||||||||||||||
Operating income (loss) | 33,541 | 52,827 | 1,683 | (613 | ) | (35,060 | ) | 52,378 | |||||||||||||||
Other income, net | — | 1,209 | 2,043 | 368 | — | 3,620 | |||||||||||||||||
Income (loss) before provision for income taxes | 33,541 | 54,036 | 3,726 | (245 | ) | (35,060 | ) | 55,998 | |||||||||||||||
Provision for income taxes | — | (22,457 | ) | — | — | — | (22,457 | ) | |||||||||||||||
Net income (loss) | $ | 33,541 | $ | 31,579 | $ | 3,726 | $ | (245 | ) | $ | (35,060 | ) | $ | 33,541 | |||||||||
29
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2004
(in thousands)
Unconsolidated | ||||||||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminating Entries | Consolidated Company | |||||||||||||||||||
Operating activities | ||||||||||||||||||||||||
Net income | $ | 91,494 | $ | 114,583 | $ | 7,396 | $ | 58,994 | $ | (180,973 | ) | $ | 91,494 | |||||||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | — | 410 | 378 | — | — | 788 | ||||||||||||||||||
Equity in loss of unconsolidated joint ventures | — | 341 | 110 | — | — | 451 | ||||||||||||||||||
Minority equity in income of consolidated entities | — | — | — | — | 24,770 | 24,770 | ||||||||||||||||||
Equity in earnings of subsidiaries | (91,494 | ) | (64,709 | ) | — | — | 156,203 | — | ||||||||||||||||
Provision for income taxes | — | 60,133 | — | 357 | — | 60,490 | ||||||||||||||||||
Net changes in operating assets and liabilities: | ||||||||||||||||||||||||
Receivables | — | 10,969 | 5,939 | 3,415 | — | 20,323 | ||||||||||||||||||
Intercompany receivables/payables | — | — | (89 | ) | 3,066 | (2,977 | ) | — | ||||||||||||||||
Real estate inventories | — | (317,587 | ) | (712 | ) | (2,662 | ) | — | (320,961 | ) | ||||||||||||||
Deferred loan costs | — | (387 | ) | — | — | — | (387 | ) | ||||||||||||||||
Other assets | — | 2,277 | (240 | ) | — | — | 2,037 | |||||||||||||||||
Accounts payable | — | 8,642 | (104 | ) | 7,113 | — | 15,651 | |||||||||||||||||
Accrued expenses | — | (56,554 | ) | (508 | ) | 3,880 | — | (53,182 | ) | |||||||||||||||
Net cash (used in) provided by operating activities | — | (241,882 | ) | 12,170 | 74,163 | (2,977 | ) | (158,526 | ) | |||||||||||||||
Investing activities | ||||||||||||||||||||||||
Net change in investment in unconsolidated joint ventures | — | 3,028 | (110 | ) | — | — | 2,918 | |||||||||||||||||
Purchases of property and equipment | — | (619 | ) | (16,750 | ) | — | — | (17,369 | ) | |||||||||||||||
Investment in subsidiaries | — | 13,113 | — | — | (13,113 | ) | — | |||||||||||||||||
Advances (to) from affiliates | (932 | ) | (14,570 | ) | — | (26,304 | ) | 41,806 | — | |||||||||||||||
Net cash (used in) provided by investing activities | (932 | ) | 952 | (16,860 | ) | (26,304 | ) | 28,693 | (14,451 | ) | ||||||||||||||
Financing activities | ||||||||||||||||||||||||
Proceeds from borrowings on notes payable | — | 1,008,132 | 249,317 | — | — | 1,257,449 | ||||||||||||||||||
Principal payments on notes payable | — | (906,561 | ) | (245,262 | ) | (43,217 | ) | — | (1,195,040 | ) | ||||||||||||||
Issuance of 7 1/2% Senior Notes | — | 147,563 | — | — | — | 147,563 | ||||||||||||||||||
Common stock issued for exercised options | 932 | — | — | — | — | 932 | ||||||||||||||||||
Minority interest contributions (distributions), net | — | (2,168 | ) | — | (19,781 | ) | — | (21,949 | ) | |||||||||||||||
Advances from affiliates | — | — | 413 | 25,303 | (25,716 | ) | — | |||||||||||||||||
Net cash provided by (used in) financing activities | 932 | 246,966 | 4,468 | (37,695 | ) | (25,716 | ) | 188,955 | ||||||||||||||||
Net increase (decrease) in cash and cash equivalents | — | 6,036 | (222 | ) | 10,164 | — | 15,978 | |||||||||||||||||
Cash and cash equivalents at beginning of period | — | 13,684 | 4,207 | 6,246 | — | 24,137 | ||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 19,720 | $ | 3,985 | $ | 16,410 | $ | — | $ | 40,115 | ||||||||||||
30
Table of Contents
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2003
(in thousands)
Unconsolidated | Eliminating Entries | Consolidated Company | |||||||||||||||||||||
Delaware Lyon | California Lyon | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | ||||||||||||||||||||
Operating activities | |||||||||||||||||||||||
Net income (loss) | $ 33,541 | $ | 31,579 | $ | 3,726 | $ | (245 | ) | $ | (35,060 | ) | $ | 33,541 | ||||||||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |||||||||||||||||||||||
Depreciation and amortization | — | 555 | 313 | — | — | 868 | |||||||||||||||||
Equity in income of unconsolidated joint ventures | — | (19,734 | ) | — | — | — | (19,734 | ) | |||||||||||||||
Minority equity in income of consolidated joint ventures | — | — | — | — | (47 | ) | (47 | ) | |||||||||||||||
Equity in earnings of subsidiaries | (33,541 | ) | (1,472 | ) | — | — | 35,013 | — | |||||||||||||||
Provision for income taxes | — | 22,457 | — | — | — | 22,457 | |||||||||||||||||
Net changes in operating assets and liabilities: | |||||||||||||||||||||||
Receivables | — | (1,720 | ) | 11,593 | (1,351 | ) | — | 8,522 | |||||||||||||||
Intercompany receivables/payables | (586 | ) | 586 | — | — | — | — | ||||||||||||||||
Real estate inventories | — | (233,064 | ) | (15 | ) | (31,391 | ) | — | (264,470 | ) | |||||||||||||
Deferred loan costs | 586 | (8,154 | ) | — | — | — | (7,568 | ) | |||||||||||||||
Other assets | — | (3,582 | ) | 26 | — | — | (3,556 | ) | |||||||||||||||
Accounts payable | — | 20,511 | (1,873 | ) | 1,602 | — | 20,240 | ||||||||||||||||
Accrued expenses | — | (6,374 | ) | (845 | ) | (7 | ) | — | (7,226 | ) | |||||||||||||
Net cash (used in) provided by operating activities | — | (198,412 | ) | 12,925 | (31,392 | ) | (94 | ) | (216,973 | ) | |||||||||||||
Investing activities | |||||||||||||||||||||||
Net change in investment in unconsolidated joint ventures | — | 37,951 | 195 | — | — | 38,146 | |||||||||||||||||
Purchases of property and equipment | — | (252 | ) | (31 | ) | — | — | (283 | ) | ||||||||||||||
Investment in subsidiaries | — | (3,687 | ) | — | — | 3,687 | — | ||||||||||||||||
Advances from (to) affiliates | 75,624 | (74,234 | ) | — | — | (1,390 | ) | — | |||||||||||||||
Net cash provided by (used in) investing activities | 75,624 | (40,222 | ) | 164 | — | 2,297 | 37,863 | ||||||||||||||||
Financing activities | |||||||||||||||||||||||
Proceeds from borrowings on notes payable | — | 470,285 | 247,672 | — | — | 717,957 | |||||||||||||||||
Principal payments on notes payable | — | (472,699 | ) | (258,014 | ) | — | — | (730,713 | ) | ||||||||||||||
Repayment of 12 1/2% Senior Notes | (70,279 | ) | — | — | — | — | (70,279 | ) | |||||||||||||||
Issuance of 10 3/4% Senior Notes | — | 246,233 | — | — | — | 246,233 | |||||||||||||||||
Common stock issued for exercised options | 1,835 | — | — | — | — | 1,835 | |||||||||||||||||
Common stock purchased | (7,180 | ) | — | — | — | — | (7,180 | ) | |||||||||||||||
Minority interest contributions, net | — | — | — | 28,776 | — | 28,776 | |||||||||||||||||
Advances (to) from affiliates | — | — | (1,589 | ) | 3,792 | (2,203 | ) | — | |||||||||||||||
Net cash (used in) provided by financing activities | (75,624 | ) | 243,819 | (11,931 | ) | 32,568 | (2,203 | ) | 186,629 | ||||||||||||||
Net increase in cash and cash equivalents | — | 5,185 | 1,158 | 1,176 | — | 7,519 | |||||||||||||||||
Cash and cash equivalents at beginning of period | — | 11,524 | 2,071 | 3,099 | — | 16,694 | |||||||||||||||||
Cash and cash equivalents at end of period | $ — | $ | 16,709 | $ | 3,229 | $ | 4,275 | $ | — | $ | 24,213 | ||||||||||||
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 5 — Related Party Transactions
A portion of the net proceeds of the Company’s offering of 10 3/4% Senior Notes (see Note 4) was used to repay all of the Company’s 12 1/2% Senior Notes, including $30,000,000 in principal amount held by General William Lyon, Chairman and Chief Executive Officer, and the trust of which his son, William H. Lyon, is the sole beneficiary, $2,323,000 held by Wade H. Cable, President and Chief Operating Officer, and $1,000,000 held by William H. McFarland, a director.
