<PAGE> 1
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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 JUNE 30, 2000
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)
<TABLE>
<S> <C>
DELAWARE 33-0864902
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4490 VON KARMAN AVENUE 92660
NEWPORT BEACH, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(949) 833-3600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF COMMON STOCK AUGUST 11, 2000
--------------------- ---------------
<S> <C>
Common stock, par value $.01 10,487,469
</TABLE>
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<PAGE> 2
WILLIAM LYON HOMES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets -- June 30, 2000 and December
31, 1999.................................................. 3
Consolidated Statements of Income -- Three and Six Months
Ended June 30, 2000 and 1999.............................. 4
Consolidated Statement of Stockholders' Equity -- Six Months
Ended June 30, 2000....................................... 5
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 2000 and 1999.................................... 6
Notes to Consolidated Financial Statements.................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 23
ITEM 3. NOT APPLICABLE.
PART II. OTHER INFORMATION........................................... 34
ITEM 1. NOT APPLICABLE
ITEM 2. NOT APPLICABLE
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 34
SIGNATURES........................................................... 35
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
WILLIAM LYON HOMES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 7,415 $ 2,154
Receivables................................................. 15,800 12,063
Real estate inventories..................................... 184,265 184,271
Investments in and advances to unconsolidated joint
ventures -- Note 4........................................ 59,318 50,282
Property and equipment, less accumulated depreciation of
$4,332 and $4,167 at June 30, 2000 and December 31, 1999,
respectively.............................................. 2,560 2,183
Deferred loan costs......................................... 1,096 1,726
Goodwill -- Note 2.......................................... 7,758 8,382
Other assets................................................ 23,188 17,422
-------- --------
$301,400 $278,483
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 18,073 $ 15,653
Accrued expenses............................................ 29,181 32,899
Notes payable............................................... 103,350 76,630
12 1/2% Senior Notes due 2001 -- Notes 5 and 7.............. 78,225 100,000
-------- --------
228,829 225,182
-------- --------
Stockholders' equity -- Notes 1, 3 and 8
Common stock, par value $.01 per share; 30,000,000 shares
authorized; 10,487,469 and 10,439,135 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively........................................... 105 104
Additional paid-in capital................................ 120,630 116,667
Accumulated deficit from January 1, 1994.................. (48,164) (63,470)
-------- --------
72,571 53,301
-------- --------
$301,400 $278,483
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
WILLIAM LYON HOMES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenue
Homes sales....................................... $ 94,142 $ 91,985 $ 158,751 $ 174,056
Lots, land and other sales........................ 203 3,730 967 3,956
Management fee income -- Note 1................... 2,346 1,044 3,971 1,981
-------- -------- --------- ---------
96,691 96,759 163,689 179,993
-------- -------- --------- ---------
Operating costs
Cost of sales -- homes............................ (76,410) (76,097) (128,921) (144,117)
Cost of sales -- lots, land and other............. (208) (3,066) (883) (3,741)
Sales and marketing............................... (3,446) (4,385) (6,982) (8,460)
General and administrative -- Note 1.............. (8,905) (4,986) (16,385) (9,854)
Amortization of goodwill -- Note 2................ (310) -- (624) --
-------- -------- --------- ---------
(89,279) (88,534) (153,795) (166,172)
-------- -------- --------- ---------
Equity in income of unconsolidated joint ventures... 5,360 1,919 10,486 4,864
-------- -------- --------- ---------
Operating income.................................... 12,772 10,144 20,380 18,685
Interest expense, net of amounts capitalized........ (1,932) (1,456) (3,477) (3,671)
Financial advisory expenses -- Note 3............... -- (588) -- (1,280)
Other income (expense), net -- Note 6............... 602 874 2,571 1,541
-------- -------- --------- ---------
Income before income taxes and extraordinary item... 11,442 8,974 19,474 15,275
Provision for income taxes -- Note 1
Income taxes -- benefit credited to paid-in
capital........................................ (3,722) (1,286) (3,722) (2,191)
Income taxes -- alternate minimum tax............. (549) -- (942) --
-------- -------- --------- ---------
Income before extraordinary item.................... 7,171 7,688 14,810 13,084
Extraordinary item -- gain from retirement of debt,
net of applicable income taxes -- Note 7.......... 496 1,789 496 1,789
-------- -------- --------- ---------
Net income.......................................... $ 7,667 $ 9,477 $ 15,306 $ 14,873
======== ======== ========= =========
Basic and diluted earnings per common share: --Notes
1 and 3
Before extraordinary item......................... $ 0.68 $ 0.74 $ 1.41 $ 1.25
Extraordinary item................................ 0.05 0.17 0.05 0.17
-------- -------- --------- ---------
After extraordinary item.......................... $ 0.73 $ 0.91 $ 1.46 $ 1.42
======== ======== ========= =========
Increase in stockholders' equity per common share
from net income and income tax benefits credited
directly to paid-in capital -- Note 1............. $ 1.09 $ 1.06 $ 1.82 $ 1.66
======== ======== ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
WILLIAM LYON HOMES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT FROM
---------------- PAID-IN JANUARY 1,
SHARES AMOUNT CAPITAL 1994 TOTAL
------ ------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1999............ 10,439 $104 $116,667 $(63,470) $53,301
Issuance of common stock upon exercise
of stock options -- Note 8............ 48 1 241 -- 242
Net income.............................. -- -- -- 15,306 15,306
Income tax benefits related to temporary
differences existing prior to the
quasi-reorganization -- Note 1........ -- -- 3,722 -- 3,722
------ ---- -------- -------- -------
Balance -- June 30, 2000................ 10,487 $105 $120,630 $(48,164) $72,571
====== ==== ======== ======== =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
WILLIAM LYON HOMES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 15,306 $ 14,873
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization.......................... 1,510 548
Equity in income of unconsolidated joint ventures...... (10,486) (4,864)
Extraordinary gain on repurchase of Senior Notes....... (522) (2,089)
Provision for income taxes............................. 4,690 2,491
Net changes in operating assets and liabilities:
Other receivables.................................... 64 2,882
Real estate inventories.............................. 6 1,803
Deferred loan costs.................................. 293 729
Other assets......................................... (5,766) (1,329)
Accounts payable..................................... 2,420 (1,435)
Accrued expenses..................................... (4,686) (1,998)
--------- --------
Net cash provided by operating activities................. 2,829 11,611
--------- --------
Cash flows from investing activities
Investments in and advances to unconsolidated joint
ventures............................................... (20,734) 377
Distributions from unconsolidated joint ventures.......... 19,034 --
Issuance of notes receivable.............................. (32,977) (17,884)
Principal payments on notes receivable.................... 32,326 10,014
Property and equipment, net............................... (1,054) (170)
--------- --------
Net cash used in investing activities..................... (3,405) (7,663)
--------- --------
Cash flows from financing activities
Proceeds from borrowing on notes payable.................. 130,465 92,065
Principal payments on notes payable....................... (103,745) (89,991)
Purchase of 12 1/2% Senior Notes.......................... (21,125) (17,700)
Common stock issued for exercised options................. 242 --
--------- --------
Net cash provided by (used in) financing activities....... 5,837 (15,626)
--------- --------
Net increase (decrease) in cash and cash equivalents........ 5,261 (11,678)
Cash and cash equivalents -- beginning of period............ 2,154 23,955
--------- --------
Cash and cash equivalents -- end of period.................. $ 7,415 $ 12,277
========= ========
Supplemental disclosures of cash flow information
Cash paid during the period for interest, net of amounts
capitalized............................................ $ 3,980 $ 5,007
========= ========
Issuance of notes payable for land acquisitions........... $ -- $ 3,823
========= ========
</TABLE>
See accompanying notes.
6
<PAGE> 7
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
William Lyon Homes, a Delaware corporation (formerly named The Presley
Companies -- see Notes 2 and 3) 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 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 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, 1999.
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 generally accepted accounting
principles have been included. Operating results for the three and six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries and joint ventures. Investments in joint
ventures in which the Company has a 50% or less ownership interest are accounted
for using the equity method. The accounting policies of the joint ventures are
substantially the same as those of the Company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets. For internal reporting purposes,
the Company is organized into six geographic home building regions and its
mortgage operations. 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. Mortgage company operations did not meet
the materiality thresholds which would require disclosure for the six months
ended June 30, 2000 and 1999, and accordingly, are not separately reported.
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 sales of homes, lots and land and management fee
income; less cost of sales, impairment losses on real estate, selling and
marketing, general and administrative expenses and amortization of goodwill.
Accordingly, operating income excludes certain expenses included in the
determination of net income. Operating income from home building operations,
including income from the Company's investment in unconsolidated joint ventures,
totaled $12.8 million and $10.1 million for the three months ended June 30, 2000
and 1999, respectively, and $20.4 million and $18.7 million for the six months
ended June 30, 2000 and 1999, respectively. All other segment measurements are
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
All revenues are from external customers and no revenues are generated from
transactions with other segments. There were no customers that contributed 10%
or more of the Company's total revenues during the three and six months ended
June 30, 2000 and 1999.
Management fee income represents income recognized in the current period
from unconsolidated joint ventures in accordance with joint venture and/or
operating agreements. Such fees are reimbursements of overhead expenses incurred
by the Company as the managing partner or member of the unconsolidated joint
ventures. Prior to January 1, 2000, management fee income had been reflected as
a reduction of general and
7
<PAGE> 8
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
administrative expense. For the three and six months ended June 30, 2000,
management fee income has been reported as a separate item and not reflected as
a reduction of general and administrative expense. The corresponding amounts of
management fee income for the three and six months ended June 30, 1999 have been
reclassified to conform to the presentation for the three and six months ended
June 30, 2000. This reclassification did not change the reported amount of
operating income or net income for any periods presented.
