-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RezjaoX0AsFsTdkeQpYH1BjsDrvnnwn5BxyY5naqxGrTR7kdG/sE+iYesz2+/Yw/ EprkHhGSll+eqXlDgvyRPg== 0001095811-00-000469.txt : 20000309 0001095811-00-000469.hdr.sgml : 20000309 ACCESSION NUMBER: 0001095811-00-000469 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIAM LYON HOMES CENTRAL INDEX KEY: 0001095996 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 330475923 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-88569 FILM NUMBER: 563116 BUSINESS ADDRESS: STREET 1: 19 CORPORATE PLAZA CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9496406400 MAIL ADDRESS: STREET 1: 19 CORPORATE PLAZA CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FORMER COMPANY: FORMER CONFORMED NAME: PRESLEY COMPANIES/NEW DATE OF NAME CHANGE: 19991115 FORMER COMPANY: FORMER CONFORMED NAME: PRESLEY MERGER SUB INC DATE OF NAME CHANGE: 19990929 10-K 1 FORM 10-K FOR THE YEAR ENDED 12/31/1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-18001 WILLIAM LYON HOMES (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0864902 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION)
4490 VON KARMAN AVENUE NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 833-3600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 1999 was $28,079,485. (This calculation assumes that all officers and directors of the Company are affiliates.) The number of shares of Common Stock outstanding as of February 25, 2000 was 10,439,135. DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's Proxy Statement for the Annual Meeting of Holders of Common Stock to be held on May 9, 2000 are incorporated herein by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 WILLIAM LYON HOMES INDEX
PAGE NO. -------- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 13 Item 3. Legal Proceedings........................................... 14 Item 4. Submission of Matters to a Vote of Security Holders......... 14 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 15 Item 6. Selected Financial Data..................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 27 Item 8. Financial Statements and Supplementary Data................. 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 28 PART III Item 10. Directors and Executive Officers of the Registrant.......... 28 Item 11. Executive Compensation...................................... 28 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 28 Item 13. Certain Relationships and Related Transactions.............. 28 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K......................................... 28 Index to Consolidated Financial Statements.................. 32
i 3 PART I ITEM 1. BUSINESS GENERAL William Lyon Homes, a Delaware corporation (formerly named The Presley Companies), and subsidiaries (the "Company") are primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona, New Mexico and Nevada. Since its founding in 1956, the Company has sold over 49,000 homes. The Company conducts its homebuilding operations through six geographic divisions (Southern California, San Diego, Northern California, Arizona, New Mexico and Nevada) including both wholly-owned projects and projects being developed in unconsolidated joint ventures. The Company believes that it was one of the largest homebuilders in California in terms of both sales and homes delivered in 1999. Approximately 72% of the Company's home closings were derived from its California operations. In 1999, the Company and its unconsolidated joint ventures had combined revenues of $643.3 million and delivered 2,618 homes. Currently the Company's homebuilding operations are being conducted under the names of William Lyon Homes and Presley Homes. The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. The Company currently markets its homes through 50 sales locations in both its wholly-owned projects and projects being developed in unconsolidated joint ventures. In 1999, the average sales price for homes delivered was $240,700, with homes priced from $83,000 to $1,011,000. The Company and its unconsolidated joint ventures currently own approximately 6,290 lots (including 3,506 in unconsolidated joint ventures) and control an additional 2,728 lots, substantially all of which are entitled. As used in this Annual Report on Form 10-K, "entitled" land has a Development Agreement and/or Vesting Tentative Map, or a final recorded plat or map from the appropriate county or city government. Development Agreements and Vesting Tentative Maps generally provide for the right to develop the land in accordance with the provisions of the Development Agreement or Vesting Tentative Map unless an issue arises concerning health, safety or general welfare. The Company's sources of developed lots for its homebuilding operations are (1) development of master-planned communities, primarily through unconsolidated joint ventures at the current time, and (2) purchase of smaller projects with shorter life cycles (merchant homebuilding). The Company estimates that its current inventory of land is adequate to supply its homebuilding operations at current operating levels for approximately 2 years. Prior to 1994, the Company had focused on the development of master-planned communities as a primary source of developed lots for its homebuilding operations. Beginning in 1994, the Company's land acquisition strategy, to the extent permitted by the Company's financing arrangements, has been to undertake projects with shorter life-cycles in order to reduce development and market risk while maintaining an inventory of lots sufficient for construction of homes over a two or three year period. As part of this strategy, the Company's current plans are to: (i) acquire and develop parcels of land with up to approximately 300 lots, (ii) expand its homebuilding operations in the Southwest, particularly in its long established markets in California and Arizona, and in Nevada, where the Company entered the market in 1995 and (iii) continue to evaluate opportunities in land development and master-planned communities with the intention that any such projects would be funded in significant part by sources other than the Company. On November 5, 1999, The Presley Companies ("Presley"), which subsequently changed its name to William Lyon Homes on December 31, 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 purchase price was determined 1 4 based on the values as of December 31, 1998 of the real property and related assets acquired. The parties intended that these assets, together with all income, receivables, escrow and other proceeds, purchase deposits, cash and other assets earned or received from any sale of these assets, including any assets acquired with sales proceeds, in the ordinary course of business since January 1, 1999 and through November 5, 1999 would inure to the buyer. These amounts were to be net of any amounts used to pay or satisfy land acquisition or development costs, capital expenditures, principal or interest on indebtedness, accounts payable, accrued liabilities, employee wages and benefits, taxes and other liabilities and operating expenses and incurred in the ordinary course of business. The Company funded the asset purchase through borrowings from its existing working capital facility and the assumption of existing indebtedness on certain real estate projects that were acquired. 