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 provide for an initial option payment of $1,000,000 and a rolling option takedown of the lots. Phase takedowns of approximately 20 lots each were anticipated to occur at periodic intervals for each of several product types through September 2004. As of September 30, 2004 all lots were purchased under this agreement. 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 $2,731,000 has been paid through September 30, 2004, including $658,000 during the three and nine months ended September 30, 2004. During the nine months ended September 30, 2004, the Company purchased 92 lots under this agreement for a total purchase price of $1,984,000. During the three and nine months ended September 30, 2003, the Company purchased 72 lots under this agreement for a total purchase price of $2,507,000. This land acquisition qualified 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 (“Old Indenture”). Pursuant to the terms of the Old Indenture, the Company 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 delivered to the Trustee under the Old 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 was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company 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 were anticipated to occur at one to two month intervals through March 2004. As of March 31, 2004, all lots have been purchased under this agreement for a purchase price of $16,660,000. Had the Company purchased the property directly, the acquisition would have qualified as an affiliate transaction under the Old Indenture. Even though the Company’s agreement is not with William Lyon, the Company chose to treat it as an affiliate transaction. Pursuant to the terms of the Old Indenture, the Company 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 delivered to the Trustee under the Old 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 was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Old 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.
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
For the three months ended September 30, 2004 and 2003, the Company incurred reimbursable on-site labor costs of $30,000 and $56,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $33,000 was due to the Company at September 30, 2004. For the nine months ended September 30, 2004 and 2003, the Company incurred reimbursable on-site labor costs of $135,000 and $205,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon.
For the three months ended September 30, 2004 and 2003, the Company incurred charges of $189,000 and $189,000, respectively, 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, 2004 and 2003, the Company incurred charges of $567,000 and $565,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.
During the three months ended September 30, 2004 and 2003, the Company incurred charges of $15,000 and $69,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon. During the nine months ended September 30, 2004 and 2003, the Company incurred charges of $115,000 and $240,000 respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon.
Effective September 1, 2004, the Company entered into an aircraft consulting and management agreement with an affiliate (the “Affiliate”) of William Lyon to operate and manage the Company’s aircraft which was placed in service effective as of September 1, 2004. The terms of the agreement provide that the Affiliate shall consult and render its advice and management services to the Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Company’s business plan for the aircraft includes (i) use by Company executives for traveling on Company business to the Company’s divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to William Lyon personally. Charter services for outside third parties and William Lyon personally are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliate’s published rates for maintenance, inspections and repairs in effect at the time such work is completed.
Pursuant to the agreement above, the Company had earned revenue of $71,550 for charter services provided to William Lyon personally, as of September 30, 2004.
On May 28, 2004 and June 18, 2004, William Lyon and his wife, Willa Dean Lyon, purchased two of the Company’s homes for a total purchase price of approximately $877,000. The purchase prices were based on the prices offered to third parties and no discounts were given. The homes were purchased for use as residences by certain family members.
The Company offers home mortgage loans to its employees and directors through its mortgage company subsidiary, Duxford Financial, Inc. These loans are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans do not involve more than the normal risk of collectibility or present other unfavorable features and are sold to investors typically within 7 to 15 days.
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 6 — 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. Unless terminated earlier by resolution of the Company’s Board of Directors, this program will expire when the Company has repurchased all shares authorized for repurchase thereunder. Under this program, 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 2004, 1,218,400 shares had been purchased and retired under this program in the amount of $26,750,000. No shares were purchased under this program during the three and nine months ended September 30, 2004.
During the three and nine months ended September 30, 2004, certain officers and directors exercised options to purchase 3,500 and 92,964 shares, respectively 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, 2004, certain officers exercised options to purchase 4,166 shares of the Company’s common stock at a price of $9.10 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the nine months ended September 30, 2004, certain officers exercised options to purchase 6,666 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.
During the three and nine months ended September 30, 2003, certain officers and directors exercised options to purchase 43,532 and 198,793 shares, respectively, 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 three and nine months ended September 30, 2003, certain officers exercised options to purchase 5,000 and 8,333 shares, respectively 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.
Note 7 — Commitments and Contingencies
The Company’s commitments and contingent liabilities include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
The Company is a defendant in various lawsuits related to its normal business activities. In the opinion of management, disposition of the various lawsuits will have no material effect on the consolidated financial statements of the Company.
See Note 2 for information relating to the Company’s land banking arrangements.
In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of Statement 91-10, “Accounting
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WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
for Special Assessment and Tax Increment Financing Entities” issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, and recorded as liabilities in the Company’s consolidated balance sheet, if the amounts are fixed and determinable.
As of September 30, 2004, the Company had $28,375,000 of outstanding irrevocable standby letters of credit to guarantee the Company’s financial obligations under certain land banking arrangements, joint venture agreements and other contractual arrangements in the normal course of business. The beneficiary may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. These letters of credit have a stated term of up to two years and have varying maturities through 2005, at which time the Company may be required to renew the letters of credit to coincide with the term of the respective arrangement.
The Company has provided unsecured environmental indemnities to certain lenders, joint venture partners and land sellers. In each case, the Company has performed due diligence on the potential environmental risks, including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate the Company to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, the Company could have recourse against other previous owners.
See Notes 3 and 4 for additional information relating to the Company’s guarantee arrangements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2003, as amended. As described in Note 2 of Notes to Consolidated Financial Statements included in Item 1, effective January 1, 2004, the Company was required to consolidate certain variable interest entities (VIEs) in accordance with Interpretation No. 46,Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”). Prior period information has not been restated to conform to the presentation in the current period. The adoption of Interpretation No. 46 has not affected the Company’s consolidated net income. As used herein, “on a combined basis” means the total of operations in wholly-owned projects and in joint ventures.