Earnings per share amounts for all periods presented conform to Financial
Accounting Standards Board Statement No. 128, Earnings Per Share. Basic earnings
per common share for the three and six months ended June 30, 2000 are based on
10,465,692 and 10,452,414 weighted average shares of common stock outstanding,
respectively. Fully diluted earnings per common share for the three and six
months ended June 30, 2000 are based on 10,497,889 and 10,473,680 weighted
average shares of common stock outstanding, respectively. Basic and diluted
earnings per common share for the three and six months ended June 30, 1999 are
based on 10,439,135 shares of common stock outstanding, after adjustment for the
retroactive effect of the merger with a wholly-owned subsidiary and the
conversion of each share of previously outstanding Series A and Series B common
stock into 0.2 common share of the surviving company, as described in Note 3.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of the assets and liabilities
as of June 30, 2000 and December 31, 1999 and revenues and expenses for the
periods presented. Accordingly, actual results could differ materially from
those estimates in the near-term.
Effective as of January 1, 1994, the Company completed a capital
restructuring and quasi-reorganization. The quasi-reorganization resulted in the
adjustment of assets and liabilities to estimated fair values and the
elimination of an accumulated deficit effective January 1, 1994. Income tax
benefits resulting from the utilization of net operating loss and other
carryforwards existing at January 1, 1994 and temporary differences existing
prior to or resulting from the quasi-reorganization, are excluded from the
results of operations and credited to paid-in capital. During the three and six
months ended June 30, 2000 income tax benefits of $3,722,000 were excluded from
results of operations and not reflected as a reduction to the Company's
provision for income taxes but credited directly to paid-in capital. During the
three and six months ended June 30, 1999 income tax benefits of $1,586,000 and
$2,491,000, respectively, were excluded from results of operations and credited
directly to paid-in capital.
The $3,722,000 included in the Company's provision for income taxes
represents income taxes which the Company will not be required to pay. As
described above, the pre-quasi-reorganization income tax benefits which would
otherwise reduce the provision for income taxes are credited directly to paid-in
capital.
Stockholders' equity per common share increased by $1.09 per share during
the three months ended June 30, 2000 as a result of the net income for the
period and the income tax benefits credited directly to paid-in capital for the
period, compared with an increase of $1.06 for the comparable period a year ago.
Stockholders' equity per common share increased by $1.82 per share during the
six months ended June 30, 2000 as a result of the net income for the period and
the income tax benefits credited directly to paid-in capital for the period,
compared with an increase of $1.66 for the comparable period a year ago.
NOTE 2 -- ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF WILLIAM LYON HOMES,
INC.
On November 5, 1999, the Company as described below, acquired substantially
all of the assets and assumed substantially all of the related liabilities of
William Lyon Homes, Inc. ("Old William Lyon Homes"), in accordance with a
Purchase Agreement executed as of October 7, 1999 with Old William Lyon Homes,
William Lyon and William H. Lyon. William Lyon is Chairman of the Board of Old
William Lyon
8
<PAGE> 9
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Homes and also Chairman of the Board and Chief Executive Officer of the Company.
William H. Lyon is the son of William Lyon and a director and an employee of the
Company.
The total purchase price consisted of approximately $42,598,000 in cash and
the assumption of approximately $101,058,000 of liabilities of Old William Lyon
Homes. The acquisition has been accounted for as a purchase and, accordingly,
the purchase price has been allocated based on the fair value of the assets and
liabilities acquired. The excess of the purchase price over the net assets
acquired amounting to approximately $8,689,000 has been reflected as goodwill
and is being amortized on a straight-line basis over an estimated useful life of
seven years.
After the acquisition described above and prior to the effectiveness of the
merger as described below, William Lyon and a trust of which William H. Lyon is
the beneficiary acquired (1) 5,741,454 shares of the Company's Series A Common
Stock for $0.655 per share in a tender offer for the purchase of up to
10,678,792 shares of the Company's Series A Common Stock which closed on
November 5, 1999 and (2) 14,372,150 shares of the Company's Series B Common
Stock for $0.655 per share under agreements with certain holders of the
Company's Series B Common Stock which closed on November 8, 1999. On November 5,
1999 William Lyon and the Company cancelled all of William Lyon's outstanding
options to purchase 750,000 shares of the Company's Series A Common Stock. The
completion of these transactions, together with the previous disposition on
August 12, 1999 of 3,000,000 shares by William Lyon and a trust of which William
H. Lyon is the beneficiary, resulted in William Lyon and a trust of which
William H. Lyon is a beneficiary owning approximately 49.9% of the Company's
outstanding Common Stock.
NOTE 3 -- COMPANY MERGES WITH AND INTO WHOLLY-OWNED SUBSIDIARY
On November 5, 1999 at a Special Meeting of Holders of Common Stock, the
Holders of Common Stock approved a proposal to adopt a certificate of ownership
and merger pursuant to which The Presley Companies would merge with and into
Presley Merger Sub, Inc., a newly-formed Delaware corporation and wholly owned
subsidiary of The Presley Companies, with Presley Merger Sub, Inc. being the
surviving corporation. In the merger, each outstanding share of common stock of
The Presley Companies became exchangeable for 0.2 share of common stock of
Presley Merger Sub, Inc. In the merger, the surviving corporation was named "The
Presley Companies," which in turn was renamed William Lyon Homes on December 31,
1999.
The principal purpose of the merger is to help preserve the Company's
substantial net operating loss carryforwards and other tax benefits for use in
offsetting future taxable income by decreasing, but not eliminating, the risk of
an "ownership change" for federal income tax purposes.
In general, the transfer restrictions prohibit, without prior approval of
the board of directors of the Company, the direct or indirect disposition or
acquisition of any stock of the Company by or to any holder who owns or would so
own upon the acquisition (either directly or through the tax attribution rules)
5% or more of the Company's stock.
The Company after the consummation of the merger had substantially the same
financial position as that of The Presley Companies immediately before the
merger (the merger took effect after consummation of the transactions
contemplated in the Purchase Agreement with Old William Lyon Homes -- see Note
2). Except for the transfer restrictions and the elimination of provisions
dividing the common stock into two series, the new shares of common stock issued
by the surviving company in the merger have terms substantially similar to the
old shares of common stock.
In connection with the acquisition and merger, the Company incurred costs
of approximately $588,000 and $1,280,000 for the three and six months ended June
30, 1999, respectively, which are reflected in the Consolidated Statements of
Income as financial advisory expenses.
9
<PAGE> 10
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Effective on November 5, 1999, Old William Lyon Homes changed its name to
Corporate Enterprises, Inc. Effective after the close of business on December
31, 1999, The Presley Companies changed its name to William Lyon Homes.
Effective on January 3, 2000, the Company's stock ticker symbol changed from PDC
to WLS. The Company's common stock continues to trade on the New York Stock
Exchange under the stock symbol WLS.
NOTE 4 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES
The Company and certain of its subsidiaries are general partners or members
in twenty-four joint ventures involved in the development and sale of
residential projects. Such joint ventures are 50% or less owned and,
accordingly, the financial statements of such joint ventures are not
consolidated with the Company's financial statements. The Company's investments
in unconsolidated joint ventures are accounted for using the equity method.
Condensed combined financial information of these joint ventures as of June 30,
2000 and December 31, 1999 and for the three and six months ended June 30, 2000
and 1999 is summarized as follows:
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 8,751 $ 7,197
Receivables................................................. 2,976 1,275
Real estate inventories..................................... 269,804 240,056
Other assets................................................ 8 735
-------- --------
$281,539 $249,263
======== ========
LIABILITIES AND OWNERS' CAPITAL
Accounts payable............................................ $ 11,647 $ 8,558
Accrued expenses............................................ 4,057 5,488
Notes payable............................................... 56,949 54,069
Advances from William Lyon Homes and subsidiaries........... 9,960 1,055
-------- --------
82,613 69,170
-------- --------
Owners' capital
William Lyon Homes and subsidiaries....................... 49,358 49,227
Others.................................................... 149,568 130,866
-------- --------
198,926 180,093
-------- --------
$281,539 $249,263
======== ========
</TABLE>
10
<PAGE> 11
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Sales
Homes...................................... $ 79,313 $ 32,619 $ 148,385 $ 70,536
Operating costs
Cost of sales -- homes..................... (65,974) (26,764) (122,557) (57,595)
Sales and marketing........................ (2,734) (1,165) (5,255) (2,569)
-------- -------- --------- --------
Operating income............................. 10,605 4,690 20,573 10,372
Other income, net............................ 72 45 316 222
-------- -------- --------- --------
Net income................................... $ 10,677 $ 4,735 $ 20,889 $ 10,594
======== ======== ========= ========
Allocation to owners
William Lyon Homes and subsidiaries........ $ 5,360 $ 1,919 $ 10,486 $ 4,864
Others..................................... 5,317 2,816 10,403 5,730
-------- -------- --------- --------
$ 10,677 $ 4,735 $ 20,889 $ 10,594
======== ======== ========= ========
</TABLE>
Based upon current estimates, substantially all future development and
construction costs will be funded by the Company's venture partners or from the
proceeds of construction financing obtained by the joint ventures.