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. A Special Committee of independent directors of the Company's Board of Directors approved the Purchase Agreement and the transactions contemplated thereby after receiving an opinion from Warburg Dillon Read LLC to the effect that after giving effect to the asset acquisition, tender offer, the merger and the Series B stock purchase agreements, the shares of common stock to be issued in the merger to the Company's stockholders and/or, to the extent that any holders of Series A Common Stock (other than the Lyons and the Series B stockholders which have entered into Series B Stock Purchase Agreements) tenders shares, the cash that may be received by each such tendering holder, subject to the proration provisions of the tender offer, is fair to the holders of the Series A Common Stock (other than the Lyons and those holders of Series B Common Stock) from a financial point of view. The Special Committee's approval was also made after receiving an opinion from Houlihan Lokey Howard & Zukin Financial Advisors, Inc. as to the fairness of the consideration to be paid by the Company in connection with the purchase of assets from Old William Lyon Homes. The closing of the purchase of assets under the Purchase Agreement was made after receiving an opinion from Houlihan Lokey as to the solvency of the Company after consummation of the transactions contemplated in the Purchase Agreement. 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 renamed The Presley Companies, which in turn was renamed William Lyon Homes on December 31, 1999. On November 11, 1999, the certificate of ownership and merger was filed in the State of Delaware and the merger became effective. Beginning on November 12, 1999, the shares of the surviving company (then named The Presley Companies) commenced trading on the New York Stock Exchange under the symbol "PDC." 2 5 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. The Company's future use of tax carryforwards would be severely limited if there were an "ownership change," as defined by the applicable tax laws and regulations, over any three-year period. While the Company believes an "ownership change" has not occurred since 1994, there is a risk that future shifts in ownership, primarily involving present or future holders of 5% or more of the Company's shares, could result in an "ownership change" as calculated for federal income tax purposes. Prior to the merger, the Company generally had no control over purchases or sales by investors who acquire 5% or more of its shares. However, the merger was intended to reduce the risk of an "ownership change" occurring by restricting certain transfers of the Company's stock. 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. These restrictions are intended to bind all holders of shares of the Company's common stock outstanding at the effective time of the merger. The transfer restrictions on the shares of the Company will remain in effect for at least three years unless the Company's board of directors determines that they are no longer needed to preserve the Company's tax benefits. 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 as described above). 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. 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 in 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 has 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 and December 4, 1999 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 and September 30, 1999 respectively. The Company acquired Senior Notes with a face amount of $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 and again after September 30, 1999 and prior to December 4, 1999, and therefore was not required to make offers to purchase Senior Notes. As a result of these transactions, the Company recognized as an extraordinary item net gains from retirement of debt totaling $4,200,000 and $2,741,000 during the years ended December 31, 1999 and 1998, after giving effect to income taxes and amortization of related loan costs. Every six months, until the Company's Consolidated Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20,000,000 of Senior Notes. At December 31, 1999, the Company's Consolidated Tangible Net Worth was $43,193,000. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the 3 6 bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. Because of the Company's obligation to offer to purchase $20 million in principal amount of the Senior Notes every six months so long as the Company's Consolidated Tangible Net Worth is less than $60 million, the Company is 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 December 31, 1999, the Company and certain of its subsidiaries are general partners or members in nineteen 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 7 of "Notes to Consolidated Financial Statements" for condensed combined financial information for these joint ventures. Based upon current estimates, substantially all future development and construction costs will be funded by the Company's joint venture partners or from the proceeds of construction financing obtained by the joint ventures. The Company will continue to utilize its current inventory of lots and future land acquisitions to conduct its operating strategy which consists of: (i) offering a diverse product line at a variety of prices to suit a wide range of consumer tastes, (ii) limiting completed housing inventory exposure, (iii) emphasizing well-designed cost-effective products, (iv) utilizing market research to allow for a quick response to local market conditions, (v) maintaining budget and control systems to facilitate effective cost controls and (vi) using extensive marketing and sales efforts. The Company had total revenues from operations of $440.0 million, $368.3 million and $329.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. Homes closed by the Company were 2,618, 1,925 and 1,597 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company's operations are dependent to a significant extent on debt financing and, beginning in the fourth quarter of 1997, on joint venture financing. The Company's principal credit sources are the 12 1/2% Senior Notes, a Working Capital Facility, project construction loans, and seller-provided financing. The Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200.0 million of 12 1/2% Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. At December 31, 1999, the outstanding principal amount of the 12 1/2% Senior Notes was $100.0 million. The Working Capital Facility is a revolving line of credit facility with a maximum commitment of $100.0 million. The Working Capital Facility is secured by substantially all of the Company's assets. At December 31, 1999, the outstanding principal amount under the Working Capital Facility was $33.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Note 8 of "Notes to Consolidated Financial Statements." 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. 4 7 The Company's principal executive offices are located at 4490 Von Karman Avenue, Newport Beach, California 92660 and its telephone number is (949) 833-3600. The Company was incorporated in the State of Delaware on July 15, 1999. THE COMPANY'S MARKETS The Company is currently operating through six geographic divisions: Southern California, San Diego, Northern California, Arizona, New Mexico, and Nevada. Each of the divisions has responsibility for the management of the Company's homebuilding and development operations within the geographic boundaries of the division. The New Mexico Division is currently phasing out its operations and will cease operating in mid-2000. The following table sets forth sales from real estate operations attributable to each of the Company's homebuilding divisions during the preceding three fiscal years:
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1999(7) 1998 1997 ----------------- ---------------- ---------------- DOLLAR % OF DOLLAR % OF DOLLAR % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) WHOLLY-OWNED Southern California(1)................ $169,394 26% $ 80,868 20% $120,641 37% San Diego(2).......................... 40,168 6% 70,390 17% 30,464 9% Northern California(3)................ 110,920 17% 76,117 19% 83,171 25% Arizona(4)............................ 32,014 5% 68,803 17% 50,550 15% New Mexico(5)......................... 23,989 4% 27,067 7% 19,996 6% Nevada(6)............................. 63,496 10% 44,487 11% 25,120 8% Other................................. -- 0% 550 0% -- 0% -------- ----- -------- --- -------- --- 439,981 68% 368,282 91% 329,942 100% -------- ----- -------- --- -------- --- UNCONSOLIDATED JOINT VENTURES Southern California(1)................ 39,054 6% 871 0% -- 0% San Diego(2).......................... 121,226 19% 26,725 6% -- 0% Northern California(3)................ 43,056 7% 13,485 3% -- 0% -------- ----- -------- --- -------- --- 203,336 32% 41,081 9% -- 0% -------- ----- -------- --- -------- --- COMBINED Southern California(1)................ 208,448 32% 81,739 20% 120,641 37% San Diego(2).......................... 161,394 25% 97,115 23% 30,464 9% Northern California(3)................ 153,976 24% 89,602 22% 83,171 25% Arizona(4)............................ 32,014 5% 68,803 17% 50,550 15% New Mexico(5)......................... 23,989 4% 27,067 7% 19,996 6% Nevada(6)............................. 63,496 10% 44,487 11% 25,120 8% Other................................. -- 0% 550 0% -- 0% -------- ----- -------- --- -------- --- $643,317 100% $409,363 100% $329,942 100% ======== ===== ======== === ======== ===
- --------------- (1) The Southern California Division consists of operations in Los Angeles, Orange, Riverside, San Bernardino and Ventura Counties. (2) The San Diego Division consists of operations in San Diego and Riverside Counties. (3) The Northern California Division consists of operations in Alameda, Contra Costa, El Dorado, Sacramento, Solano, Yolo and Santa Clara Counties. (4) The Arizona Division consists of operations in the Phoenix area and, until January 1999, Tucson, Arizona. (5) The New Mexico Division consists of operations in Albuquerque and Santa Fe, New Mexico. 5 8 (6) The Nevada Division consists of operations in the Las Vegas area. (7) In November 1999, the Company acquired substantially all of the assets of Old William Lyon Homes, all of which are located in California. For financial information concerning segments, see the "Consolidated Financial Statements" and Note 1 of "Notes to Consolidated Financial Statements." HOMEBUILDING The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its markets. The Company's products include entry-level, move-up and luxury homes and lots for custom homes, although it primarily emphasizes sales to the entry-level and move-up home markets. The Company believes that this diversified product strategy enables it to mitigate some of the risks inherent in the homebuilding industry and to meet a variety of market conditions. In order to reduce exposure to local market conditions, the Company's sales locations are geographically dispersed. The Company currently has 50 sales locations. Because the decision as to which product to develop is based on the Company's assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Company's attached housing ranges in size from 868 to 1,376 square feet, and the Company's detached housing ranges from 1,127 to 4,655 square feet. Due to the Company's product and geographic diversification strategy, the prices of the Company's homes also vary substantially. Prices for the Company's attached housing range from approximately $144,000 to $228,000 and prices for detached housing range from approximately $83,000 to $1,011,000. The average sales price of the Company's homes for the year ended December 31, 1999 was $240,700. The Company generally standardizes and limits the number of home designs within any given product line. This standardization permits on-site mass production techniques and bulk purchasing of materials and components, thus enabling the Company to better control and sometimes reduce construction costs. The Company contracts with a number of architects and other consultants who are involved in the design process of the Company's homes. Designs are constrained by zoning requirements, building codes, energy efficiency laws and local architectural guidelines, among other factors. Engineering, landscaping, master-planning and environmental impact analysis work are subcontracted to independent firms which are familiar with local requirements. Substantially all construction work is done by subcontractors with the Company acting as the general contractor. The Company manages subcontractor activities with on-site supervisory employees and management control systems. The Company does not have long-term contractual commitments with its subcontractors or suppliers. However, the Company generally has been able to obtain sufficient materials and subcontractors during times of material shortages. The Company believes its relationships with its suppliers and subcontractors are good. 6 9 DESCRIPTION OF PROJECTS The Company's homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company's homebuilding divisions.
LOTS HOMES CLOSED ESTIMATED OWNED FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, SALES PRICE PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1999 1999 1999(2)(4) RANGE(3) ------------------------ -------- ------------- ------------ ------------ ------------ -------------------- SOUTHERN CALIFORNIA WHOLLY-OWNED: Sun Lakes Country Club (Riverside County)(5) Previously Closed Products........ 1987 1,970 0 0 0 Veranda........................... 1994 25 0 2 0 $ 105,000 - 115,000 Executive Series.................. 1995 87 0 2 0 $ 108,900 - 135,900 Promenade......................... 1996 108 8 42 8 $ 120,000 - 131,000 Atrium............................ 1996 102 6 41 6 $ 139,000 - 186,000 Terrace........................... 1996 110 11 42 11 $ 173,000 - 192,000 ------ ----- ----- --- 2,402 25 129 25 ------ ----- ----- --- Horsethief Canyon Ranch (Riverside County) Previously Closed Products.......................... 1989 847 0 0 0 Series "300"...................... 1998 116 1 102 1 $ 126,000 - 144,000 Series "400"...................... 1995 554 301 74 9 $ 164,000 - 197,000 Series "500"...................... 1995 445 192 92 9 $ 193,000 - 216,000 ------ ----- ----- --- 1,962 494 268 19 ------ ----- ----- --- Fontana (San Bernardino County)..... 1998 135 49 79 14 $ 152,000 - 166,000 ------ ----- ----- --- Carey Ranch -- Sylmar (Los Angeles County)........................... 1997 138 0 33 0 $ 210,000 - 242,000 ------ ----- ----- --- Granada Hills (Los Angeles County)........................... 1999 37 2 35 1 $ 450,000 - 520,000 ------ ----- ----- --- Oak Park -- Irvine (Orange County)........................... 1998 330 30 168 15 $ 144,000 - 228,000 ------ ----- ----- --- Crown Ridge -- Palmdale (Los Angeles County)........................... 2000 71 71 0 0 $ 179,000 - 199,000 ------ ----- ----- --- Lyon Reflections (Riverside County)........................... 1999 39 2 37 2 $ 150,000 - 180,000 ------ ----- ----- --- Lyon Orchard (San Bernardino County)........................... 2000 81 81 0 0 $ 165,000 - 190,000 ------ ----- ----- --- Lyon Vineyard (San Bernardino County)........................... 2000 100 100 0 0 $ 200,000 - 230,000 ------ ----- ----- --- Lyon Harvest (Orange County)........ 1999 23 2 21 1 $ 270,000 - 280,000 ------ ----- ----- --- Bishop Ranch (Orange County)........ 1999 20 0 20 0 $ 270,000 - 300,000 ------ ----- ----- --- Solana at Talega (Orange County).... 2000 120 120 0 24 $ 285,000 - 325,000 ------ ----- ----- --- Lyon Parkside (Orange County)....... 1999 30 4 26 2 $ 440,000 - 480,000 ------ ----- ----- --- Avalon at Summer Lane (Orange County)........................... 113 113 0 0 ------ ----- ----- --- Total wholly-owned.......... 5,601 1,093 816 103 ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Thousand Oaks (Ventura County)...... 1998 110 33 74 11 $ 299,000 - 323,000 ------ ----- ----- --- White Cloud Estates (Ventura County)........................... 1999 78 64 14 5 $ 300,000 - 334,000 ------ ----- ----- --- Ladera Maplewood (Orange County).... 1999 103 72 31 7 $ 275,000 - 315,000 ------ ----- ----- --- Lyon Monterrey (Orange County)...... 1999 99 92 7 11 $ 360,000 - 412,000 ------ ----- ----- --- Compass Pointe @ Foster Ranch (Orange County)................... 92 92 0 0 ------ ----- ----- --- Total unconsolidated joint ventures.................. 482 353 126 34 ------ ----- ----- --- SOUTHERN CALIFORNIA DIVISION TOTAL............................. 6,083 1,446 942 137 ====== ===== ===== ===