Results of Operations
Overview and Recent Results
Selected financial and operating information for the Company including its wholly-owned projects and joint ventures as of and for the periods presented is as follows:
Three Months Ended September 30, | ||||||||||||||||||||||
2004 | 2003 | |||||||||||||||||||||
Wholly-Owned | Joint Ventures | Combined Total | Wholly-Owned | Joint Ventures | Combined Total | |||||||||||||||||
Selected Financial Information (dollars in thousands) | ||||||||||||||||||||||
Homes closed | 574 | 290 | 577 | 112 | ||||||||||||||||||
Home sales revenue | $ | 321,091 | $ | 153,231 | $ | 212,598 | $ | 51,338 | ||||||||||||||
Cost of sales | (238,765 | ) | (109,841 | ) | (176,553 | ) | (39,538 | ) | ||||||||||||||
Gross margin | $ | 82,326 | $ | 43,390 | $ | 36,045 | $ | 11,800 | ||||||||||||||
Gross margin percentage | 25.6 | % | 28.3 | % | 17.0 | % | 23.0 | % | ||||||||||||||
Number of homes closed | ||||||||||||||||||||||
California | 338 | 290 | 628 | 336 | 112 | 448 | ||||||||||||||||
Arizona | 97 | — | 97 | 94 | — | 94 | ||||||||||||||||
Nevada | 139 | — | 139 | 147 | — | 147 | ||||||||||||||||
Total | 574 | 290 | 864 | 577 | 112 | 689 | ||||||||||||||||
Average sales price | ||||||||||||||||||||||
California | $ | 737,000 | $ | 528,400 | $ | 640,700 | $ | 447,400 | $ | 458,400 | $ | 450,200 | ||||||||||
Arizona | 269,200 | — | 269,200 | 199,600 | — | 199,600 | ||||||||||||||||
Nevada | 329,900 | — | 329,900 | 295,900 | — | 295,900 | ||||||||||||||||
Total | $ | 559,400 | $ | 528,400 | $ | 549,000 | $ | 368,500 | $ | 458,400 | $ | 383,100 | ||||||||||
Number of net new home orders | ||||||||||||||||||||||
California | 159 | 159 | 318 | 441 | 219 | 660 | ||||||||||||||||
Arizona | 192 | — | 192 | 90 | — | 90 | ||||||||||||||||
Nevada | 149 | — | 149 | 227 | — | 227 | ||||||||||||||||
Total | 500 | 159 | 659 | 758 | 219 | 977 | ||||||||||||||||
Average number of sales locations during period | ||||||||||||||||||||||
California | 15 | 11 | 26 | 22 | 12 | 34 | ||||||||||||||||
Arizona | 7 | — | 7 | 6 | — | 6 | ||||||||||||||||
Nevada | 7 | — | 7 | 8 | — | 8 | ||||||||||||||||
Total | 29 | 11 | 40 | 36 | 12 | 48 | ||||||||||||||||
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As of September 30, | ||||||||||||||||||
2004 | 2003 | |||||||||||||||||
Wholly-Owned | Joint Ventures | Combined Total | Wholly-Owned | Joint Ventures | Combined Total | |||||||||||||
Backlog of homes sold but not closed at end of period | ||||||||||||||||||
California | 587 | 535 | 1,122 | 863 | 382 | 1,245 | ||||||||||||
Arizona | 518 | — | 518 | 230 | — | 230 | ||||||||||||
Nevada | 243 | — | 243 | 320 | — | 320 | ||||||||||||
Total | 1,348 | 535 | 1,883 | 1,413 | 382 | 1,795 | ||||||||||||
Dollar amount of homes sold but not closed at end of period (dollars in thousands) | ||||||||||||||||||
California | $ | 494,028 | $ | 316,187 | $ | 810,215 | $ | 472,223 | $ | 178,263 | $ | 650,486 | ||||||
Arizona | 137,967 | — | 137,967 | 46,593 | — | 46,593 | ||||||||||||
Nevada | 94,390 | — | 94,390 | 100,892 | — | 100,892 | ||||||||||||
Total | $ | 726,385 | $ | 316,187 | $ | 1,042,572 | $ | 619,708 | $ | 178,263 | $ | 797,971 | ||||||
Lots controlled at end of period | ||||||||||||||||||
Owned lots | ||||||||||||||||||
California | 2,659 | 1,786 | 4,445 | 2,419 | 1,429 | 3,848 | ||||||||||||
Arizona | 4,069 | — | 4,069 | 967 | — | 967 | ||||||||||||
Nevada | 1,256 | — | 1,256 | 1,501 | — | 1,501 | ||||||||||||
Total | 7,984 | 1,786 | 9,770 | 4,887 | 1,429 | 6,316 | ||||||||||||
Optioned lots(1) | ||||||||||||||||||
California | 4,817 | 4,297 | ||||||||||||||||
Arizona | 4,038 | 4,165 | ||||||||||||||||
Nevada | 1,411 | 138 | ||||||||||||||||
Total | 10,266 | 8,600 | ||||||||||||||||
Total lots controlled | ||||||||||||||||||
California | 9,262 | 8,145 | ||||||||||||||||
Arizona | 8,107 | 5,132 | ||||||||||||||||
Nevada | 2,667 | 1,639 | ||||||||||||||||
Total | 20,036 | 14,916 | ||||||||||||||||
(1) | Optioned lots may be purchased by the Company as wholly-owned projects or may be purchased by newly formed joint ventures. |
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Nine Months Ended September 30, | ||||||||||||||||||||||
2004 | 2003 | |||||||||||||||||||||
Wholly-owned | Joint Ventures | Combined Total | Wholly-owned | Joint Ventures | Combined Total | |||||||||||||||||
Selected Financial Information (dollars in thousands) | ||||||||||||||||||||||
Homes closed | 1,674 | 587 | 1,129 | 385 | ||||||||||||||||||
Home sales revenue | $ | 799,783 | $ | 296,147 | $ | 422,702 | $ | 190,677 | ||||||||||||||
Cost of sales | (612,958 | ) | (218,912 | ) | (350,370 | ) | (147,215 | ) | ||||||||||||||
Gross margin | $ | 186,825 | $ | 77,235 | $ | 72,332 | $ | 43,462 | ||||||||||||||
Gross margin percentage | 23.4 | % | 26.1 | % | 17.1 | % | 22.8 | % | ||||||||||||||
Number of homes closed | ||||||||||||||||||||||
California | 899 | 587 | 1,486 | 583 | 385 | 968 | ||||||||||||||||
Arizona | 266 | — | 266 | 218 | — | 218 | ||||||||||||||||
Nevada | 509 | — | 509 | 328 | — | 328 | ||||||||||||||||
Total | 1,674 | 587 | 2,261 | 1,129 | 385 | 1,514 | ||||||||||||||||
Average sales price | ||||||||||||||||||||||
California | $ | 644,600 | $ | 504,500 | $ | 589,200 | $ | 477,600 | $ | 495,300 | $ | 484,600 | ||||||||||
Arizona | 237,300 | — | 237,300 | 216,700 | — | 216,700 | ||||||||||||||||
Nevada | 308,300 | — | 308,300 | 295,800 | — | 295,800 | ||||||||||||||||
Total | $ | 477,800 | $ | 504,500 | $ | 484,700 | $ | 374,400 | $ | 495,300 | $ | 405,100 | ||||||||||
Number of net new home orders | ||||||||||||||||||||||
California | 974 | 808 | 1,782 | 1,246 | 572 | 1,818 | ||||||||||||||||
Arizona | 577 | — | 577 | 311 | — | 311 | ||||||||||||||||
Nevada | 519 | — | 519 | 553 | — | 553 | ||||||||||||||||
Total | 2,070 | 808 | 2,878 | 2,110 | 572 | 2,682 | ||||||||||||||||
Average number of sales locations during period | ||||||||||||||||||||||
California | 18 | 12 | 30 | 19 | 10 | 29 | ||||||||||||||||
Arizona | 6 | — | 6 | 6 | — | 6 | ||||||||||||||||
Nevada | 7 | — | 7 | 7 | — | 7 | ||||||||||||||||
Total | 31 | 12 | 43 | 32 | 10 | 42 | ||||||||||||||||
On a combined basis, the number of net new home orders for the nine months ended September 30, 2004 increased 7.3% to 2,878 homes from 2,682 homes for the nine months ended September 30, 2003. The number of homes closed on a combined basis for the nine months ended September 30, 2004 increased 49.3% to 2,261 homes from 1,514 homes for the nine months ended September 30, 2003. On a combined basis, the backlog of homes sold but not closed as of September 30, 2004 was 1,883, up 4.9% from 1,795 a year earlier, down 9.8% from 2,088 homes at June 30, 2004.
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, 2004 was $1.0 billion, up 30.7% from $798.0 million as of September 30, 2003 and down 8.6% from $1.1 billion as of June 30, 2004. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 15% during the nine months ended September 30, 2004 as compared to 18% during the nine months ended September 30, 2003. The inventory of completed and unsold homes was 10 homes as of September 30, 2004.
The Company experienced a 2.4% increase in the average number of sales locations to 43 for the nine months ended September 30, 2004 as compared to 42 for the nine months ended September 30, 2003 and the Company’s number of new home orders per average sales location increased to 66.9 for the nine months ended September 30, 2004 as compared to 63.9 for the nine months ended September 30, 2003. In many of the markets in which the Company operates, the demand for housing exceeds the current supply of housing.
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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, 2004 to Three Months Ended September 30, 2003
Consolidated operating revenue for the three months ended September 30, 2004 was $475.0 million, an increase of $260.9 million, or 121.8%, from consolidated operating revenue of $214.1 million for the three months ended September 30, 2003. Revenue from sales of wholly-owned homes increased $108.5 million, or 51%, to $321.1 million in the 2004 period from $212.6 million in the 2003 period. The increase was primarily due to an increase in the average sales price of wholly-owned homes closed to $559,400 in the 2004 period from $368,500 in the 2003 period. In addition, consolidated operating revenue during the three months ended September 30, 2004 includes revenue from sales of homes of $153.2 million from consolidated joint ventures with no comparable amount included in consolidated operating revenue in the same period in 2003, due to the adoption of Interpretation No. 46 as described above. Revenue from sales of lots, land and other increased to $0.6 million in the 2004 period with no comparable amount in the 2003 period due to the bulk sales of land. Management fee income increased by $3.1 million to $4.6 million in the 2004 period from $1.5 million in the 2003 period, primarily due to the increase in the number of joint venture units closed to 290 in the 2004 period from 112 in the 2003 period; however, upon consolidation of the joint ventures in connection with Interpretation No. 46 described above, management fee income is eliminated with the related cost of sales. The increase in the average sales price of units closed in wholly-owned projects was due primarily to (i) price appreciation in certain projects and (ii) a change in product mix.