NOTE 5 -- 12 1/2% SENIOR NOTES DUE 2001
In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due on July 1, 2001, if the Company's Consolidated
Tangible Net Worth is less than $60,000,000 for two consecutive fiscal quarters,
the Company is required to offer to purchase $20,000,000 in principal amount of
the Senior Notes. Because the Company's Consolidated Tangible Net Worth had been
less than $60,000,000 beginning with the quarter ended June 30, 1997, the
Company would, effective on December 4, 1997, June 4, 1998, December 4, 1998,
June 4, 1999, December 4, 1999 and June 4, 2000, have been required to make
offers to purchase $20,000,000 of the Senior Notes at par plus accrued interest,
less the face amount of Senior Notes acquired by the Company after September 30,
1997, March 31, 1998, September 30, 1998, March 31, 1999, September 30, 1999 and
March 31, 2000, respectively. The Company acquired Senior Notes with a face
amount equal to or greater than $20,000,000 after September 30, 1997 and prior
to December 4, 1997, again after March 31, 1998 and prior to June 4, 1998, again
after September 30, 1998 and prior to December 4, 1998, again after March 31,
1999 and prior to June 4, 1999, again after September 30, 1999 and prior to
December 4, 1999, and again after March 31, 2000 and prior to June 4, 2000 and
therefore was not required to make offers to purchase Senior Notes.
At June 30, 2000, the Company's Consolidated Tangible Net Worth was
$63,717,000. As long as the Company's Consolidated Tangible Net Worth is not
less than $60,000,000 on the last day of two consecutive fiscal quarters, the
Company will not be required to make similar offers to purchase $20,000,000 in
principal amount of the Senior Notes.
Because of the Company's obligation to offer to purchase $20,000,000 in
principal amount of the Senior Notes every six months so long as the Company's
Consolidated Tangible Net Worth was less than $60,000,000 on the last day of two
consecutive fiscal quarters, the Company has been restricted in its ability to
acquire, hold and develop real estate projects. The Company changed its
operating strategy during 1997 to
11
<PAGE> 12
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
finance certain projects by forming joint ventures with venture partners that
would provide a substantial portion of the capital necessary to develop these
projects.
The 12 1/2% Senior Notes due July 1, 2001 are obligations of William Lyon
Homes (formerly The Presley Companies), a Delaware corporation ("Delaware
Lyon"), and are unconditionally guaranteed on a senior basis by William Lyon
Homes, Inc. (formerly Presley Homes), a California corporation and a
wholly-owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has
granted liens on substantially all of its assets as security for its obligations
under the Working Capital Facility and other loans. Because the William Lyon
Homes, Inc. guarantee is not secured, holders of the Senior Notes are
effectively junior to borrowings under the Working Capital Facility with respect
to such assets. Delaware Lyon and its consolidated subsidiaries are referred to
collectively herein as the "Company." Interest on the Senior Notes is payable on
January 1 and July 1 of each year, commencing January 1, 1995.
12
<PAGE> 13
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Supplemental consolidating financial information of the Company,
specifically including information for William Lyon Homes, Inc. is presented
below. Investments in subsidiaries are presented using the equity method of
accounting. Separate financial statements of William Lyon Homes, Inc. are not
provided, as the consolidating financial information contained herein provides a
more meaningful disclosure to allow investors to determine the nature of assets
held and the operations of the combined groups.
CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... $ -- $ 5,303 $ 2,112 $ -- $ 7,415
Receivables......................... -- 8,396 7,404 -- 15,800
Real estate inventories............. -- 181,295 2,970 -- 184,265
Investments in and advances to
unconsolidated joint ventures..... -- 22,953 36,365 -- 59,318
Property and equipment, net......... -- 2,258 302 -- 2,560
Deferred loan costs................. 367 729 -- -- 1,096
Goodwill............................ -- 7,758 -- -- 7,758
Other assets........................ -- 23,092 96 -- 23,188
Investments in subsidiaries......... 68,617 40,720 -- (109,337) --
Intercompany receivables............ 87,215 5,403 -- (92,618) --
-------- -------- ------- --------- --------
$156,199 $297,907 $49,249 $(201,955) $301,400
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................... $ -- $ 17,576 $ 497 $ -- $ 18,073
Accrued expenses.................... -- 27,544 1,637 -- 29,181
Notes payable....................... -- 99,476 3,874 -- 103,350
12 1/2% Senior Notes................ 78,225 -- -- -- 78,225
Intercompany payables............... 5,403 87,215 -- (92,618) --
-------- -------- ------- --------- --------
Total liabilities......... 83,628 231,811 6,008 (92,618) 228,829
Stockholders' equity................ 72,571 66,096 43,241 (109,337) 72,571
-------- -------- ------- --------- --------
$156,199 $297,907 $49,249 $(201,955) $301,400
======== ======== ======= ========= ========
</TABLE>
13
<PAGE> 14
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-----------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... $ -- $ 1,344 $ 810 $ -- $ 2,154
Receivables......................... -- 6,792 5,271 -- 12,063
Real estate inventories............. -- 178,280 5,991 -- 184,271
Investments in and advances to
unconsolidated joint ventures..... -- 16,229 34,053 -- 50,282
Property and equipment, net......... -- 2,115 68 -- 2,183
Deferred loan costs................. 704 1,022 -- -- 1,726
Goodwill............................ -- 8,382 -- -- 8,382
Other assets........................ -- 17,400 22 -- 17,422
Investments in subsidiaries......... 49,843 39,819 -- (89,662) --
Intercompany receivables............ 108,340 5,586 -- (113,926) --
-------- -------- ------- --------- --------
$158,887 $276,969 $46,215 $(203,588) $278,483
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................... $ -- $ 15,215 $ 438 $ -- $ 15,653
Accrued expenses.................... -- 31,201 1,698 -- 32,899
Notes payable....................... -- 73,497 3,133 -- 76,630
12 1/2% Senior Notes................ 100,000 -- -- -- 100,000
Intercompany payables............... 5,586 108,340 -- (113,926) --
-------- -------- ------- --------- --------
Total liabilities......... 105,586 228,253 5,269 (113,926) 225,182
Stockholders' Equity................ 53,301 48,716 40,946 (89,662) 53,301
-------- -------- ------- --------- --------
$158,887 $276,969 $46,215 $(203,588) $278,483
======== ======== ======= ========= ========
</TABLE>
14
<PAGE> 15
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenue
Sales............................... $ -- $ 82,582 $ 11,763 $ -- $ 94,345
Management fee income............... -- 327 2,019 -- 2,346
------- -------- -------- -------- --------
-- 82,909 13,782 -- 96,691
------- -------- -------- -------- --------
Operating costs
Cost of sales....................... -- (66,592) (10,026) -- (76,618)
Sales and marketing................. -- (2,975) (471) -- (3,446)
General and administrative.......... -- (8,849) (56) -- (8,905)
Amortization of goodwill............ -- (310) -- -- (310)
------- -------- -------- -------- --------
-- (78,726) (10,553) -- (89,279)
------- -------- -------- -------- --------
Equity in income of unconsolidated
joint ventures...................... -- 30 5,330 -- 5,360
------- -------- -------- -------- --------
Income from subsidiaries.............. 7,171 8,636 -- (15,807) --
------- -------- -------- -------- --------
Operating income...................... 7,171 12,849 8,559 (15,807) 12,772
Interest expense, net of amounts
capitalized......................... -- (1,876) (56) -- (1,932)
Other income (expense), net........... -- 462 140 -- 602
------- -------- -------- -------- --------
Income before income taxes and
extraordinary item.................. 7,171 11,435 8,643 (15,807) 11,442
Provision for income taxes
Income taxes -- benefit credited to
paid-in capital.................. -- (3,722) -- -- (3,722)
Income taxes -- alternate minimum
tax.............................. -- (549) -- -- (549)
------- -------- -------- -------- --------
Income before extraordinary item...... 7,171 7,164 8,643 (15,807) 7,171
Extraordinary item -- gain from
retirement of debt, net of
applicable income taxes............. 496 -- -- -- 496
------- -------- -------- -------- --------
Net income............................ $ 7,667 $ 7,164 $ 8,643 $(15,807) $ 7,667
======= ======== ======== ======== ========
</TABLE>
15
<PAGE> 16
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenue
Sales............................... $ -- $ 75,162 $ 20,553 $ -- $ 95,715
Management fee income............... -- 151 893 -- 1,044
------ -------- -------- -------- --------
-- 75,313 21,446 -- 96,759
------ -------- -------- -------- --------
Operating costs
Cost of sales....................... -- (63,856) (15,307) -- (79,163)
Sales and marketing................. -- (3,650) (735) -- (4,385)
General and administrative.......... -- (4,938) (48) -- (4,986)
------ -------- -------- -------- --------
-- (72,444) (16,090) -- (88,534)
------ -------- -------- -------- --------
Equity in income of unconsolidated
joint ventures...................... -- 228 1,691 -- 1,919
------ -------- -------- -------- --------
Income from subsidiaries.............. 8,276 6,778 -- (15,054) --
------ -------- -------- -------- --------
Operating income...................... 8,276 9,875 7,047 (15,054) 10,144
Interest expense, net of amounts
capitalized......................... -- (832) (624) -- (1,456)
Financial advisory expenses........... (588) -- -- -- (588)
Other income (expense), net........... -- 401 473 -- 874
------ -------- -------- -------- --------
Income before income taxes and
extraordinary item.................. 7,688 9,444 6,896 (15,054) 8,974
Provision for income taxes
Income taxes -- benefit credited to
paid-in capital.................. -- (1,286) -- -- (1,286)
------ -------- -------- -------- --------
Income before extraordinary item...... 7,688 8,158 6,896 (15,054) 7,688
------ -------- -------- -------- --------
Extraordinary item -- gain from
retirement of debt, net of