7 10
LOTS HOMES CLOSED ESTIMATED OWNED FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, SALES PRICE PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1999 1999 1999(2)(4) RANGE(3) ------------------------ -------- ------------- ------------ ------------ ------------ -------------------- NORTHERN CALIFORNIA WHOLLY-OWNED: Oakhurst Country Club (Contra Costa County) Previously Closed Products........ 1989 1,063 0 0 0 Falcon Ridge...................... 1996 145 0 42 0 $ 366,000 - 437,000 Peacock Creek..................... 1996 142 22 30 17 $ 462,000 - 592,000 Diablo Village (Town Center)...... 2000 33 33 0 0 ------ ----- ----- --- 1,383 55 72 17 ------ ----- ----- --- Twin Cities Mill Creek (Sacramento County)........................... 1996 116 0 19 0 $ 110,000 - 125,000 ------ ----- ----- --- Eagle Ridge (Solano County)......... 1997 364 17 90 11 $ 222,000 - 308,000 ------ ----- ----- --- Mace Ranch -- Classics (Yolo County)........................... 1997 121 0 54 0 $ 186,000 - 234,000 ------ ----- ----- --- Mace Ranch -- Affordables (Yolo County)........................... 1997 28 0 4 0 $ 118,000 - 135,000 ------ ----- ----- --- Lyon Rosewood (San Joaquin County)........................... 1999 74 38 36 22 $ 134,000 - 192,000 ------ ----- ----- --- Lyon Edgewood (San Joaquin County)........................... 1999 87 53 34 8 $ 118,300 - 135,000 ------ ----- ----- --- Lyon Villas (San Joaquin County).... 1999 135 116 19 29 $ 203,000 - 242,000 ------ ----- ----- --- Lyon Estates (San Joaquin County)... 1999 120 98 22 21 $ 241,000 - 279,000 ------ ----- ----- --- Lyon Fairways (Solano County)....... 1999 91 58 33 41 $ 272,000 - 344,000 ------ ----- ----- --- Total wholly-owned.......... 2,519 435 383 149 ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Cerro Plata (Santa Clara County).... 2001 538 538 0 0 ------ ----- ----- --- The Preserve (Alameda County)....... 1997 87 27 44 23 $897,000 - 1,011,000 ------ ----- ----- --- St. Helena Westminster Estates (Napa County)........................... 2000 23 23 0 8 $ 495,000 - 555,000 ------ ----- ----- --- Lyon Groves (Contra Costa County)... 1999 103 85 18 13 $ 244,000 - 327,000 ------ ----- ----- --- Lyon Ridge (Contra Costa County).... 2000 71 71 0 0 $ 255,000 - 315,000 ------ ----- ----- --- Manor at Thomas Ranch (Contra Costa County)........................... 2000 63 63 0 11 $ 493,000 - 536,000 ------ ----- ----- --- Plantation at Thomas Ranch (Contra Costa County)..................... 2000 73 73 0 8 $ 545,000 - 706,000 ------ ----- ----- --- Total unconsolidated joint ventures.................. 958 880 62 63 ------ ----- ----- --- NORTHERN CALIFORNIA DIVISION TOTAL............................. 3,477 1,315 445 212 ====== ===== ===== === SAN DIEGO WHOLLY-OWNED: Discovery Hills (San Diego County) Previously Closed Products........ 1991 734 0 0 0 Discovery Meadows................. 1997 143 0 5 0 $ 186,000 - 219,000 ------ ----- ----- --- 877 0 5 0 ------ ----- ----- --- Carmel Mountain Ranch (San Diego County) Previously Closed Products.......................... 1986 5,044 0 0 0 The Summit........................ 1997 86 0 37 0 $ 353,000 - 392,000 The Bluffs........................ 1997 114 0 30 0 $ 265,000 - 297,000 ------ ----- ----- --- 5,244 0 67 0 ------ ----- ----- --- Sycamore Ranch (Riverside County)... 1997 195 132 25 7 $ 319,000 - 366,000 ------ ----- ----- --- Vail Ranch (San Diego County)....... 2000 152 152 0 4 $ 162,000 - 178,000 ------ ----- ----- --- Meadowlark -- La Fuente (San Diego County)................ 2000 56 56 0 0 ------ ----- ----- --- Total wholly-owned.......... 6,524 340 97 11 ------ ----- ----- ---
8 11
LOTS HOMES CLOSED ESTIMATED OWNED FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, SALES PRICE PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1999 1999 1999(2)(4) RANGE(3) ------------------------ -------- ------------- ------------ ------------ ------------ -------------------- ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Torrey Hills -- The Sands (San Diego County)........................... 1998 107 0 61 0 $ 333,000 - 375,000 ------ ----- ----- --- Torrey Hills -- The Shores (San Diego County)..................... 1998 111 46 39 31 $ 408,000 - 446,000 ------ ----- ----- --- Torrey Hills -- The Cove (San Diego County)........................... 1999 108 57 51 21 $ 394,000 - 422,000 ------ ----- ----- --- Knollwood at Castle Creek (San Diego County)........................... 1999 77 30 47 10 $ 203,000 - 221,000 ------ ----- ----- --- Stonecrest (San Diego County)....... 1999 110 16 94 16 $ 233,000 - 282,000 ------ ----- ----- --- Mercy Road -- Allegra (San Diego County)........................... 1999 113 19 94 16 $ 238,000 - 293,000 ------ ----- ----- --- Otay Ranch -- Saratogo Trails (San Diego County)..................... 1999 74 67 7 1 $ 244,000 - 264,000 ------ ----- ----- --- Otay Ranch -- Mendocino (San Diego County)........................... 1999 139 130 9 1 $ 193,000 - 210,000 ------ ----- ----- --- Meadowlark -- Monte Verde (San Diego County)................ 2000 65 65 0 0 ------ ----- ----- --- East Grove (San Diego County)....... 291 291 0 0 ------ ----- ----- --- Total unconsolidated joint ventures.................. 1,195 721 402 96 ------ ----- ----- --- SAN DIEGO DIVISION TOTAL............ 7,719 1,061 499 107 ====== ===== ===== === ARIZONA WHOLLY-OWNED: McDowell Mt. Ranch (Maricopa County)........................... 1995 75 0 1 0 $ 196,000 - 235,000 ------ ----- ----- --- Estrella (Maricopa County).......... 1995 113 2 21 0 $ 117,000 - 147,000 ------ ----- ----- --- Eagle Mountain (Maricopa County).... 1996 101 0 21 0 $ 190,000 - 248,000 ------ ----- ----- --- Legend Trail (Maricopa County)...... 1996 102 1 33 0 $ 150,000 - 186,000 ------ ----- ----- --- Williams Centre -- Haciendas (Pima County)........................... 1996 50 0 2 0 $ 166,000 - 196,000 ------ ----- ----- --- Williams Centre -- Las Villas (Pima County)..................... 1997 46 0 1 0 $ 119,000 - 136,000 ------ ----- ----- --- McDowell Mt. Ranch "P" (Maricopa County)........................... 1997 69 0 10 0 $ 199,000 - 237,000 ------ ----- ----- --- Lone Mountain (Maricopa County)..... 1997 55 0 29 0 $ 235,000 - 287,000 ------ ----- ----- --- Manzanita Heights (Maricopa County)........................... 1997 73 0 6 0 $ 83,000 - 93,000 ------ ----- ----- --- Crystal Gardens (Maricopa County)... 1997 157 64 36 15 $ 97,000 - 122,000 ------ ----- ----- --- Monument Vista (Pima County)........ 1997 106 0 3 0 $ 179,000 - 240,000 ------ ----- ----- --- Rio Del Verde (Maricopa County)..... 2000 84 13 0 1 $ 160,000 - 199,000 ------ ----- ----- --- Sage Creek -- Encanto (Maricopa County)........................... 2000 176 15 0 0 $ 99,000 - 113,000 ------ ----- ----- --- Sage Creek -- Arcadia (Maricopa County)........................... 2000 167 9 0 0 $ 126,000 - 147,000 ------ ----- ----- --- Sage Creek -- Solano (Maricopa County)........................... 2000 82 7 0 0 $ 157,000 - 181,000 ------ ----- ----- --- Mesquite Grove -- Small (Maricopa County)................. 2000 110 110 0 0 ------ ----- ----- --- Mesquite Grove -- Large (Maricopa County)................. 2000 95 95 0 0 ------ ----- ----- --- Total wholly-owned.......... 1,661 316 163 16 ------ ----- ----- ---
9 12