Total operating income increased to $73.0 million in the 2004 period from $23.1 million in the 2003 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $89.7 million to $125.7 million in the 2004 period from $36.0 million in the 2003 period primarily due to (i) an increase in the average sales price of wholly-owned homes closed to $559,400 in the 2004 period from $368,500 in the 2003 period, (ii) an increase in the wholly-owned gross margin percentages to 25.6% in the 2004 period from 17.0% in the 2003 period and (iii) gross margin of $43.4 million from consolidated joint ventures in 2004 with no comparable amount included in 2003, due to the adoption of Interpretation No. 46 as described above. The increase in the period-over-period gross margin percentage reflects the impact of increased sales prices due to strong demand for housing in many of the Company’s markets. Sales and marketing expenses increased by $6.2 million to $14.3 million in the 2004 period from $8.1 million in the 2003 period primarily due to the consolidation of certain joint ventures due to the adoption of Interpretation No. 46 as described above.
General and administrative expenses increased by $13.0 million to $23.5 million in the 2004 period from $10.5 million in the 2003 period, primarily as a result of an increase in accrued bonuses due to higher levels of pre-tax, pre-bonus income in the 2004 period as compared to the 2003 period. Other operating costs consist of initial start-up and operating losses realized by golf course operations at certain of the Company’s projects which increased to $0.7 million in the 2004 period from $0.5 million in the 2003 period. Equity in (loss) income from unconsolidated joint ventures decreased to $(0.3) million in the 2004 period from $4.7 million in the comparable period for 2003, primarily as a result of the consolidation of certain joint ventures in 2004 due to the adoption of Interpretation No. 46 as described above. Minority equity in income of consolidated entities was $13.9 million in the 2004 period with no comparable amount in the 2003 period due to the adoption of Interpretation No. 46 as described above.
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Total interest incurred increased to $14.9 million in the 2004 period from $12.0 million in the 2003 period primarily as a result of an increase in the average principal balance of debt outstanding in the 2004 period compared to the 2003 period, including the issuance of the 7 1/2% Senior Notes (see below) and the debt associated with the consolidation of certain entities due to the adoption of Interpretation No. 46 as described above. All interest incurred was capitalized in the 2004 and 2003 periods.
As a result of the above factors, net income increased to $44.9 million in the 2004 period from $14.9 million in the 2003 period.
Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30, 2003
Consolidated operating revenue for the nine months ended September 30, 2004 was $1.1 billion, an increase of $668.7 million, or 150%, from consolidated operating revenue of $445.3 million for the nine months ended September 30, 2003. Revenue from sales of wholly-owned homes increased $377.1 million, or 89.2%, to $799.8 million in the 2004 period from $422.7 million in the 2003 period. The increase was primarily due to an increase in the average sales price of wholly-owned homes closed to $477,800 in the 2004 period from $374,400 in the 2003 period. In addition, consolidated operating revenue during the nine months ended September 30, 2004 includes revenue from sales of homes of $296.1 million from consolidated joint ventures with no comparable amount included in consolidated operating revenue in the same period in 2003, due to the adoption of Interpretation No. 46 as described above. Revenue from sales of lots, land and other increased to $18.1 million in the 2004 period from $17.0 million in the 2003 period due to an increase in bulk sales of land. Management fee income increased by $3.2 million to $8.8 million in the 2004 period from $5.6 million in the 2003 period primarily due to the increase in the number of joint venture units closed to 587 in the 2004 period from 385 in the 2003 period; however, upon consolidation of the joint ventures in connection with Interpretation No. 46 described above, management fee income is eliminated with the related cost of sales. The increase in the average sales price of units closed in wholly-owned projects was due primarily to (i) price appreciation in certain projects and (ii) a change in product mix.
Total operating income increased to $149.0 million in the 2004 period from $52.4 million in the 2003 period. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $191.8 million to $264.1 million in the 2004 period from $72.3 million in the 2003 period primarily due to (i) an increase in the number of wholly-owned homes closed to 1,674 in the 2004 period from 1,129 in the 2003 period, (ii) an increase in the average sales price of wholly-owned homes closed to $477,800 in the 2004 period from $374,400 in the 2003 period, (iii) an increase in the wholly-owned gross margin percentages to 23.4% in the 2004 period from 17.1% in the 2003 period and (iv) gross margin of $77.2 million from consolidated joint ventures in 2004 with no comparable amount included in 2003, due to the adoption of Interpretation No. 46 as described above. The increase in the period-over-period gross margin percentage reflects the impact of increased sales prices due to strong demand for housing in many of the Company’s markets. The excess of revenue from the sales of lots, land and other over the related cost of sales (gross margin) decreased by $2.8 million to $3.4 million in the 2004 period compared to $6.2 million in the 2003 period. Sales and marketing expenses increased by $19.2 million to $37.6 million in the 2004 period from $18.4 million in the 2003 period primarily due to the consolidation of certain joint ventures due to the adoption of Interpretation No. 46 as described above.
General and administrative expenses increased by $22.6 million to $54.3 million in the 2004 period from $31.7 million in the 2003 period, primarily as a result of an increase in accrued bonuses due to higher levels of pre-tax, pre-bonus income in the 2004 period as compared to the 2003 period. Other operating costs consist of initial start-up and operating losses realized by golf course operations at certain of the Company’s projects which remained at $1.4 million in the 2004 and 2003 period. Equity in (loss) income from unconsolidated joint ventures decreased to $(0.5) million in the 2004 period from $19.7 million in the comparable period for 2003, primarily as a result of the consolidation of certain joint ventures in 2004 due to the adoption of Interpretation No. 46 as described above. Minority equity in income of consolidated entities was $24.8 million in the 2004 period compared to a loss of $(0.04) in the 2004 period due to the adoption of Interpretation No. 46 as described above.
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Total interest incurred increased to $44.1 million in the 2004 period from $34.2 million in the 2003 period primarily as a result of an increase in the average principal balance of debt outstanding in the 2004 period compared to the 2003 period, including the issuance of 7 1/2% Senior Notes (see below) and the debt associated with the consolidation of certain entities due to the adoption of Interpretation No. 46 as described above. All interest incurred was capitalized in the 2004 and 2003 periods.
As a result of the foregoing factors, the Company’s net income increased to $91.5 million in the 2004 period from $33.5 million in the 2003 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 10 3/4% Senior Notes and 7 1/2% Senior Notes and construction notes payable and maintains secured revolving credit facilities (“Revolving Credit Facilities”). The Company has financed, and may in the future finance, 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 either nationally or in regions in which the Company operates, the outbreak of war or other hostilities involving the United States, mortgage and other interest rates, changes in prices of homebuilding materials, 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, the timing of receipt of regulatory approvals and the opening of projects, and the availability and cost of land for future development.
10 3/4% Senior Notes
The Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250.0 million of Senior Notes which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246.2 million. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net of the unamortized discount in the accompanying consolidated balance sheets.
The 10 3/4% Senior Notes due April 1, 2013 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”) which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. Interest on the 10 3/4% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
Except as set forth in the Indenture governing the 10 3/4% Senior Notes (“10 3/4% Senior Notes Indenture”), the 10 3/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 10 3/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.
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Upon a change of control as described in the 10 3/4% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
If the Company’s consolidated tangible net worth falls below $75.0 million for any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of the notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.
California Lyon is 100% owned by Delaware Lyon. Each subsidiary guarantor is 100% owned by California Lyon or Delaware Lyon. All guarantees are full and unconditional and all guarantees are joint and several. There are no significant restrictions on the ability of Delaware Lyon or any guarantor to obtain funds from subsidiaries by dividend or loan.
The 10 3/4% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyon’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of Delaware Lyon’s and California Lyon’s assets. These covenants are subject to a number of important exceptions and qualifications as described in the 10 3/4% Senior Notes Indenture.
The foregoing summary is not a complete description of the terms of the 10 3/4% Senior Notes and is qualified in its entirety by reference to the 10 3/4% Senior Notes Indenture.