applicable income taxes............. 1,789 -- -- -- 1,789
------ -------- -------- -------- --------
Net income............................ $9,477 $ 8,158 $ 6,896 $(15,054) $ 9,477
====== ======== ======== ======== ========
</TABLE>
16
<PAGE> 17
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenue
Sales............................... $ -- $ 146,103 $ 13,615 $ -- $ 159,718
Management fee income............... -- 677 3,294 -- 3,971
------- --------- -------- -------- ---------
-- 146,780 16,909 -- 163,689
------- --------- -------- -------- ---------
Operating costs
Cost of sales....................... -- (118,272) (11,532) -- (129,804)
Sales and marketing................. -- (6,210) (772) -- (6,982)
General and administrative.......... -- (16,268) (117) -- (16,385)
Amortization of goodwill............ -- (624) -- -- (624)
------- --------- -------- -------- ---------
-- (141,374) (12,421) -- (153,795)
------- --------- -------- -------- ---------
Equity in income of unconsolidated
joint ventures...................... -- 793 9,693 -- 10,486
------- --------- -------- -------- ---------
Income from subsidiaries.............. 14,810 14,189 -- (28,999) --
------- --------- -------- -------- ---------
Operating income...................... 14,810 20,388 14,181 (28,999) 20,380
Interest expense, net of amounts
capitalized......................... -- (3,233) (244) -- (3,477)
Other income (expense), net........... -- 2,442 129 -- 2,571
------- --------- -------- -------- ---------
Income before income taxes and
extraordinary item.................. 14,810 19,597 14,066 (28,999) 19,474
Provision for income taxes
Income taxes -- benefit credited to
paid-in capital.................. -- (3,722) -- -- (3,722)
Income taxes -- alternate minimum
tax.............................. -- (549) -- -- (549)
------- --------- -------- -------- ---------
Income before extraordinary item...... 14,810 14,933 14,066 (28,999) 14,810
Extraordinary item -- gain from
retirement of debt, net of
applicable income taxes............. 496 -- -- -- 496
------- --------- -------- -------- ---------
Net income............................ $15,306 $ 14,933 $ 14,066 $(28,999) $ 15,306
======= ========= ======== ======== =========
</TABLE>
17
<PAGE> 18
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenue
Sales............................... $ -- $ 139,525 $ 38,487 $ -- $ 178,012
Management fee income............... -- 318 1,663 -- 1,981
------- --------- -------- -------- ---------
-- 139,843 40,150 -- 179,993
------- --------- -------- -------- ---------
Operating costs
Cost of sales....................... -- (118,206) (29,652) -- (147,858)
Sales and marketing................. -- (6,963) (1,497) -- (8,460)
General and administrative.......... -- (9,752) (102) -- (9,854)
------- --------- -------- -------- ---------
-- (134,921) (31,251) -- (166,172)
------- --------- -------- -------- ---------
Income from unconsolidated joint
ventures............................ -- 396 4,468 -- 4,864
------- --------- -------- -------- ---------
Income from subsidiaries.............. 14,364 12,788 -- (27,152) --
------- --------- -------- -------- ---------
Operating income...................... 14,364 18,106 13,367 (27,152) 18,685
Interest expense, net of amounts
capitalized......................... -- (2,268) (1,403) -- (3,671)
Financial advisory expenses........... (1,280) -- -- -- (1,280)
Other income (expense), net........... -- 478 1,063 -- 1,541
------- --------- -------- -------- ---------
Income before income taxes and
extraordinary item.................. 13,084 16,316 13,027 (27,152) 15,275
Provision for income taxes
Income taxes -- benefit credited to
paid-in capital.................. -- (2,191) -- -- (2,191)
------- --------- -------- -------- ---------
Income before extraordinary item...... 13,084 14,125 13,027 (27,152) 13,084
------- --------- -------- -------- ---------
Extraordinary item -- gain from
retirement of debt, net of
applicable income taxes............. 1,789 -- -- -- 1,789
------- --------- -------- -------- ---------
Net income............................ $14,873 $ 14,125 $ 13,027 $(27,152) $ 14,873
======= ========= ======== ======== =========
</TABLE>
18
<PAGE> 19
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 15,306 $ 14,933 $ 14,066 $(28,999) $ 15,306
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization........ -- 1,463 47 -- 1,510
Equity in income of unconsolidated
joint ventures..................... -- (793) (9,693) -- (10,486)
Equity in earnings of subsidiaries... (14,810) (14,189) -- 28,999 --
Extraordinary gain on repurchase of
senior notes....................... (522) -- -- -- (522)
Provision for income taxes........... -- 4,690 -- -- 4,690
Net changes in operating assets and
liabilities:
Other receivables.................. -- (953) 1,017 -- 64
Intercompany
receivables/payables............ (183) 183 -- -- --
Real estate inventories............ -- (3,015) 3,021 -- 6
Deferred loan costs................ 209 84 -- -- 293
Other assets....................... -- (5,692) (74) -- (5,766)
Accounts payable................... -- 2,361 59 -- 2,420
Accrued expenses................... -- (4,625) (61) -- (4,686)
-------- -------- -------- -------- ---------
Net cash (used in) provided by operating
activities........................... -- (5,553) 8,382 -- 2,829
-------- -------- -------- -------- ---------
Cash flows from investing activities:
Investment in unconsolidated joint
ventures............................. -- (5,931) 4,231 -- (1,700)
Issuance of/payments on notes
receivable........................... -- (651) -- -- (651)
Purchases of property and equipment..... -- (773) (281) -- (1,054)
Investment in subsidiaries.............. -- 13,288 -- (13,288) --
Advances to affiliates.................. 20,883 -- -- (20,883) --
-------- -------- -------- -------- ---------
Net cash provided by (used in) investing
activities........................... 20,883 5,933 3,950 (34,171) (3,405)
-------- -------- -------- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings on notes
payable.............................. -- 97,488 32,977 -- 130,465
Principal payments on notes payable..... -- (71,509) (32,236) -- (103,745)
Purchase of 12 1/2% Senior Notes........ (21,125) -- -- -- (21,125)
Distributions to/contributions from
shareholders......................... -- (1,275) (11,771) 13,046 --
Common stock issued for exercised
options.............................. 242 -- -- -- 242
Advances from affiliates................ -- (21,125) -- 21,125 --
-------- -------- -------- -------- ---------
Net cash provided by financing
activities........................... (20,883) 3,579 (11,030) 34,171 5,837
-------- -------- -------- -------- ---------
Net increase in cash and cash
equivalents............................. -- 3,959 1,302 -- 5,261
Cash and cash equivalents at beginning of
period.................................. -- 1,344 810 -- 2,154
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of
period.................................. $ -- $ 5,303 $ 2,112 $ -- $ 7,415
======== ======== ======== ======== =========
</TABLE>
19
<PAGE> 20
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED
LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY
-------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 14,873 $ 14,125 $ 13,027 $(27,152) $ 14,873
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization........ -- 470 78 -- 548
Equity in earnings of joint
ventures........................... -- (396) (4,468) -- (4,864)
Equity in earnings of subsidiaries... (14,364) (12,788) -- 27,152 --
Extraordinary gain on repurchase of
Senior Notes....................... (2,089) -- -- -- (2,089)
Provision for income taxes........... -- 2,491 -- -- 2,491
Net changes in operating assets and
liabilities:
Other receivables.................. -- 10,775 (7,893) -- 2,882
Intercompany
receivables/payables............ 1,275 (1,275) -- -- --
Real estate inventories............ -- (2,901) 4,704 -- 1,803
Deferred loan costs................ 305 394 30 -- 729
Other assets....................... -- (1,347) 18 -- (1,329)
Accounts payable................... -- (571) (864) -- (1,435)
Accrued expenses................... -- (2,036) 38 -- (1,998)
-------- -------- -------- -------- --------
Net cash provided by operating
activities........................... -- 6,941 4,670 -- 11,611
-------- -------- -------- -------- --------
Cash flows from investing activities:
Investment in unconsolidated joint
ventures............................. -- (36) 413 -- 377
Issuance of/payments on notes
receivable........................... -- (7,870) -- -- (7,870)
Purchases of property and equipment..... -- (98) (72) -- (170)
Investment in subsidiaries.............. -- 6,714 -- (6,714) --
Advances to affiliates.................. 17,700 -- -- (17,700) --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities.............................. 17,700 (1,290) 341 (24,414) (7,663)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings on notes
payable.............................. -- 70,306 21,759 -- 92,065
Principal payments on notes payable..... -- (70,425) (19,566) -- (89,991)
Purchase of 12 1/2% Senior Notes........ (17,700) -- -- -- (17,700)
Distributions to/contributions from
shareholders......................... -- 379 (7,093) 6,714 --
Advances from affiliates................ -- (17,700) -- 17,700 --
-------- -------- -------- -------- --------
Net cash used in financing activities..... (17,700) (17,440) (4,900) 24,414 (15,626)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. -- (11,789) 111 -- (11,678)
Cash and cash equivalents at beginning of
period.................................. -- 22,605 1,350 -- 23,955
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period.................................. $ -- $ 10,816 $ 1,461 $ -- $ 12,277
======== ======== ======== ======== ========
</TABLE>
20
<PAGE> 21
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 -- GAIN FROM SALE OF OFFICE BUILDING
In March 2000, the Company completed the sale of an office building where
its prior executive offices were located in Newport Beach, California which was
no longer needed after the consolidation of certain of the Company's operations.
The sales price was $2,120,000 which the Company received in cash at closing.
The net gain from the sale of approximately $1,747,000 is reflected in Other
income (expense), net on the Consolidated Statement of Income for the six months
ended June 30, 2000.