LOTS HOMES CLOSED ESTIMATED OWNED FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, SALES PRICE PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1999 1999 1999(2)(4) RANGE(3) ------------------------ -------- ------------- ------------ ------------ ------------ -------------------- UNCONSOLIDATED JOINT VENTURES: Mountaingate (Maricopa County)...... 2001 1,552 1,552 0 0 ------ ----- ----- --- Total unconsolidated joint ventures.................. 1,552 1,552 0 0 ------ ----- ----- --- ARIZONA DIVISION TOTAL.............. 3,213 1,868 163 16 ====== ===== ===== === NEW MEXICO WHOLLY-OWNED: Summerfield (Bernalillo County)..... 1995 195 51 55 8 $ 90,000 - 140,000 ------ ----- ----- --- Tuscany Hills (Bernalillo County)... 1996 30 0 3 0 $ 129,000 - 183,000 ------ ----- ----- --- Rancho del Sol (Santa Fe County).... 1996 195 24 68 7 $ 91,000 - 165,000 ------ ----- ----- --- The Courtyards at Park West (Bernalillo County)............... 1996 77 0 30 0 $ 136,000 - 175,000 ------ ----- ----- --- Ventana (Bernalillo County)......... 1997 81 14 16 0 $ 132,000 - 175,000 ------ ----- ----- --- NEW MEXICO DIVISION TOTAL........... 578 89 172 15 ====== ===== ===== === NEVADA WHOLLY-OWNED: Prominence (Clark County)........... 1996 100 0 2 0 $ 147,000 - 175,000 ------ ----- ----- --- Camden Park (Clark County).......... 1997 150 0 56 0 $ 157,000 - 166,000 ------ ----- ----- --- Monte Nero (Clark County)........... 1997 171 25 71 24 $ 135,000 - 170,000 ------ ----- ----- --- Royal Woods (Clark County).......... 1998 142 11 91 9 $ 153,000 - 186,000 ------ ----- ----- --- Deer Springs Ranch (Clark County)... 1998 117 18 65 15 $ 119,000 - 147,000 ------ ----- ----- --- Cambridge Court (Clark County)...... 1998 177 47 99 36 $ 144,000 - 162,000 ------ ----- ----- --- Belvedere (Clark County)............ 1999 78 65 13 29 $ 171,000 - 196,000 ------ ----- ----- --- La Terraza (Clark County)........... 2000 16 16 0 12 $ 146,000 - 157,000 ------ ----- ----- --- Bella Veranda (Clark County)........ 2000 79 79 0 0 $ 236,000 - 261,000 ------ ----- ----- --- Kingsway Ridge (Clark County)....... 2000 156 156 0 0 ------ ----- ----- --- Summerlin -- The Gardens (Clark County)........................... 2000 94 94 0 0 ------ ----- ----- --- NEVADA DIVISION TOTAL............... 1,280 511 397 125 ====== ===== ===== === GRAND TOTALS: Wholly-owned...................... 18,163 2,784 2,028 419 Unconsolidated joint ventures..... 4,187 3,506 590 193 ------ ----- ----- --- 22,350 6,290 2,618 612 ====== ===== ===== ===
- --------------- (1) The estimated number of homes to be built at completion is subject to change, and there can be no assurance that the Company will build these homes. (2) Backlog consists of homes sold under sales contracts that have not yet closed, and there can be no assurance that closings of sold homes will occur. (3) Sales price range reflects base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project. (4) Of the total homes subject to pending sales contracts as of December 31, 1999, 543 represent homes completed or under construction and 69 represent homes not yet under construction. (5) In December 1999 the Company sold substantially all of the remaining lots in its Sun Lakes Country Club project in a bulk sale. 10 13 SALES AND MARKETING The management team responsible for a specific project develops marketing objectives, formulates pricing and sales strategies and develops advertising and public relations programs for approval of senior management. The Company makes extensive use of advertising and other promotional activities, including newspaper advertisements, brochures, television and radio commercials, direct mail and the placement of strategically located sign boards in the immediate areas of its developments. In general, the Company's advertising emphasizes the Company's strengths with respect to the quality and value of its products. The Company normally builds, decorates, furnishes and landscapes three to five model homes for each product line and maintains on-site sales offices, which typically are open seven days a week. Management believes that model homes play a particularly important role in the Company's marketing efforts. Consequently, the Company expends a significant amount of effort in creating an attractive atmosphere at its model homes. Interior decorations vary among the Company's models and are carefully selected based upon the lifestyles of targeted buyers. Structural changes in design from the model homes are not generally permitted, but home buyers may select various other optional construction and design amenities. The Company employs in-house commissioned sales personnel and, on a limited basis, outside brokers in the selling of its homes. The Company typically engages its sales personnel on a long-term, rather than a project-by-project basis, which it believes results in a more motivated sales force with an extensive knowledge of the Company's operating policies and products. Sales personnel are trained by the Company and attend weekly meetings to be updated on the availability of financing, construction schedules and marketing and advertising plans. The Company strives to provide a high level of customer service during the sales process and after a home is sold. The participation of the sales representatives, on-site construction supervisors and the post-closing customer service personnel, working in a team effort, is intended to foster the Company's reputation for quality and service, and ultimately lead to enhanced customer retention and referrals. The Company's homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyer's ability to qualify for financing. 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. Cancellation rates are subject to a variety of factors beyond the Company's control such as adverse economic conditions and increases in mortgage interest rates. The Company generally provides a one-year limited warranty of workmanship and materials with each of its homes. From January 1, 1992 through March 31, 1995, the Company provided a five-year limited warranty for certain homes in the Company's Southern California Region. This five-year warranty exceeded the warranty offered by competitors and served as a marketing tool for the Company. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. The Company's historical experience is that one-year warranty claims generally fall within the one percent reserve. In addition, California law provides that consumers can seek redress for patent defects in new homes within four years from when the defect is discovered, or should have been discovered, provided that if the defect is latent there is an outside limit for seeking redress which is ten years from the completion of construction. In addition, because the Company generally subcontracts its homebuilding work to qualified subcontractors who generally provide the Company with an indemnity and a certificate of insurance prior to receiving payment from the Company for their work, the Company generally has recourse against the subcontractors or their insurance carriers for claims relating to the subcontractors' workmanship or materials. However, there can be no assurance that claims will not arise out of matters such as landslides, soil subsidence or earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements. 