The net proceeds of the offering were used as follows (dollars in thousands):
Repayment of revolving credit facilities | $ | 104,354 | |
Repayment of 12 1/2% Senior Notes | 70,279 | ||
Repayment of construction notes payable | 28,000 | ||
Repayment of purchase money notes payable—land acquisitions | 26,000 | ||
Repayment of unsecured line of credit | 9,500 | ||
Underwriting discount | 6,875 | ||
Offering costs | 1,225 | ||
$ | 246,233 | ||
7 1/2% Senior Notes
On February 6, 2004, the Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) closed its offering of $150.0 million principal amount of 7 1/2% Senior Notes due 2014. The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes have not and will not be registered under the Securities Act of 1933 and, unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. The notes were issued at par, resulting in net proceeds to the Company of approximately $147.6 million. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes (“Exchange Notes”) having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150.0 million aggregate principal amount of 7 1/2% Senior Notes due 2014, which are not registered under the Securities Act of 1933, for a like amount of its new 7 1/2% Senior Notes due 2014, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated July 16, 2004. The exchange offer
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was completed for the full principal amount of the 7 1/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. California Lyon will not receive any proceeds from the exchange offer and the exchange will not be a taxable event for U.S. federal income tax purposes. The new notes have been listed on the New York Stock Exchange.
The 7 1/2% Senior Notes due February 15, 2014 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by Delaware Lyon, which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness. Interest on the 7 1/2% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Except as set forth in the Indenture governing the 7 1/2% Senior Notes (“7 1/2% Senior Notes Indenture”), the 7 1/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 7 1/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.
Upon a change of control as described in the 7 1/2% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
If the Company’s consolidated tangible net worth falls below $75.0 million for any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of the notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.
California Lyon is 100% owned by Delaware Lyon. Each subsidiary guarantor is 100% owned by California Lyon or Delaware Lyon. All guarantees are full and unconditional and all guarantees are joint and several. There are no significant restrictions on the ability of Delaware Lyon or any guarantor to obtain funds from subsidiaries by dividend or loan.
The 7 1/2% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyon’s restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of Delaware Lyon’s and California Lyon’s assets. These covenants are subject to a number of important exceptions and qualifications as described in the 7 1/2% Senior Notes Indenture.
The foregoing summary is not a complete description of the 7 1/2% Senior Notes and is qualified in its entirety by reference to the 7 1/2% Senior Notes Indenture.
The net proceeds of the offering were used to repay $70.0 million of the outstanding balance on the revolving credit facilities and $21.5 million of a construction note payable, together with $0.3 million of accrued interest. The remaining proceeds were used to pay fees and commissions related to the offering and for other general corporate purposes.
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At September 30, 2004, the Company had approximately $163.5 million of secured indebtedness (excluding approximately $69.5 million of secured indebtedness of consolidated entities) and approximately $159.1 million of additional secured indebtedness available to be borrowed under the Company’s credit facilities, as limited by the Company’s borrowing base formulas.
Revolving Credit Facilities
As of September 30, 2004, the Company has four revolving credit facilities which have an aggregate maximum loan commitment of $395.0 million and mature at various dates through 2008. A $125.0 million revolving line of credit “expires” in November 2005. After that date the Company may borrow amounts, subject to applicable borrowing base and concentration limitations, under this facility solely to complete the construction of residences begun prior to such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last residence, the construction of which was financed with proceeds of this loan, is sold or the date upon which such last residence is excluded from the borrowing base by the passage of time under this facility. Of the $125.0 million maximum commitment amount, $25.0 million is not available for disbursement and the loan amount is limited to $100.0 million until the lender consents, which consent may be withheld in its sole discretion, to make such funds available. On October 6, 2004, the lender agreed to increase the disbursement availability of the revolving line of credit to the full $125.0 million. A $150.0 million revolving line of credit finally matures in September 2008, although after September 2006, advances under this facility may only be made to complete projects approved on or before such date. A $50.0 million revolving line of credit initially “matures” in September 2006, after which the amounts available for borrowing begin to reduce with a final maturity date of September 2008. A $70.0 million revolving line of credit became effective in June 2004, and matures in June 2007, although after June 2007, maturity may be extended upon written request by the Company. Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Company’s investment in a project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which are detailed below. Outstanding advances bear interest at various rates, which approximate the prime rate. As of September 30, 2004, $149.8 million was outstanding under these credit facilities, with a weighted-average interest rate of 4.773%. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of each month. As of September 30, 2004, the undrawn availability under these facilities was $159.1 million as limited by the borrowing base formulas. Delaware Lyon has guaranteed on an unsecured basis California Lyon’s obligations under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the $125.0 million bank line of credit.
Under the revolving credit facilities, we are required to comply with a number of covenants, the most restrictive of which require Delaware Lyon to maintain:
Ø | A tangible net worth, as defined, of $120.0 million, adjusted upwards quarterly by 50% of Delaware Lyon’s quarterly net income after March 31, 2002, |
Ø | A ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1; and |
Ø | Minimum liquidity, as defined, of at least $10.0 million. |
As of and for the period ending September 30, 2004, the Company is in compliance with these covenants.
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Construction Notes Payable
At September 30, 2004, the Company had construction notes payable on certain consolidated entities amounting to $69.5 million. The construction notes have various maturity dates and bear interest at rates ranging from prime plus 0.25% to prime plus 0.75% at September 30, 2004. Interest is calculated on the average daily balance and is paid following the end of each month.
Revolving Mortgage Warehouse Credit Facilities
The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2005, provides for revolving loans of up to $30.0 million outstanding, $20.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $10.0 million is not committed (lender advances are optional even if stated conditions are otherwise satisfied). On August 29, 2003, the Company’s mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $10.0 million credit facility which matures in August 2006. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by the Company. At September 30, 2004 the outstanding balance under these facilities was $13.7 million.
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, thereby 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 equal to 20% or less 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. 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. As described above, Interpretation No. 46 requires the consolidation of the assets, liabilities and operations of two of the Company’s land banking arrangements including, as of September 30, 2004, real estate inventories of $32,898,000, and notes payable of $929,000. Summary information with respect to the Company’s consolidated land banking arrangements is as follows as of September 30, 2004 (dollars in thousands):
Total number of consolidated land banking projects | 2 | ||
Total number of lots | 508 | ||
Total purchase price | $ | 77,543 | |
Balance of lots still under option and not purchased: | |||
Number of lots | 226 | ||
Purchase price | $ | 38,177 | |
Forfeited deposits and penalties if lots were not purchased | $ | 12,592 | |
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Joint Venture Financing
The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in “Recently Issued Accounting Standards”, in accordance with Financial Accounting Standards Board Interpretation No. 46,Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”) certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the three and nine months ended September 30, 2004. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary 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. The Company generally receives, after partners’ priority returns and returns of partners’ capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the joint ventures whose financial statements have been consolidated with the Company’s financial statements. See Note 3 of “Notes to Consolidated Financial Statements” for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.
As of September 30, 2004, the Company’s investment in and advances to unconsolidated joint ventures was $15.7 million and the venture partners’ investment in such joint ventures was $16.7 million. As of September 30, 2004, these joint ventures had obtained financing which amounted to $26.4 million of outstanding indebtedness.
During the year ended December 31, 2002, one of the Company’s joint ventures (“Existing Venture”) was restructured such that the Company was 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. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64.5 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 was required to and did 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 was 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. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19.8 million, which includes a $4.0 million preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement. During the year ended December 31, 2003, an additional 219 lots were purchased from the Existing Venture for $74.9 million, which included a $21.7 million preferred return to the outside partner of the Existing Venture. These purchases included (i) 172 lots which were purchased from the Existing Venture under a land banking arrangement (see Note 2) for $56.6 million, which included a $16.4 million preferred return to the outside partner of the Existing Venture and (2) 47 lots which were purchased by the New Venture from the Existing Venture for $18.3 million, which included a $5.3 million preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2003, the Company purchased 175 lots from the New Venture for $54.5 million, all of which was paid to the outside partner as a return of capital. During the three and nine months ended September 30, 2004, the Company purchased 15 and 88 lots, respectively, from the New Venture for $6.1 million and $28.5 million, respectively. The intercompany sales and related profits have been eliminated in consolidation.
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During the year ended December 31, 2003, California Lyon and two unaffiliated parties formed a series of limited liability companies (“Development LLCs”) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. The development process is anticipated to be completed by early in 2005 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of the lots. California Lyon has a 12 1/2% indirect, minority interest in the Development LLCs, which are the borrowers under two secured lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon owned by the applicable Development LLCs, as well as pledges of all net sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed debt-to-value ratios. The maximum commitment amount under the line of credit that closed in January 2003 (“First Line of Credit”) is $35.0 million. Subject to specified terms and conditions, California Lyon and the other direct and indirect members of the Development LLC that is the borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLC’s indebtedness under the First Line of Credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLC’s performance under its environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. The First Line of Credit matures in January 2005, but may be extended to July 2005, subject to specified terms and conditions. The maximum commitment amount under the line of credit that closed in March 2003 (“Second Line of Credit”) is $105.0 million. The Second Line of Credit matures in March 2005, but may be extended to September 2005 subject to specified terms and conditions. Although the guarantee obligations of the other direct and indirect members of the Development LLC that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of Credit. However, California Lyon has posted letters of credit equal to approximately $24.6 million to secure its obligations as well as the Development LLCs’ obligations to the bank under both lines of credit. Further, California Lyon and the other direct and indirect members of the Development LLCs, including certain affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related guarantees and letters of credit. Delaware Lyon has entered into joinder agreements to be jointly and severally liable for California Lyon’s obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with the members’ percentage interests in the Development LLCs’ distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks in certain specified circumstances, such as those involving the default, willful misconduct or gross negligence of California Lyon. As of September 30, 2004, the outstanding indebtedness under the First Line of Credit was $35.0 million and the outstanding indebtedness under the Second Line of Credit was $105.0 million.