NOTE 7 -- GAIN FROM RETIREMENT OF DEBT
In April and May 2000, the Company purchased $21,775,000 principal amount
of its outstanding Senior Notes at a cost of $21,125,000. The net gain resulting
from the purchase was $496,000 after giving effect to income taxes of $26,000
and amortization of related loan costs of $128,000. Such gain is reflected as an
extraordinary item in the Company's results of operations for the second quarter
ended June 30, 2000.
In April 1999, the Company purchased $20,000,000 principal amount of its
outstanding Senior Notes at a cost of $17,700,000. The net gain resulting from
the purchase was $1,789,000, after giving effect to income taxes of $300,000 and
amortization of related deferred loan costs of $211,000. Such gain is reflected
as an extraordinary item in the Company's results of operations for the second
quarter ended June 30, 1999.
NOTE 8 -- STOCK OPTIONS
Effective on May 12, 2000, certain officers exercised options to purchase
48,334 shares of the Company's common stock at a price of $5.00 per share in
accordance with the Company's 1991 Stock Option Plan, as amended. As of June 30,
2000, outstanding options to purchase common stock under the Company's 1991
Stock Option Plan are as follows: 96,666 options priced at $5.00 and 16,000
options priced at $14.375.
Effective on May 9, 2000, the Company's Board of Directors approved the
William Lyon Homes 2000 Stock Incentive Plan (the "Plan") and authorized an
initial 1,000,000 shares of common stock to be reserved for issuance under the
Plan. Under the Plan, options may be granted from time to time to key employees,
officers, directors, consultants and advisors of the Company. The Plan is
administered by the Stock Option Committee of the Board of Directors (the
"Committee"). The Committee is generally empowered to interpret the Plan,
prescribe rules and regulations relating thereto, determine the terms of the
option agreements, amend them with the consent of the optionee, determine the
employees to whom options are to be granted, and determine the number of shares
subject to each option and the exercise price thereof. The per share exercise
price for options will not be less than 100% of the fair market value of a share
of common stock on the date the option is granted. The options will be
exercisable for a term determined by the Committee, not to exceed ten years from
the date of grant.
Effective on May 9, 2000, the Company issued options under the William Lyon
Homes 2000 Stock Incentive Plan to purchase a total of 627,500 shares of common
stock at $8.6875 per share. The options vest as follows: one-third on May 9,
2001, one-third on May 9, 2002 and one-third on May 9, 2003. All unexercised
options expire on May 9, 2010.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company acquired substantially all of the assets and assumed
substantially all of the related liabilities of Old William Lyon Homes as
described in Note 2.
The Company purchased real estate projects for a total purchase price of
$5,529,700 during the six months ended June 30, 2000 from entities controlled by
William Lyon and William H. Lyon.
21
<PAGE> 22
WILLIAM LYON HOMES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
For the three and six months ended June 30, 2000, the Company earned
management fees of $172,000 and $280,300, respectively; and accrued on-site
labor costs of $80,100 and $276,200, respectively, for managing and selling real
estate owned by entities controlled by William Lyon and William H. Lyon of which
$91,700 was due the Company at June 30, 2000.
For the three and six months ended June 30, 2000, the Company incurred
charges of $182,300 and $352,400, respectively, related to rent on its corporate
office, from an entity controlled by William Lyon and William H. Lyon.
22
<PAGE> 23
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, 1999.
GENERAL OVERVIEW
On November 5, 1999, the Company as described below, acquired substantially
all of the assets and assumed substantially all of the related liabilities of
William Lyon Homes, Inc. ("Old William Lyon Homes"), in accordance with a
Purchase Agreement executed as of October 7, 1999 with Old William Lyon Homes,
William Lyon and William H. Lyon. William Lyon is Chairman of the Board of Old
William Lyon Homes and also Chairman of the Board and Chief Executive Officer of
the Company. William H. Lyon is the son of William Lyon and a director and an
employee of the Company.
The total purchase price consisted of approximately $42,598,000 in cash and
the assumption of approximately $101,058,000 of liabilities of Old William Lyon
Homes. The acquisition has been accounted for as a purchase and, accordingly,
the purchase price has been allocated based on the fair value of the assets and
liabilities acquired. The excess of the purchase price over the net assets
acquired amounting to approximately $8,689,000 has been reflected as goodwill
and is being amortized on a straight-line basis over an estimated useful life of
seven years.
After the acquisition described above and prior to the effectiveness of the
merger as described below, William Lyon and a trust of which William H. Lyon is
the beneficiary acquired (1) 5,741,454 shares of the Company's Series A Common
Stock for $0.655 per share in a tender offer for the purchase of up to
10,678,792 shares of the Company's Series A Common Stock which closed on
November 5, 1999 and (2) 14,372,150 shares of the Company's Series B Common
Stock for $0.655 per share under agreements with certain holders of the
Company's Series B Common Stock which closed on November 8, 1999. On November 5,
1999 William Lyon and the Company cancelled all of William Lyon's outstanding
options to purchase 750,000 shares of the Company's Series A Common Stock. The
completion of these transactions, together with the previous disposition on
August 12, 1999 of 3,000,000 shares by William Lyon and a trust of which William
H. Lyon is the beneficiary, resulted in William Lyon and a trust of which
William H. Lyon is a beneficiary owning approximately 49.9% of the Company's
outstanding Common Stock.
On November 5, 1999 at a Special Meeting of Holders of Common Stock, the
Holders of Common Stock approved a proposal to adopt a certificate of ownership
and merger pursuant to which The Presley Companies would merge with and into
Presley Merger Sub, Inc., a newly-formed Delaware corporation and wholly owned
subsidiary of The Presley Companies, with Presley Merger Sub, Inc. being the
surviving corporation. In the merger, each outstanding share of common stock of
The Presley Companies became exchangeable for 0.2 share of common stock of
Presley Merger Sub, Inc. In the merger, the surviving corporation was named "The
Presley Companies," which in turn was renamed William Lyon Homes on December 31,
1999.
The principal purpose of the merger is to help preserve the Company's
substantial net operating loss carryforwards and other tax benefits for use in
offsetting future taxable income by decreasing, but not eliminating, the risk of
an "ownership change" for federal income tax purposes.
In general, the transfer restrictions prohibit, without prior approval of
the board of directors of the Company, the direct or indirect disposition or
acquisition of any stock of the Company by or to any holder who owns or would so
own upon the acquisition (either directly or through the tax attribution rules)
5% or more of the Company's stock.
23
<PAGE> 24
The Company after the consummation of the merger had substantially the same
financial position as that of The Presley Companies immediately before the
merger (the merger took effect after consummation of the transactions
contemplated in the Purchase Agreement with Old William Lyon Homes -- see Note
2). Except for the transfer restrictions and the elimination of provisions
dividing the common stock into two series, the new shares of common stock issued
by the surviving company in the merger have terms substantially similar to the
old shares of common stock.
In connection with the acquisition and merger, the Company incurred costs
of approximately $588,000 and $1,280,000 for the three and six months ended June
30, 1999, respectively, which are reflected in the Consolidated Statements of
Income as financial advisory expenses.
Effective on November 5, 1999, Old William Lyon Homes changed its name to
Corporate Enterprises, Inc. Effective after the close of business on December
31, 1999, The Presley Companies changed its name to William Lyon Homes.
Effective on January 3, 2000, the Company's stock ticker symbol changed from PDC
to WLS. The Company's common stock continues to trade on the New York Stock
Exchange under the stock symbol WLS.
In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due on July 1, 2001, if the Company's Consolidated
Tangible Net Worth is less than $60 million for two consecutive fiscal quarters,
the Company is required to offer to purchase $20 million in principal amount of
the Senior Notes. Because the Company's Consolidated Tangible Net Worth had been
less than $60 million beginning with the quarter ended June 30, 1997, the
Company would, effective on December 4, 1997, June 4, 1998, December 4, 1998,
June 4, 1999, December 4, 1999 and June 4, 2000, have been required to make
offers to purchase $20 million of the Senior Notes at par plus accrued interest,
less the face amount of Senior Notes acquired by the Company after September 30,
1997, March 31, 1998, September 30, 1998, March 31, 1999, September 30, 1999 and
March 31, 2000, respectively. The Company acquired Senior Notes with a face
amount equal to or greater than $20 million after September 30, 1997 and prior
to December 4, 1997, again after March 31, 1998 and prior to June 4, 1998, again
after September 30, 1998 and prior to December 4, 1998, again after March 31,
1999 and prior to June 4, 1999, again after September 30, 1999 and prior to
December 4, 1999, and again after March 31, 2000 and prior to June 4, 2000 and
therefore was not required to make said offers.
At June 30, 2000, the Company's Consolidated Tangible Net Worth was $63.7
million. As long as the Company's Consolidated Tangible Net Worth is not less
than $60.0 million on the last day of two consecutive fiscal quarters, the
Company will not be required to make similar offers to purchase $20 million in
principal amount of the Senior Notes.
Because of the Company's obligation to offer to purchase $20 million of the
Senior Notes every six months so long as the Company's Consolidated Tangible Net
Worth was less than $60 million on the last day of two consecutive fiscal
quarters, the Company has been restricted in its ability to acquire, hold and
develop real estate projects. The Company changed its operating strategy during
1997 to finance certain projects by forming joint ventures with venture partners
that would provide a substantial portion of the capital necessary to develop
these projects. The Company believes that the use of joint venture partnerships
better enables it to reduce its capital investments and risks in the highly
capital intensive California markets, as well as to repurchase the Company's
Senior Notes as described above. The Company generally receives, after priority
returns and capital distributions to its partners, approximately 50% of the
profits and losses, and cash flows from joint ventures.