11 14 CUSTOMER FINANCING -- DUXFORD FINANCIAL, INC. The Company seeks to assist its home buyers in obtaining financing by arranging with mortgage lenders to offer qualified buyers a variety of financing options. Substantially all home buyers utilize long-term mortgage financing to purchase a home and mortgage lenders will usually make loans only to qualified borrowers. Duxford Financial, Inc., formerly named Presley Mortgage Company, a wholly owned subsidiary, began operations effective December 1, 1994 and is in operation to service the Company's operating regions. The mortgage company operates as a mortgage broker/loan correspondent and originates conventional, FHA and VA loans. SALE OF LOTS AND LAND In the ordinary course of business, the Company continually evaluates land sales and has sold, and expects that it will continue to sell, land as market and business conditions warrant. The Company also sells both multiple lots to other builders (bulk sales) and improved individual lots for the construction of custom homes where the presence of such homes adds to the quality of the community. In addition, the Company may acquire sites with commercial, industrial and multi-family parcels which will generally be sold to third-party developers. INFORMATION SYSTEMS AND CONTROLS The Company assigns a high priority to the development and maintenance of its budget and cost control systems and procedures. The Company's regional and area offices are connected to corporate headquarters through a fully integrated accounting, financial and operational management information system. Through this system, management regularly evaluates the status of its projects in relation to budgets to determine the cause of any variances and, where appropriate, adjusts its operations to capitalize on favorable variances or to limit adverse financial impacts. COMPETITION The homebuilding industry is highly competitive, particularly in the low and medium-price range where the Company currently concentrates its activities. Although the Company is one of California's largest homebuilders, the Company does not believe it has a significant market position in any geographic area which it serves due to the fragmented nature of the market. Due in significant part to the recent recession and its effect on the housing market, the Company has, since 1990, had to reduce its sales prices and offer greater incentives to buyers in order to effectively compete for sales in several of its markets. Beginning in 1997 the market has generally rebounded allowing the Company to selectively increase sales prices and reduce incentives while remaining competitive. A number of the Company's competitors have larger staffs, larger marketing organizations, and substantially greater financial resources than those of the Company. However, the Company believes that it competes effectively in its existing markets as a result of its product and geographic diversity, substantial development expertise, and its reputation as a low-cost producer of quality homes. Further, the Company sometimes gains a competitive advantage in locations where changing regulations make it difficult for competitors to obtain entitlements and/or government approvals which the Company has already obtained. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS The Company and its competitors are subject to various local, state and Federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can ultimately be built within the boundaries of a particular project. The Company and its competitors may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future in the states in which it operates. Because the Company usually purchases land with entitlements, the 12 15 Company believes that the moratoriums would adversely affect the Company only if they arose from unforeseen health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in when the Company receives entitlements. Duxford Financial, Inc. is subject to state licensing laws as a mortgage broker as well as Federal and state laws concerning real estate loans. The Company and its competitors are also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause the Company and its competitors to incur substantial compliance and other costs, and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. The Company's projects in California are especially susceptible to restrictive government regulations and environmental laws. However, environmental laws have not, to date, had a material adverse impact on the Company's operations. CORPORATE ORGANIZATION AND PERSONNEL Each of the Company's operating divisions has responsibility for the Company's homebuilding and development operations within the geographical boundaries of that division. The Company's eight executive officers at the corporate level average more than 20 years of experience in the homebuilding and development industries within California and the Southwest. The Company combines decentralized management in those aspects of its business where detailed knowledge of local market conditions is important (such as governmental processing, construction, land development and sales and marketing), with centralized management in those functions where the Company believes central control is required (such as approval of land acquisitions and financial, personnel and legal matters). As of December 31, 1999, the Company's real estate development and homebuilding operations employed approximately 536 full-time and 13 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, engineering, land acquisition, sales and marketing activities. The Company believes that its relations with its employees have been good. Some employees of the subcontractors which the Company utilizes are unionized, but virtually none of the Company's employees are union members. Although there have been temporary work stoppages in the building trades in the Company's areas of operation, to date none has had any material impact upon the Company's overall operations. ITEM 2. PROPERTIES Headquarters On February 4, 2000, the Company relocated its corporate headquarters from 19 Corporate Plaza, Newport Beach, California to 4490 Von Karman Avenue, Newport Beach, California. The Company leases its corporate headquarters from The William Lyon Property Management Company, an affiliated entity of which William Lyon owns 57%. The old corporate headquarters at 19 Corporate Plaza, which is owned by the Company, is currently under a contract of sale. The Company leases or owns properties for its area offices, design centers and Duxford Financial, Inc., but none of these properties is material to the operation of the Company's business. For information about properties owned by the Company for use in its homebuilding activities, see Item 1. 13 16 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings, most of which relate to routine litigation and some of which are covered by insurance. In the opinion of the Company's management, none of the uninsured claims involve claims which are material and unreserved or will have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of stockholders of the Company was held on November 5, 1999. At the special meeting, the stockholders approved a certificate of ownership and merger providing for the merger of The Presley Companies with and into Presley Merger Sub, Inc., a wholly owned subsidiary. With respect to this matter, 36,541,820 votes were cast for, 847,693 votes were cast against, and 44,975 votes abstained (including broker non-votes). 14 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Prior to November 12, 1999, the Series A Common Stock of The Presley Companies traded on the New York Stock Exchange (the "NYSE") under the symbol PDC. As a result of the merger of The Presley Companies with and into its wholly owned subsidiary, Presley Merger Sub, Inc., effective on November 11, 1999, each outstanding share of The Presley Companies common stock was converted into 0.2 share of the Common Stock of the Company which was listed on the NYSE under the same symbol, PDC. On December 31, 1999, the Company changed its name to William Lyon Homes and its stock ticker symbol changed from PDC to WLS effective on January 3, 2000. The following table sets forth the high and low sales prices for the Common Stock of the Company as reported on the NYSE for the periods indicated after adjustment for the retroactive effect of the merger with a wholly-owned subsidiary and the conversion of each share of Series A and Series B common stock into 0.2 common share of the surviving Company as described in Note 2 of "Notes to Consolidated Financial Statements."