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.
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Cash Flows — Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30, 2003
Net cash used in operating activities decreased to $158.5 million in the 2004 period from $217.0 million in the 2003 period. The change was primarily as a result of increased expenditures in real estate inventories in the 2004 period, offset by an increase in operating income as a result of increased operating revenues. The successful issuance of the 10 3/4% Senior Notes in 2003 and the 7 1/2% Senior Notes in 2004, offset by the repayment of the 12 1/2% Senior Notes (as described in financing activities above), provided the Company with increased financial resources. The increase in real estate inventories resulted from (i) the Company’s improved financial condition and its ability to finance more of its operations as wholly-owned projects rather than being financed as unconsolidated joint venture projects and (ii) the consolidation of variable interest entities as described above. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss.
Net cash (used in) provided by investing activities decreased to a use of $14.5 million in the 2004 period from a source of $37.9 million in the 2003 period. The change was primarily as a result of (i) a decrease in cash distributions of income from unconsolidated joint ventures to none in the 2004 period from $23.9 million in the 2003 period, (ii) a decrease in cash distributions of capital from unconsolidated joint ventures to $11.1 million in the 2004 period from $21.2 million in the 2003 period and (iii) an increase in cash paid for property and equipment to $17.4 million in the 2004 period from $0.3 million in the 2003 period due to the purchase of an aircraft.
Net cash provided by financing activities increased to $189.0 million in the 2004 period from $186.6 million in the 2003 period, primarily as a result of (i) an increase in net borrowings on notes payable of $62.4 million in the 2004 period compared to net principal repayments on notes payable of $12.8 million in the 2003 period and (ii) the net proceeds of $147.6 million from the issuance of the 7 1/2% Senior Notes in the 2004 period compared to the net proceeds of $246.2 million from the issuance of the 10 3/4% Senior Notes and repayment of $70.3 million of the 12 1/2% Senior Notes in the 2003 period and (iii) the repurchase of shares of common stock during the 2003 period amounting to $7.2 million with no comparable amount in the 2004 period.
Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements including joint venture financing, option arrangements, land banking arrangements and variable interests in consolidated and unconsolidated entities. These arrangements are more fully described above and in Notes 2, 3 and 7 to Consolidated Financial Statements. In addition, the Company is party to certain contractual obligations, including land purchases and project commitments, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended.
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Description of Projects
The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding divisions.
Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of September 30, 2004 | Backlog at September 30, 2004(2)(3) | Lots Owned as of September 30, 2004 | Homes Closed for the Ended September 30, 2004 | Sales Price Range(5) | |||||||
SOUTHERN CALIFORNIA | ||||||||||||||
Wholly-Owned: | ||||||||||||||
Orange County | ||||||||||||||
Mirador at Talega, San Clemente | 2004 | 76 | 0 | 36 | 76 | 0 | $1,120,000—1,260,000 | |||||||
Davenport, Ladera Ranch | 2003 | 163 | 163 | 0 | 0 | 51 | $380,000—432,000 | |||||||
Walden Park, Ladera Ranch | 2004 | 109 | 52 | 29 | 57 | 52 | $660,000—690,000 | |||||||
Laurel at Quail Hill, Irvine | 2003 | 83 | 83 | 0 | 0 | 6 | $560,000—610,000 | |||||||
Linden at Quail Hill, Irvine | 2003 | 100 | 100 | 0 | 0 | 6 | $580,000—685,000 | |||||||
Ambridge at Quail Hill, Irvine | 2004 | 128 | 7 | 64 | 97 | 7 | $495,000—535,000 | |||||||
Lombard Court, Irvine | 2005 | 150 | 0 | 0 | 34 | 0 | $455,000—620,000 | |||||||
Garland Park, Irvine | 2005 | 166 | 0 | 0 | 41 | 0 | $590,000—675,000 | |||||||
Altamura @ Nellie Gail Ranch, Laguna Hills | 2003 | 52 | 34 | 17 | 18 | 24 | $1,975,000—2,000,000 | |||||||
Seacove at the Waterfront, Huntington Beach | 2004 | 106 | 0 | 43 | 106 | 0 | $820,000—1,055,000 | |||||||
Honeyman I, San Juan Capistrano | 2005 | 80 | 0 | 0 | 80 | 0 | $1,020,000—1,190,000 | |||||||
Honeyman II, San Juan Capistrano | 2005 | 40 | 0 | 0 | 40 | 0 | $1,260,000—1,350,000 | |||||||
Los Angeles County | ||||||||||||||
Rassmussen, Moorpark | 2006 | 265 | 0 | 0 | 265 | 0 | $710,000—865,000 | |||||||
Riverside County | ||||||||||||||
Homestead at Heartland, North Corona | 2005 | 239 | 0 | 0 | 239 | 0 | $415,000—490,000 | |||||||
San Bernardino County | ||||||||||||||
The Peaks at Citrus Heights, Fontana | 2005 | 150 | 0 | 0 | 72 | 0 | $421,000—466,000 | |||||||
Total Wholly-Owned | 1,907 | 439 | 189 | 1,125 | 146 | |||||||||
Joint Ventures: | ||||||||||||||
Orange County | ||||||||||||||
Amarante, Covenant Hills P-30A, Ladera Ranch | 2005 | 53 | 0 | 12 | 53 | 0 | $870,000—1,045,000 | |||||||
Bellataire, Covenant Hills P-30B, Ladera Ranch | 2005 | 52 | 0 | 11 | 52 | 0 | $1,100,000—1,165,000 | |||||||
Los Angeles County | ||||||||||||||
Oakmont @ Westridge, Valencia | 2003 | 87 | 61 | 26 | 26 | 45 | $1,030,000—1,140,000 | |||||||
Creekside, Valencia | 2004 | 141 | 43 | 65 | 98 | 43 | $383,000—475,000 | |||||||
Riverside County | ||||||||||||||
Discovery, North Corona | 2004 | 172 | 74 | 37 | 98 | 74 | $402,000—450,000 | |||||||
Bounty, North Corona | 2003 | 167 | 102 | 43 | 65 | 77 | $450,000—495,000 | |||||||
San Bernardino County | ||||||||||||||
Echo Glen—Chino | 2003 | 89 | 75 | 14 | 14 | 54 | $510,000—570,000 | |||||||
Total Joint Ventures | 761 | 355 | 208 | 406 | 293 | |||||||||
SOUTHERN CALIFORNIA REGION COMBINED TOTAL | 2,668 | 794 | 397 | 1,531 | 439 | |||||||||
NORTHERN CALIFORNIA | ||||||||||||||
Wholly-Owned: | ||||||||||||||
San Joaquin County | ||||||||||||||
Ironwood II, Lathrop | 2003 | 88 | 85 | 0 | 3 | 21 | $276,000—317,000 | |||||||
Ironwood III, Lathrop | 2005 | 109 | 0 | 8 | 109 | 0 | $389,000—431,000 | |||||||
Lyon Estates at Stonebridge, Lathrop | 2004 | 72 | 49 | 23 | 23 | 49 | $382,000—422,000 | |||||||
Seasons, Stockton | 2005 | 145 | 0 | 8 | 145 | 0 | $410,000—455,000 | |||||||
Contra Costa County | ||||||||||||||
Bayside, Hercules | 2005 | 172 | 0 | 0 | 172 | 0 | $438,000—548,000 | |||||||
The Bluffs, Hercules | 2003 | 80 | 80 | 0 | 0 | 37 | $622,000—674,000 | |||||||
The Shores, Hercules | 2003 | 110 | 110 | 0 | 0 | 55 | $575,000—653,000 | |||||||
Santa Clara County | ||||||||||||||
Baton Rouge, San Jose | 2005 | 91 | 0 | 0 | 91 | 0 | $425,000—455,000 |
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Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of September 30, 2004 | Backlog at September 30, 2004(2)(3) | Lots Owned as of September 30, 2004 | Homes Closed for the Ended September 30, 2004 | Sales Price Range(5) | |||||||
The Ranch at Silver Creek, San Jose: | ||||||||||||||
Provance | 2003 | 95 | 49 | 30 | 46 | 34 | $1,400,000—1,560,000 | |||||||
Portofino | 2003 | 42 | 39 | 0 | 3 | 31 | $1,245,000—1,395,000 | |||||||
Mariposa | 2003 | 78 | 50 | 26 | 28 | 32 | $650,000—760,000 | |||||||
Siena | 2003 | 61 | 60 | 1 | 1 | 43 | $725,000—840,000 | |||||||