As of June 30, 2000, the Company and certain of its subsidiaries are
general partners or members in twenty-four joint ventures involved in the
development and sale of residential projects. Such joint ventures are 50% or
less owned and, accordingly, the financial statements of such joint ventures are
not consolidated with the Company's financial statements. The Company's
investments in unconsolidated joint ventures are accounted for using the equity
method. See Note 4 of "Notes to Consolidated Financial Statements" for condensed
combined financial information for these joint ventures. Based upon current
estimates, all future development and construction costs will be funded by the
Company's venture partners or from the proceeds of construction financing
obtained by the joint ventures.
24
<PAGE> 25
At December 31, 1999, the Company had net operating loss carryforwards for
Federal tax purposes of approximately $106.2 million, of which $12.9 million
expires in 2008, $27.4 million expires in 2009, $35.8 million expires in 2010,
$13.7 million expires in 2011, $16.4 million expires in 2012 and $28,000 expires
in 2018. The Company's ability to utilize the tax benefits associated with its
net operating loss carryforwards will depend upon the amount of its otherwise
taxable income and may be limited in the event of an "ownership change" under
federal tax laws and regulations.
The ability of the Company to meet its obligations on its indebtedness will
depend to a large degree on its future performance which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, weather, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective indemnification agreements,
availability of labor and homebuilding materials, changes in governmental laws
and regulations, and the availability and cost of land for future development.
At this time, the Company's degree of leverage may limit its ability to meet its
obligations, withstand adverse business or other conditions and capitalize on
business opportunities.
The Company has previously announced that it had received notification from
the New York Stock Exchange on July 28, 1999 that the Securities and Exchange
Commission had approved amendments to the NYSE's continued listing standards.
Under these new standards, the Company would be considered "below criteria" if
it has:
- Total market capitalization of less than $50 million;
- Total stockholders' equity of less than $50 million;
- Average market capitalization of less than $15 million over a consecutive
30-day trading period; or
- Average closing price of less than $1.00 over a consecutive 30
trading-day period.
The NYSE notified the Company that it was below these new criteria on the
date of the notification. The NYSE further informed the Company that failure to
raise its stock price above $1.00 per share within six months would result in
immediate suspension of trading and application to the SEC for delisting. In
addition, the Company would have 45 days from the date of the NYSE's
notification to present a business plan to the NYSE that would demonstrate
compliance with all aspects of the other two criteria within 12 months of the
date of the NYSE's notification. The Company submitted a business plan to the
NYSE within the 45 day period. On September 30, 1999, the NYSE notified the
Company that it had accepted the Company's business plan and would continue the
listing of the Company at that time. The NYSE notification further stated that
the NYSE would continue to monitor the Company quarterly during the twelve
months from the date of the notification. If the Company failed to achieve the
quarterly milestones or if at the completion of the 12 months it was not in
compliance with the new continued listing criteria, the Company would be
suspended from trading on the NYSE and application would be made to the SEC for
delisting. As of and through June 30, 2000, the Company was in compliance with
all NYSE listing criteria and had achieved all quarterly milestones. As of June
30, 2000, the Company had a total market capitalization and stockholders' equity
in excess of $50 million, had an average market capitalization in excess of $15
million over the consecutive 30-day trading period and had an average closing
price in excess of $1.00 over the consecutive 30-day trading period.
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<PAGE> 26
RESULTS OF OPERATIONS
OVERVIEW AND RECENT RESULTS
Homes sold, closed and in backlog for the Company and its unconsolidated
joint ventures as of and for the periods presented are as follows:
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR
THE THREE MONTHS THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of homes sold
Company..................................... 367 462 838 928
Unconsolidated joint ventures............... 221 143 509 331
------ ------ ------ ------
588 605 1,347 1,259
====== ====== ====== ======
Number of homes closed
Company..................................... 387 438 706 839
Unconsolidated joint ventures............... 200 96 400 212
------ ------ ------ ------
587 534 1,106 1,051
====== ====== ====== ======
Backlog of homes sold but not closed at end of
period
Company..................................... 575 588 575 588
Unconsolidated joint ventures............... 296 237 296 237
------ ------ ------ ------
871 825 871 825
====== ====== ====== ======
Dollar amount of backlog of homes sold but not
closed at end of period (in millions):
Company..................................... $132.5 $120.0 $132.5 $120.0
Unconsolidated joint ventures............... 141.1 95.7 141.1 95.7
------ ------ ------ ------
$273.6 $215.7 $273.6 $215.7
====== ====== ====== ======
</TABLE>
Homes in backlog are generally closed within three to six months. The
dollar amount of backlog of homes sold but not closed as of June 30, 2000 was
$273.6 million, as compared to $215.7 million as of June 30, 1999 and $276.4
million as of March 31, 2000. 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 1999 and 16% during the first six months of 2000.
The number of homes sold for the quarter ended June 30, 2000 decreased 3
percent to 588 units from 605 a year ago. For the second quarter of 2000, the
number of homes sold decreased 23 percent to 588 from 759 units in the first
quarter of 2000. The number of homes closed in the second quarter of 2000
increased 10 percent to 587 from 534 in the second quarter of 1999. The backlog
of homes sold as of June 30, 2000 was 871, up 6 percent from 825 units a year
earlier, and up slightly from 868 units at March 31, 2000.
Financial Accounting Standards Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
("Statement No. 121") which requires impairment losses to be recorded on assets
to be held and used by the Company when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets (excluding
interest) are less than the carrying amount of the assets. Statement No. 121
also requires that long-lived assets that are held for disposal be reported at
the lower of the assets' carrying amount or fair value less cost of disposal.
Under the pronouncement, when an impairment loss is required for assets to be
held and used by the Company, the related assets are adjusted to their estimated
fair value.
The net loss for the year ended December 31, 1997 included a non-cash
charge of $74,000,000 during the second quarter of 1997 to record impairment
losses on certain real estate assets held and used by the Company. The
impairment losses related to three of the Company's master-planned communities.
The impairment losses related to two communities, which are located in the
Inland Empire area of Southern
26
<PAGE> 27
California, arose primarily from declines in home sales prices due to continued
weak economic conditions and competitive pressures in that area of Southern
California. The impairment loss relating to the other community, which is
located in Contra Costa County in the East San Francisco Bay area of Northern
California, was primarily attributable to lower than expected cash flow relating
to one of the high end residential products in this community and to a
deterioration in the value of the non-residential portion of the project. The
significant deteriorations in the market conditions associated with these
communities resulted in the undiscounted cash flows (excluding interest)
estimated to be generated by these communities being less than their historical
book values. Accordingly, the master-planned communities were written-down to
their estimated fair value.
The following represents the home sales and excess of revenue from sales
over related cost of sales (i.e., gross profit) of the three master-planned
communities since the recordation of impairment losses on June 30, 1997:
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS FOR THE FOR THE SIX MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales......................... $17,662,000 $54,828,000 $79,584,000 $28,896,000
Gross profit.................. $ 1,202,000 $ 5,850,000 $13,012,000 $ 7,049,000
Gross profit %................ 6.8% 10.7% 16.4% 24.4%
</TABLE>
The gross profits recognized on the three master-planned communities
subsequent to the recordation of the impairment losses has increased due to
better than projected sales price increases beginning in 1998.
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 net results may
be adversely impacted. To a limited extent, the Company hedges against increases
in interest costs by acquiring interest rate protection that locks in or caps
interest rates for limited periods of time for mortgage financing for
prospective homebuyers.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999
Total sales (which represent recorded revenues from closings) for the three
months ended June 30, 2000 were $94.3 million, a decrease of $1.4 million (1.5%)
from sales of $95.7 million for the three months ended June 30, 1999. Revenue
from sales of homes increased $2.1 million (2.3%) to $94.1 million in the 2000
period from $92.0 million in the 1999 period. This increase was due primarily to
an increase in the average sales prices of wholly-owned units to $243,300 in the
2000 period from $210,000 in the 1999 period, offset by a decrease in the number
of wholly-owned units closed to 387 in the 2000 period from 438 in the 1999
period. Management fee income increased by $1.3 million to $2.3 million in the
2000 period from $1.0 million in the 1999 period as a direct result of the
Company's strategy of financing an increased number of projects through
unconsolidated joint ventures. Equity in income of unconsolidated joint ventures
amounting to $5.4 million was recognized in the 2000 period, compared to $1.9
million in the comparable period for 1999 also as a direct result of the
Company's strategy of financing an increased number of projects through
unconsolidated joint ventures.
Total operating income increased from $10.1 million in the 1999 period to
$12.8 million in the 2000 period. The excess of revenue from sales of homes over
the related cost of sales increased by $1.8 million to $17.7 million in the 2000
period from $15.9 million in the 1999 period, resulting in an improvement in
gross margins of 1.5 percent to 18.8 percent in the 2000 period from 17.3
percent in the 1999 period. This increase was primarily due to an increase in
the average sales price of wholly-owned units to $243,300 in the 2000 period
from $210,000 in the 1999 period, offset by a decrease in the number of
wholly-owned units closed to 387 units in the 2000 period from 438 units in the
1999 period. The Company's revenues and total operating
27
<PAGE> 28
income are affected by the proportion of units sold by the Company and those
sold by unconsolidated joint ventures. While the average sales price of homes
sold by joint ventures has been higher than the average sales price of
wholly-owned units, the Company generally receives, after priority returns and
capital distributions, approximately 50% of the profits and losses and cash
flows from joint ventures. Sales and marketing expenses decreased by $1.0
million to $3.4 million in the 2000 period from $4.4 million in the 1999 period
primarily as a result of a reduction in direct selling expenses due to a
decrease in the number of wholly-owned units closed to 387 units in the 2000
period from 438 units in the 1999 period. General and administrative expenses
increased by $3.9 million to $8.9 million in the 2000 period from $5.0 million
in the 1999 period, primarily as a result of 1) increases in salaries and
benefits primarily as a result of an increase in the total number of employees
related to the Company's increased operations ($1.7 million); 2) increases in
office expenses related to increased employment levels ($0.6 million); 3)
increases in outside services primarily related to the consolidation and
conversion of the accounting and operational systems for all of the projects
acquired in November 1999 as described in Note 2 of Notes to Consolidated
Financial Statements ($0.5 million); and 4) increases in provisions for
increased bonuses due to the Company's improved results of operations ($1.1
million).