HIGH LOW ------- ------- 1998 First Quarter.................................. $5.6250 $3.1250 Second Quarter................................. 5.6250 3.4375 Third Quarter.................................. 6.5625 2.8125 Fourth Quarter................................. 3.7500 2.1875 1999 First Quarter.................................. 3.7500 1.8750 Second Quarter................................. 5.0000 2.5000 Third Quarter.................................. 5.6250 3.1250 Fourth Quarter................................. 6.4375 3.1250
As of February 25, 2000, the closing price for the Company's Common Stock as reported on the NYSE was $5.5625. As of February 25, 2000, there were approximately 1,948 beneficial owners of the Company's Common Stock. The Company has not paid any cash dividends on its Common Stock during the last two fiscal years and expects that for the foreseeable future it will follow a policy of retaining earnings in order to help finance its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements, general economic conditions and operating and financial condition of the Company, among other factors. In addition, the effect of the Company's principal financing agreements currently prohibits the payment of dividends by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Note 8 of "Notes to Consolidated Financial Statements." 15 18 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company have been derived from the Consolidated Financial Statements of the Company and other available information. The summary should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere herein.
1999(1) 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS AND NUMBER OF HOMES) STATEMENT OF OPERATIONS DATA: Sales Homes.................................. $426,839 $348,352 $307,332 $317,366 $231,204 Lots, land and other................... 13,142 19,930 22,610 1,631 54,301 -------- -------- -------- -------- -------- Total sales....................... 439,981 368,282 329,942 318,997 285,505 Income from unconsolidated joint ventures............................... 17,859 3,499 -- -- -- Operating income (loss).................. 48,402 15,580 (84,534) 163 (41,335) Income (loss) before income taxes and extraordinary item..................... 43,497 8,305 (89,894) 152 (41,653) Credit (provision) for income taxes...... (220) (1,191) -- -- 1,868 Income (loss) before extraordinary item................................... 43,277 7,114 (89,894) 152 (39,785) Extraordinary item-gain from retirement of debt, net of applicable taxes....... 4,200 2,741 -- -- 2,688 Net income (loss)........................ $ 47,477 $ 9,855 $(89,894) $ 152 $(37,097) Basic and diluted earnings (loss) per common share(2): Before extraordinary item.............. $ 4.15 $ 0.68 $ (8.61) $ -- $ (3.81) Extraordinary item..................... 0.40 0.26 -- -- 0.26 -------- -------- -------- -------- -------- After extraordinary item............... $ 4.55 $ 0.94 $ (8.61) $ -- $ (3.55) Ratio of earnings to fixed charges(3)(4).......................... 2.59 1.31 (4) (4) (4) BALANCE SHEET DATA: Real estate inventories.................. $184,271 $174,502 $255,472 $306,381 $315,535 Total assets............................. 278,483 246,404 285,244 331,615 340,933 Notes payable............................ 176,630 195,393 254,935 208,524 224,434 Stockholders' equity (deficit)........... 53,301 5,824 (5,681) 84,213 84,061 OPERATING DATA (including unconsolidated joint ventures): Number of homes sold..................... 2,285 2,139 1,718 1,804 1,488 Number of homes closed................... 2,618 1,925 1,597 1,838 1,425 Number of homes in escrow at end of period................................. 612 617 403 282 316 Average sales prices of homes closed..... $ 241 $ 202 $ 192 $ 173 $ 162
- --------------- (1) On November 5, 1999, the Company acquired substantially all of the assets and assumed substantially all of the related liabilities of Old William Lyon Homes. The total purchase price consisted of approximately $42,598,000 in cash and the assumption of approximately $101,058,000 of liabilities. The acquisition is being 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 being 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of "Notes to Consolidated Financial Statements." (2) Reflects the conversion of each outstanding share of The Presley Companies Common Stock into 0.2 share of the Company's Common Stock as a result of the merger of The Presley Companies with and into the Company. See Notes 2 and 3 of "Notes to Consolidated Financial Statements." 16 19 (3) Ratio of earnings to fixed charges is calculated by dividing income as adjusted by fixed charges. For this purpose, "income as adjusted" means income (loss) before (i) minority partners' interest in consolidated income (loss) and (ii) income taxes, plus (i) interest expense and (ii) amortization of capitalized interest included in cost of sales. For this purpose "fixed charges" means (i) interest expense and (ii) interest capitalized during the period. (4) Earnings were not adequate to cover fixed charges by $25.4 million, $21.1 million, and $67.1 million for the years ended December 31, 1997, 1996, and 1995, respectively. These deficits, as well as the operating income (loss), include the effect of an impairment loss on real estate assets of $74 million in 1997, and $16.8 million in 1995 and reductions of real estate assets to estimated net realizable value of $9.4 million in 1995. ITEM 7. 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 Selected Financial Data and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. General Overview. On November 5, 1999, The Presley Companies ("Presley"), which subsequently changed its name to William Lyon Homes on December 31, 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 purchase price was determined based on the values as of December 31, 1998 of the real property and related assets acquired. The parties intended that these assets, together with all income, receivables, escrow and other proceeds, purchase deposits, cash and other assets earned or received from any sale of these assets, including any assets acquired with sales proceeds, in the ordinary course of business since January 1, 1999 and through November 5, 1999 would inure to the buyer. These amounts were to be net of any amounts used to pay or satisfy land acquisition or development costs, capital expenditures, principal or interest on indebtedness, accounts payable, accrued liabilities, employee wages and benefits, taxes and other liabilities and operating expenses and incurred in the ordinary course of business. The Company funded the asset purchase through borrowings from its existing working capital facility and the assumption of existing indebtedness on certain real estate projects that were acquired. 