Casa Bella | 2003 | 56 | 44 | 12 | 12 | 41 | $590,000—720,000 | |||||||
Esperanza | 2004 | 74 | 4 | 44 | 70 | 4 | $845,000—1,060,000 | |||||||
Montesa | 2004 | 54 | 6 | 42 | 48 | 6 | $955,000—1,090,000 | |||||||
Hacienda | 2004 | 34 | 0 | 13 | 34 | 0 | $1,785,000—2,050,000 | |||||||
Tesoro | 2004 | 44 | 4 | 38 | 40 | 4 | $805,000—865,000 | |||||||
538 | 256 | 206 | 282 | 195 | ||||||||||
Stanislaus County | ||||||||||||||
Sonterra at Walker Ranch, Patterson | 2003 | 119 | 48 | 62 | 71 | 30 | $430,000—483,000 | |||||||
Total Wholly-Owned | 1,524 | 628 | 307 | 896 | 387 | |||||||||
Joint Ventures: | ||||||||||||||
Contra Costa County | ||||||||||||||
Olde Ivy, Brentwood | 2003 | 77 | 47 | 26 | 30 | 27 | $411,000—468,000 | |||||||
Heartland, Brentwood | 2003 | 76 | 48 | 24 | 28 | 28 | $444,000—471,000 | |||||||
Gables, Brentwood | 2003 | 99 | 49 | 44 | 50 | 29 | $440,000—499,000 | |||||||
Overlook, Hercules | 2003 | 133 | 74 | 55 | 59 | 48 | $664,000—706,000 | |||||||
El Dorado County | ||||||||||||||
Lyon Casina, El Dorado Hills | 2001 | 123 | 123 | 0 | 0 | 23 | $365,000—405,000 | |||||||
Lyon Prima, El Dorado Hills | 2001 | 137 | 122 | 11 | 15 | 36 | $445,000—511,000 | |||||||
Placer County | ||||||||||||||
Pinehurst at Morgan Creek | 2003 | 117 | 37 | 45 | 80 | 25 | $584,000—676,000 | |||||||
Cypress at Morgan Creek | 2003 | 73 | 33 | 38 | 40 | 21 | $521,000—581,000 | |||||||
Sacramento County | ||||||||||||||
Big Horn, Elk Grove | 2005 | 255 | 0 | 0 | 255 | 0 | $195,000—269,000 | |||||||
Total Joint Ventures | 1,090 | 533 | 243 | 557 | 237 | |||||||||
NORTHERN CALIFORNIA REGION COMBINED TOTAL | 2,614 | 1,161 | 550 | 1,453 | 624 | |||||||||
SAN DIEGO | ||||||||||||||
Wholly-Owned: | ||||||||||||||
Riverside County | ||||||||||||||
Bridle Creek, Corona | 2003 | 274 | 66 | 29 | 124 | 48 | $603,000—680,000 | |||||||
Willow Glen, Temecula | 2003 | 74 | 74 | 0 | 0 | 15 | $342,000—383,000 | |||||||
Tessera, Beaumont | 2003 | 168 | 142 | 22 | 26 | 76 | $302,000—342,000 | |||||||
Sedona, Murietta | 2003 | 138 | 111 | 16 | 33 | 69 | $472,000—559,000 | |||||||
Sequoia at Wolf Creek, Temecula | 2005 | 125 | 0 | 0 | 125 | 0 | $346,000—363,000 | |||||||
Harveston Ranch, Temecula | 2005 | 162 | 0 | 0 | 162 | 0 | $301,000—316,000 | |||||||
San Diego County | ||||||||||||||
Vineyards, Escondido | 2002 | 72 | 71 | 1 | 1 | 44 | $440,000—495,000 | |||||||
Meadows, Escondido | 2004 | 45 | 42 | 2 | 3 | 42 | $622,000—700,000 | |||||||
Promenade North, San Diego | 2006 | 143 | 0 | 0 | 143 | 0 | $400,000—475,000 | |||||||
Sonora Ridge, Chula Vista | 2003 | 172 | 151 | 21 | 21 | 72 | $453,000—493,000 | |||||||
Total Wholly-Owned | 1,373 | 657 | 91 | 638 | 366 | |||||||||
Joint Ventures: | ||||||||||||||
Riverside County | ||||||||||||||
Cabrillo at Montecito Ranch, Corona | 2004 | 83 | 57 | 25 | 26 | 57 | $597,000—629,000 | |||||||
San Diego County | ||||||||||||||
Ravenna, San Diego | 2005 | 199 | 0 | 0 | 199 | 0 | $440,000—450,000 | |||||||
Amante, San Diego | 2005 | 127 | 0 | 0 | 127 | 0 | $527,000—572,000 | |||||||
Boardwalk, San Diego | 2004 | 90 | 0 | 59 | 90 | 0 | $522,000—605,000 | |||||||
Treviso, San Diego | 2005 | 186 | 0 | 0 | 186 | 0 | $369,000—500,000 | |||||||
Belleza at San Miguel Village, Chula Vista | 2005 | 195 | 0 | 0 | 195 | 0 | $344,000—400,000 | |||||||
Total Joint Ventures | 880 | 57 | 84 | 823 | 57 | |||||||||
SAN DIEGO REGION COMBINED TOTAL | 2,253 | 714 | 175 | 1,461 | 423 | |||||||||
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Project (County) Product | Year of First Delivery | Estimated Number of Homes at Completion(1) | Units Closed as of September 30, 2004 | Backlog at September 30, 2004(2)(3) | Lots Owned as of September 30, 2004 | Homes Closed for the Ended September 30, 2004 | Sales Price Range(5) | |||||||
ARIZONA | ||||||||||||||
Wholly-Owned: | ||||||||||||||
Maricopa County | ||||||||||||||
Mesquite Grove — Parada, Chandler | 2001 | 112 | 111 | 1 | 1 | 7 | $195,000—239,000 | |||||||
Mesquite Grove — Estates, Chandler | 2001 | 93 | 90 | 3 | 3 | 26 | $301,000—338,000 | |||||||
Dove Wing at Power Ranch, Gilbert | 2001 | 103 | 103 | 0 | 0 | 3 | $177,000—227,000 | |||||||
Morgan Creek at Country Place, Tolleson | 2001 | 115 | 115 | 0 | 0 | 3 | $119,000—141,000 | |||||||
Oakcrest at Gateway Crossing, Gilbert | 2003 | 236 | 145 | 83 | 91 | 103 | $154,000—200,000 | |||||||
Woodridge at Gateway Crossing, Gilbert | 2003 | 165 | 50 | 111 | 115 | 48 | $183,000—230,000 | |||||||
Sonoran Foothills, Phoenix | ||||||||||||||
Desert Crown | 2004 | 124 | 0 | 69 | 124 | 0 | $379,000—501,000 | |||||||
Desert Sierra | 2004 | 212 | 0 | 50 | 212 | 0 | $187,000—233,000 | |||||||
Copper Canyon Ranch, Surprise | ||||||||||||||
Rancho Vistas | 2004 | 212 | 76 | 105 | 136 | 76 | $464,000—552,000 | |||||||
Sunset Point | 2004 | 282 | 0 | 40 | 282 | 0 | $167,000—252,000 | |||||||
El Sendero Hills | 2004 | 188 | 0 | 56 | 188 | 0 | $250,000—315,000 | |||||||
Talavera, Phoenix | 2006 | 134 | 0 | 0 | 134 | 0 | $168,000—201,000 | |||||||
Coldwater Ranch, Maricopa County | 2006 | 590 | 0 | 0 | 590 | 0 | $129,000—181,000 | |||||||
Lyon’s Gate, Gilbert | 2006 | 2,193 | 0 | 0 | 2,193 | 0 | $130,000—300,000 | |||||||
ARIZONA REGION TOTAL | 4,759 | 690 | 518 | 4,069 | 266 | |||||||||
NEVADA | ||||||||||||||
Wholly-Owned: | ||||||||||||||
Clark County | ||||||||||||||
Topaz Ridge at Summerlin, Las Vegas | 2002 | 89 | 89 | 0 | 0 | 9 | $577,000—630,000 | |||||||
Annendale, North Las Vegas | 2001 | 194 | 194 | 0 | 0 | 1 | $181,000—204,000 | |||||||
Iron Mountain, Las Vegas | 2003 | 70 | 70 | 0 | 0 | 26 | $363,000—416,000 | |||||||
Vista Verde at Summerlin, Las Vegas | 2003 | 122 | 79 | 16 | 43 | 64 | $410,000—473,000 | |||||||
Miraleste at Summerlin, Las Vegas | 2003 | 122 | 76 | 46 | 46 | 69 | $551,000—595,000 | |||||||
The Classics, North Las Vegas | 2003 | 227 | 132 | 50 | 95 | 80 | $286,000—311,000 | |||||||
The Springs, North Las Vegas | 2003 | 209 | 113 | 29 | 96 | 86 | $254,000—303,000 | |||||||
The Estates, North Las Vegas | 2003 | 176 | 91 | 50 | 85 | 67 | $315,000—349,000 | |||||||
The Cottages, North Las Vegas | 2004 | 360 | 83 | 29 | 277 | 83 | $227,000—257,000 | |||||||
Granada at Summerlin, Las Vegas | 2004 | 144 | 24 | 23 | 120 | 24 | $430,000—495,000 | |||||||
The Lyon Collection at Summerlin, Las Vegas | 2005 | 60 | 0 | 0 | 60 | 0 | $600,000—635,000 | |||||||
Carson Ranch, Las Vegas | 2005 | 130 | 0 | 0 | 130 | 0 | $264,000—297,000 | |||||||
West Park Villas, Las Vegas | 2005 | 191 | 0 | 0 | 191 | 0 | $285,000—365,000 | |||||||
West Park Courtyards, Las Vegas | 2005 | 113 | 0 | 0 | 113 | 0 | $325,000—430,000 | |||||||
NEVADA REGION TOTAL | 2,207 | 951 | 243 | 1,256 | 509 | |||||||||
GRAND TOTALS: | ||||||||||||||
Wholly-Owned | 11,770 | 3,365 | 1,348 | 7,984 | 1,674 | |||||||||
Joint Ventures | 2,731 | 945 | 535 | 1,786 | 587 | |||||||||
14,501 | 4,310 | 1,883 | 9,770 | 2,261 | ||||||||||
(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, 2004, 1,762 represent homes completed or under construction and 121 represent homes not yet under construction. |
(4) | Lots owned as of September 30, 2004 include lots in backlog at September 30, 2004. |
(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. |
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Net Operating Loss Carryforwards
At December 31, 2003, the Company had net operating loss carryforwards for Federal tax purposes of approximately $2.0 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 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.