Total interest incurred increased $0.8 million (15%) from $5.5 million in
the 1999 period to $6.3 million in the 2000 period primarily as a result of an
increase in the average amount of outstanding debt and by increases in interest
rates. Net interest expense increased to $1.9 million in the 2000 period from
$1.5 million in the 1999 period as a result of an increase in total interest
incurred.
As a result of the acquisition and merger described in Notes 2 and 3 of
Notes to Consolidated Financial Statements, the Company incurred financial
advisory expenses of $0.6 million for the three months ended June 30, 1999, with
no corresponding amounts for the three months ended June 30, 2000.
Other income (expense), net decreased to $0.6 million in the 2000 period
from $0.9 million in the 1999 period primarily as a result of reduced income
from the Company's mortgage company operations.
For the three months ended June 30, 2000 and 1999, income tax benefits of
$3,722,000 and $1,586,000, respectively, related to temporary differences
resulting from the quasi-reorganization were excluded from the results of
operations and not reflected as a reduction to the Company's provision for
income taxes but credited directly to paid-in capital.
The $3,722,000 included in the Company's provision for income taxes
represents income taxes which the Company will not be required to pay. As
described in Note 1 of Notes to Consolidated Financial Statements, the
pre-quasi-reorganization income tax benefits which would otherwise reduce the
provision for income taxes are credited directly to paid-in capital.
Stockholders' equity per common share increased by $1.09 per share during
the three months ended June 30, 2000 as a result of the net income for the
period and the income tax benefits credited directly to paid-in capital for the
period, compared with an increase of $1.06 for the comparable period a year ago.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999
Total sales (which represent recorded revenues from closings) for the six
months ended June 30, 2000 were $159.7 million, a decrease of $18.3 million
(10.3%) from sales of $178.0 million for the six months ended June 30, 1999.
Revenue from sales of homes decreased $15.3 million (8.8%) to $158.8 million in
the 2000 period from $174.1 million in the 1999 period. This decrease was due
primarily to a decrease in the number of wholly-owned units closed to 706 in the
2000 period from 839 in the 1999 period, offset by an increase in the average
sales prices of wholly-owned units to $224,900 in the 2000 period from $207,500
in the 1999 period. Management fee income increased by $2.0 million to $4.0
million in the 2000 period from $2.0 million in the 1999 period as a direct
result of the Company's strategy of financing an increased number of projects
through unconsolidated joint ventures. Equity in income of unconsolidated joint
ventures amounting to $10.5 million was recognized in the 2000 period, compared
to $4.9 million in the comparable period for 1999 also as a direct result of the
Company's strategy of financing an increased number of projects through
unconsolidated joint ventures.
28
<PAGE> 29
Total operating income increased from $18.7 million in the 1999 period to
$20.4 million in the 2000 period. The excess of revenue from sales of homes over
the related cost of sales decreased slightly to $29.8 million in the 2000 period
from $29.9 million in the 1999 period, resulting in an improvement in gross
margins of 1.6 percent to 18.8 percent in the 2000 period from 17.2 percent in
the 1999 period. This increase was primarily due to an increase in the average
sales price of wholly-owned units to $224,900 in the 2000 period from $207,500
in the 1999 period, offset by a decrease in the number of wholly-owned units
closed to 706 units in the 2000 period from 839 units in the 1999 period. The
Company's revenues and total operating income are affected by the proportion of
units sold by the Company and those sold by unconsolidated joint ventures. While
the average sales price of homes sold by joint ventures has been higher than the
average sales price of wholly-owned units, the Company generally receives, after
priority returns and capital distributions, approximately 50% of the profits and
losses and cash flows from joint ventures. Sales and marketing expenses
decreased by $1.5 million to $7.0 million in the 2000 period from $8.5 million
in the 1999 period primarily as a result of a reduction in direct selling
expenses due to a decrease in the number of wholly-owned units closed to 706
units in the 2000 period from 839 units in the 1999 period. General and
administrative expenses increased by $6.5 million to $16.4 million in the 2000
period from $9.9 million in the 1999 period, primarily as a result of 1)
increases in salaries and benefits primarily as a result of an increase in the
total number of employees related to the Company's increased operations ($2.9
million); 2) increases in office expenses related to increased employment levels
($1.1 million); 3) increases in outside services primarily related to the
consolidation and conversion of the accounting and operational systems for all
of the projects acquired in November 1999 as described in Note 2 of Notes to
Consolidated Financial Statements ($1.1 million); and 4) increases in provisions
for increased bonuses due to the Company's improved results of operations ($1.4
million).
Total interest incurred increased $0.7 million (6%) from $11.7 million in
the 1999 period to $12.4 million in the 2000 period primarily as a result of
increases in interest rates, offset by a decrease in the average amount of
outstanding debt. Net interest expense decreased to $3.5 million in the 2000
period from $3.7 million in the 1999 period as a result of an increase in real
estate assets which qualify for interest capitalization.
As a result of the acquisition and merger described in Notes 2 and 3 of
Notes to Consolidated Financial Statements, the Company incurred financial
advisory expenses of $1.3 million for the six months ended June 30, 1999, with
no corresponding amounts for the six months ended June 30, 2000.
Other income (expense), net increased to $2.6 million in the 2000 period
from $1.5 million in the 1999 period primarily as a result of the gain of $1.7
million on the sale of an office building in the 2000 period, offset by reduced
income from the Company's mortgage company operations.
For the six months ended June 30, 2000 and 1999, income tax benefits of
$3,722,000 and $2,491,000, respectively, related to temporary differences
resulting from the quasi-reorganization were excluded from the results of
operations and not reflected as a reduction to the Company's provision for
income taxes but credited directly to paid-in capital.
The $3,722,000 included in the Company's provision for income taxes
represents income taxes which the Company will not be required to pay. As
described in Note 1 of Notes to Consolidated Financial Statements, the
pre-quasi-reorganization income tax benefits which would otherwise reduce the
provision for income taxes are credited directly to paid-in capital.
Stockholders' equity per common share increased by $1.82 per share during
the six months ended June 30, 2000 as a result of the net income for the period
and the income tax benefits credited directly to paid-in capital for the period,
compared with an increase of $1.66 for the comparable period a year ago.
FINANCIAL CONDITION AND LIQUIDITY
The Company provides for its ongoing cash requirements principally from
internally generated funds from the sales of real estate and from outside
borrowings and, beginning in the fourth quarter of 1997, by joint venture
financing from newly formed joint ventures with venture partners that provide a
substantial portion of the capital required for certain projects. The Company
currently maintains the following major credit
29
<PAGE> 30
facilities: 12 1/2% Senior Notes (the "Senior Notes") and a secured revolving
lending facility (the "Working Capital Facility"). The Company also finances
certain projects with construction loans secured by real estate inventories and
finances certain land acquisitions with seller-provided financing.
The ability of the Company to meet its obligations on the Senior Notes and
its other 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. The Company's degree of leverage may limit its
ability to meet its obligations, withstand adverse business conditions and
capitalize on business opportunities.
The Company will in all likelihood be required to refinance the Senior
Notes and the Working Capital Facility when they mature, and no assurances can
be given that the Company will be successful in that regard.
SENIOR NOTES
The 12 1/2% Senior Notes due July 1, 2001 (the "Senior Notes") are
obligations of William Lyon Homes (formerly The Presley Companies), a Delaware
corporation ("Delaware Lyon"), and are unconditionally guaranteed on a senior
basis by William Lyon Homes, Inc. (formerly Presley Homes), a California
corporation and a wholly-owned subsidiary of Delaware Lyon. However, William
Lyon Homes, Inc. has granted liens on substantially all of its assets as
security for its obligations under the Working Capital Facility and other loans.
Because the William Lyon Homes, Inc. guarantee is not secured, holders of the
Senior Notes are effectively junior to borrowings under the Working Capital
Facility with respect to such assets. Interest on the Senior Notes is payable on
January 1 and July 1 of each year, commencing January 1, 1995.
Except as set forth in the Indenture Agreement (the "Indenture"), the
Senior Notes are redeemable at the option of Delaware Lyon, in whole or in part,
at the redemption prices set forth in the Indenture.
The Senior Notes are senior obligations of Delaware Lyon and rank pari
passu in right of payment to all existing and future unsecured indebtedness of
Delaware Lyon, and senior in right of payment to all future indebtedness of the
Company which by its terms is subordinated to the Senior Notes.
As described above in General Overview, Delaware Lyon is required to offer
to repurchase certain Senior Notes at a price equal to 100% of the principal
amount plus any accrued and unpaid interest to the date of repurchase if
Delaware Lyon's Consolidated Tangible Net Worth is less than $60.0 million on
the last day of any two consecutive fiscal quarters, as well as from the
proceeds of certain asset sales.
Upon certain changes of control as described in the Indenture, Delaware
Lyon must offer to repurchase Senior Notes at a price equal to 101% of the
principal amount plus accrued and unpaid interest, if any, to the date of
repurchase.