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 5 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 U.S. generally accepted accounting principles. 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 reporting 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, 2003, as amended, the Company’s most critical accounting policies are real estate inventories and cost of sales; impairment of real estate inventories; sales and profit recognition; and variable interest entities. Since December 31, 2003, there have been no changes in the Company’s most critical accounting policies, except as described in the following paragraph, and no material changes in the assumptions and estimates used by management.
Variable Interest Entities
Certain land purchase contracts and lot option contracts are accounted for in accordance with Financial Accounting Standards Board Interpretation No. 46,Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”). In addition, all joint ventures are reviewed and analyzed under Interpretation No. 46 to determine whether or not these arrangements are accounted for under the principles of Interpretation No. 46 or other accounting rules. Under Interpretation No. 46, a variable interest entity (“VIE”) is created when (i) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without
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additional subordinated financial support from other parties or (ii) the entity’s equity holders as a group either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity if they occur or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE pursuant to Interpretation No. 46, the enterprise that absorbs a majority of the expected losses, receives a majority of the entity’s expected residual returns, or both, is considered the primary beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash flows as defined in Interpretation No. 46. Based on the provisions of Interpretation No. 46, whenever the Company enters into a land purchase contract or an option contract for land or lots with an entity and makes a non-refundable deposit, or enters into a joint venture, a VIE may be created and the arrangement is evaluated under Interpretation No. 46. In order to (i) evaluate whether the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, (ii) calculate expected losses, expected residual returns and the probability of estimated future cash flows, and (iii) determine whether the Company is the primary beneficiary, the Company must exercise significant judgment regarding the interpretation of the terms of the underlying agreements in light of Interpretation No. 46 and make assumptions regarding future events that may or may not occur. The terms of these agreements are subject to various interpretations and the assumptions used by the Company are inherently uncertain. The use by the Company of different interpretations and/or assumptions could affect the Company’s evaluation as to whether or not land purchase contracts, lot option contracts or joint ventures are VIEs and whether or not the Company is the primary beneficiary of the VIE.
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,Consolidation of Variable Interest Entities(“Interpretation No. 46”) which addresses the consolidation of variable interest entities (“VIEs”). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applies immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation was applied to the Company as of January 1, 2004.
Under Interpretation No. 46, a VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to Interpretation No. 46, an enterprise that absorbs a majority of the expected losses or residual returns of the VIE is considered the primary beneficiary and must consolidate the VIE.
Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements or (iii) enters into arrangements with a financial partner for the formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected losses if they occur. For each VIE created, the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE will be consolidated with the Company’s financial statements.
Based on the Company’s analysis of arrangements created after January 31, 2003, no VIEs had been created for the period from February 1, 2003 through September 30, 2003 with respect to option agreements or land
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banking arrangements as identified under clauses (i) and (ii) of the previous paragraph. At September 30, 2003, three joint ventures and one land banking arrangement created after January 31, 2003 have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these three joint ventures and one land banking arrangement have been consolidated with the Company’s financial statements as of September 30, 2003 and for the three and nine months ended September 30, 2003. At December 31, 2003, certain joint ventures and one land banking arrangement created after January 31, 2003 had been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures and land banking arrangement were consolidated with the Company’s financial statements as of December 31, 2003 and for the period then ended. Effective January 1, 2004, certain additional joint ventures and land banking arrangements created prior to February 1, 2003 have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures and land banking arrangements have been consolidated with the Company’s financial statements as of January 1, 2004 and for the three and nine months ended September 30, 2004.
Forward Looking Statements
Investors are cautioned that certain statements contained in this Quarterly Report on Form 10-Q, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined in the Act. Forward-looking statements are based upon expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company, economic and market factors and the homebuilding industry.
Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates, terrorism or other hostilities involving the United States, whether an ownership change occurred which could, under certain circumstances, have resulted in the limitation of the Company’s ability to offset prior years’ taxable income with net operating losses, changes in home mortgage and other 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 its debt obligation 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. While it is impossible to identify all such factors, additional factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the Company’s other filings with the Securities and Exchange Commission. The Company’s past performance or past or present economic conditions in the Company’s housing markets are not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended, 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, 2003.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. 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 Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report. Although the Company’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives, there can be no assurance that such disclosure controls and procedures will always achieve their stated goals under all circumstances.
Changes in Internal Controls. There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Sarbanes-Oxley 404 Compliance. The Company has begun a detailed assessment of its internal controls as called for by the Sarbanes-Oxley Act of 2002. The Company has completed the evaluation of design phase where it has identified what may be control deficiencies in its system of internal controls. As the Company continues in the testing phase of its project, it is validating potential control deficiencies and assessing whether or not they rise to the level of significant deficiencies or material weaknesses. In the meantime, the Company has established remediation teams to investigate these potential control deficiencies, and, where appropriate, to remediate them. Although the Company has made this project a top priority, there can be no assurances that all control deficiencies identified and validated will be remediated before the end of the Company’s fiscal year or that the remaining unresolved control deficiencies will not rise to the level of significant deficiencies or material weaknesses.
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WILLIAM LYON HOMES
Not applicable.
Exhibit No. | Description | ||
10.1 | (1) | Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation. | |
10.2 | (1) | Amended and Restated Loan Agreement dated as of September 17, 2004 by and between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation. | |
10.3 | Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States. | ||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 | ||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 | ||
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 |
(1) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed September 22, 2004 and incorporated herein by this reference. |
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WILLIAM LYON HOMES
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.
WILLIAM LYON HOMES Registrant | ||||||||
Date: November 8, 2004 | By: | /s/ MICHAEL D. GRUBBS | ||||||
MICHAEL D. GRUBBS Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||||||
Date: November 8, 2004 | By: | /s/ W. DOUGLASS HARRIS | ||||||
W. DOUGLASS HARRIS Vice President, Corporate Controller (Principal Accounting Officer) |
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Exhibit No. | Description | ||
10.1 | (1) | Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation. | |
10.2 | (1) | Amended and Restated Loan Agreement dated as of September 17, 2004 by and between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation. | |
10.3 | Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States. | ||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 | ||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 | ||
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 |
(1) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed September 22, 2004 and incorporated herein by this reference. |
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