The Indenture governing the Senior Notes restricts Delaware Lyon and
certain of its subsidiaries with respect to, among other things: (i) the payment
of dividends on and redemptions of capital stock, (ii) the incurrence of
indebtedness or the issuance of preferred stock, (iii) the creation of certain
liens, (iv) consolidation or mergers with or transfers of all or substantially
all of its assets and (v) transactions with affiliates. These restrictions are
subject to a number of important qualifications and exceptions.
WORKING CAPITAL FACILITY
On July 6, 1998 the Company completed an agreement with the Agent of its
existing lender group under its Working Capital Facility to (1) extend this loan
facility to May 20, 2001, (2) increase the loan commitment to $100.0 million,
and (3) decrease the fees and costs compared to the prior revolving facility.
The collateral for the loans provided by the Working Capital Facility
continues to include substantially all real estate and other assets of the
Company (excluding assets of partnerships and limited liability companies and
assets which are pledged as collateral for construction notes payable described
below). The borrowing base is calculated based on specified percentages of book
values of real estate assets. The borrowing base at June 30, 2000 was
approximately $109.5 million; however, the maximum loan under the Working
Capital Facility, as stated above, is limited to $100.0 million. The principal
outstanding under the Working Capital Facility at June 30, 2000 was $73.0
million.
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<PAGE> 31
Pursuant to the terms of the Working Capital Facility, outstanding advances
bear interest at the "reference rate" of Chase Manhattan Bank plus 2%. An
alternate option provides for interest based on a specified overseas base rate
plus 4.44%, but not less than 8%. In addition, the Company pays a monthly fee of
0.25% on the average daily unused portion of the loan facility.
Upon completion of the new Working Capital Facility agreement, the Company
paid a one-time, non-refundable Facility Fee of $2.0 million, as well as a
yearly non-refundable Administrative Fee of $100,000.
The Working Capital Facility requires certain minimum cash flow and pre-tax
and pre-interest tests. The Working Capital Facility also includes negative
covenants which, among other things, place limitations on the payment of cash
dividends, merger transactions, transactions with affiliates, the incurrence of
additional debt and the acquisition of new land as described in the following
paragraph.
Under the terms of the Working Capital Facility, the Company may acquire
new improved land for development of housing units of no more than 300 lots in
any one location without approval from the lenders if certain conditions are
satisfied. The Company may, however, acquire any new raw land or improved land
provided the Company has obtained the prior written approval of lenders holding
two-thirds of the obligations under the Working Capital Facility.
The Working Capital Facility requires that mandatory prepayments be made to
reduce the outstanding balance of loans to the extent of all funds in excess of
$20.0 million in the principal operating accounts of the Company.
Management of the Company is currently in discussions and negotiations with
potential new lenders to provide financing to replace the Working Capital
Facility in advance of its maturity date of May 20, 2001. Management currently
anticipates that project level financing will be available in facilities
provided by a number of lenders which, collectively, would provide for the
repayment of the amounts outstanding under the Working Capital Facility as well
as finance on-going future projects. It is currently anticipated that the
repayment of amounts outstanding under the Working Capital Facility would be
completed no later than September 30, 2000. However, the availability and terms
of any such financing will depend upon a number of factors, including factors
not within the control of the Company such as prevailing economic conditions.
Therefore, no assurances can be given at this time that management will be
successful in obtaining such financing. Borrowing availability under these new
facilities would be based upon specified percentages of appraised values of real
estate assets.
CONSTRUCTION NOTES PAYABLE
At June 30, 2000, the Company had construction notes payable amounting to
$17.0 million related to various real estate projects. The notes are due as
units close or at various dates on or before August 5, 2001 and bear interest at
rates of prime plus 0.25% to prime plus 0.50%.
SELLER FINANCING
Another source of financing available to the Company is seller-provided
financing for land acquired by the Company. At June 30, 2000, the Company had
various notes payable outstanding related to land acquisitions for which seller
financing was provided in the amount of $9.5 million.
JOINT VENTURE FINANCING
As of June 30, 2000, the Company and certain of its subsidiaries are
general partners or members in twenty-four joint ventures involved in the
development and sale of residential projects. Such joint ventures are 50% or
less owned and, accordingly, the financial statements of such joint ventures are
not consolidated with the Company's financial statements. The Company's
investments in unconsolidated joint ventures are accounted for using the equity
method. See Note 4 of "Notes to Consolidated Financial Statements" for condensed
combined financial information for these joint ventures. Based upon current
estimates, all future development and construction costs will be funded by the
Company's venture partners or from the proceeds of construction financing
obtained by the joint ventures.
31
<PAGE> 32
As of June 30, 2000, the Company's investment in such joint ventures was
approximately $49.4 million and the Company's venture partners' investment in
such joint ventures was approximately $149.6 million. In addition, certain joint
ventures have obtained financing from land sellers or construction lenders which
amounted to approximately $56.9 million at June 30, 2000.
ASSESSMENT DISTRICT BONDS
In some jurisdictions in which the Company develops and constructs
property, assessment district bonds are issued by municipalities to finance
major infrastructure improvements and fees. Such financing has been an important
part of financing master-planned communities due to the long-term nature of the
financing, favorable interest rates when compared to the Company's other sources
of funds and the fact that the bonds are sold, administered and collected by the
relevant government entity. As a landowner benefited by the improvements, the
Company is responsible for the assessments on its land. When the Company's homes
or other properties are sold, the assessments are either prepaid or the buyers
assume the responsibility for the related assessments.
CASH FLOWS -- COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED
JUNE 30, 1999
Net cash provided by operating activities changed from a net amount
provided of $11.6 million in the 1999 period to a net amount provided of $2.8
million in the 2000 period primarily as a result of a decrease in home sales in
the 2000 period.
Net cash used in investing activities decreased to $3.4 million in the 2000
period from $7.7 million in the 1999 period primarily as a result of increased
net cash received from unconsolidated joint ventures in the 2000 period and a
decrease in the net cash used related to notes receivable in the 2000 period.
Net cash provided by (used in) financing activities changed from a use of
$15.6 million in the 1999 period to a net amount provided of $5.8 million in the
2000 period as a result of increased net borrowings on notes payable.
IMPACT OF YEAR 2000
The term "year 2000 issue" is a general term used to describe the
complications that may be caused by existing computer hardware and software that
were designed without consideration for the change in the century. If not
corrected, such programs may have caused computer systems and equipment to fail
or to miscalculate data. Due to the year 2000 issue, the Company undertook
initiatives to modify or replace portions of its existing computer operating
systems so that they would function properly with respect to dates in the year
2000 and thereafter.
The Company's year 2000 compliance effort was focused on its core business
computer applications (i.e., those systems that the Company is dependent upon
for the conduct of day-to-day business operations). The Company determined that
the highest priority project based on greatest business risk and greatest
technical effort should be the conversion and upgrade of the Company's JD
Edwards accounting systems (the "JD Edwards Programs"). The Company acquired and
installed a Year 2000 compliant version of the software in October 1998 and
completed extensive testing of such software and developed programs to convert
its current applications to the new version of the software. The Company
completed this conversion effective on June 30, 1999. The conversion had minimal
effects on the Company's systems and the cost incurred in that connection was
not material.
The Company undertook an assessment of other internal systems used by the
Company in various of its operations. Internal systems used by the Company in
its mortgage company operations, payroll processing and banking interfaces were
all converted during 1998 to systems which are Year 2000 compliant. The
implementation had minimal effect on its systems and the costs incurred in that
connection were not material. Internal systems used by the Company in its design
center operations were converted to a system which is Year 2000 compliant
effective on August 31, 1999 and the cost incurred in that connection was not
material.
32
<PAGE> 33
The Company has incurred approximately $300,000 in connection with its Year
2000 initiatives. To date the Year 2000 issue has not had a material adverse
effect on the Company's liquidity, financial condition and results of
operations. However, the failure to resolve a material Year 2000 issue by the
Company, third party suppliers, or the government could have a material adverse
effect on the Company's results of operations, liquidity or financial condition.
INFLATION
Although inflation rates have been low in recent years, 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.
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
foward-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, whether an ownership
change occurs which results in the limitation of the Company's ability to
utilize the tax benefits associated with its net operating loss carryforward,
changes in home mortgage interest rates, changes in prices of homebuilding
materials, labor shortages, adverse weather conditions, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective indemnification agreements,
changes in governmental laws and regulations, whether the Company is able to
refinance the outstanding balances of Senior Notes and Working Capital Facility
at their respective maturities, the timing of receipt of regulatory approvals
and the opening of projects and the availability and cost of land for future
growth.
33
<PAGE> 34
WILLIAM LYON HOMES
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, AND 5.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Holders of Common Stock was held on May 9,
2000. At this meeting the Holders of Common Stock approved the following:
<TABLE>
<CAPTION>
VOTES ABSTAINED
VOTES (INCLUDING BROKER
VOTES FOR AGAINST NON-VOTES)
--------- ------- -----------------
<S> <C> <C> <C>
Adoption and Approval of the William Lyon Homes
2000 Stock Incentive Plan, as described in the
Company's Proxy Statement. ................... 7,006,691 98,370 32,781
Ratification of the selection of Ernst & Young
LLP as Independent Auditors of the Company for
the fiscal year ending December 31, 2000. .... 9,766,825 5,017 8,470
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K.
No reports were filed on Form 8-K during the reporting period.
34
<PAGE> 35
WILLIAM LYON HOMES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2000 By: /s/ MICHAEL D. GRUBBS
------------------------------------
MICHAEL D. GRUBBS
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Date: August 11, 2000 By: /s/ W. DOUGLASS HARRIS
------------------------------------
W. DOUGLASS HARRIS
Vice President, Corporate Controller
(Principal Accounting Officer)
35
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