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 William H. Lyon 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. The foregoing number of shares does not reflect the 17 20 subsequent merger and the conversion of each share of Series A and Series B Common Stock into 0.2 share of common stock as described in Note 2 of "Notes to Consolidated Financial Statements." In accordance with the bond indenture agreement governing the Company's Senior Notes which are due in 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 has 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 and December 4, 1999, 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 and September 30, 1999, respectively. The Company acquired Senior Notes with a face amount of $20 million after September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and prior to June 4, 1998, and again after September 30, 1998 and prior to December 4, 1998, again after March 31, 1999 and prior to June 4, 1999 and again after September 30, 1999 and prior to December 4, 1999 and therefore was not required to make offers to purchase Senior Notes. As a result of these transactions, the Company has recognized a net gain of $4.2 million and $2.7 million during the years ended December 31, 1999 and 1998, respectively, after giving effect to income taxes and amortization of related loan costs. Every six months, until the Company's Consolidated Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20 million of Senior Notes. At December 31, 1999, the Company's Consolidated Tangible Net Worth was $43.2 million. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. Because of the Company's obligation to offer to purchase $20 million in principal amount of the Senior Notes every six months so long as the Company's Consolidated Tangible Net Worth is less than $60 million, the Company is 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 December 31, 1999, the Company and certain of its subsidiaries are general partners or members in nineteen 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 in the preparation of the Company's financial statements. The Company's investments in unconsolidated joint ventures are accounted for using the equity method. See Note 7 of "Notes to Consolidated Financial Statements" for condensed combined financial information for these joint ventures. Based upon current estimates, substantially all future development and construction costs will be funded by the Company's joint venture partners or from the proceeds of construction financing obtained by the joint ventures. 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. 18 21 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 lands 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. RESULTS OF OPERATIONS Homes sold, closed and in backlog as of and for the periods presented are as follows:
AS OF AND FOR YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ Number of homes sold Company........................................ 1,692 1,937 1,718 Unconsolidated joint ventures.................. 593 202 -- ------ ------ ------ 2,285 2,139 1,718 ====== ====== ====== Number of homes closed Company........................................ 2,031 1,834 1,597 Unconsolidated joint ventures.................. 587 91 -- ------ ------ ------ 2,618 1,925 1,597 ====== ====== ====== Backlog of homes sold but not closed at end of period Company........................................ 446 499 403 Unconsolidated joint ventures.................. 166 118 -- ------ ------ ------ 612 617 403 ====== ====== ====== Dollar amount of backlog of homes sold but not closed at end of period (in millions) Company........................................ $111.7 $111.8 $ 84.6 Unconsolidated joint ventures.................. 74.1 53.3 -- ------ ------ ------ $185.8 $165.1 $ 84.6 ====== ====== ======
Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed as of December 31, 1999 was $185.8 million as compared to $165.1 million as of December 31, 1998 and $179.5 million as of September 30, 1999. 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. The number of homes closed in 1999 increased 36.0 percent to 2,618 from 1,925 in 1998. Net new home orders for the year ended December 31, 1999 increased 6.8 percent to 2,285 units from 2,139 for the year ended December 31, 1998. The backlog of homes sold as of December 31, 1999 was 612, down slightly from 617 units as of December 31, 1998, and down 10.9 percent from 687 units at September 30, 1999. The Company's inventory of completed and unsold homes as of December 31, 1999 increased to 71 units from 50 units as of December 31, 1998. The improvement in net new home orders and closings for 1999 as compared with 1998 is primarily the result of improved market conditions in substantially all of the Company's markets and additional sales locations as a result of new land acquisitions. At December 31, 1999, the Company had 50 sales locations as compared to 46 sales locations at December 31, 1998. 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") requires impairment losses to 19 22 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 new 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 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:
FOR THE FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 ------------------ ----------------- ----------------- Sales................... $17,662,000 $54,828,000 $79,584,000 Gross profit............ $ 1,202,000 $ 5,850,000 13,012,000 Gross profit %.......... 6.8% 10.7% 16.4%
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. The Company periodically evaluates its real estate assets to determine whether such assets have been impaired and therefore would be required to be adjusted to fair value. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein. This Annual Report on Form 10-K does not attempt to discuss or describe all of the factors that influence or impact the evaluation of an impairment of the Company's real estate assets. Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of product available for sale is expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expense during 1999, 1998, and 1997 was approximately $6.2 million, $9.2 million and $7.8 million, respectively. 20 23 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 Years Ended December 31, 1999 and 1998. Total sales (which represent recorded revenues from closings) for the year ended December 31, 1999 were $440.0 million, an increase of $71.7 million (19.5%), from sales of $368.3 million for the year ended December 31, 1998. Revenue from sales of homes increased $78.4 million to $426.8 million in 1999 from $348.4 million in 1998. This increase was due primarily to an increase in the number of homes closed to 2,031 in 1999 from 1,834 in 1998, and an increase in the average sales prices of homes to $210,200 in 1999 from $189,900 in 1998. Total operating income increased from $15.6 million in 1998 to $48.4 million in 1999. The excess of revenue from sales of homes over the related cost of sales increased by $19.1 million, to $69.7 million in 1999 from $50.6 million in 1998. This increase was primarily due to (1) an increase of 10.7% in the number of units closed to 2,031 units in 1999 from 1,834 units in 1998, and (2) an increase in the average sales prices to $210,200 from $189,900 (a 10.7% increase). Sales and marketing expenses decreased by $2.1 million (3.6%) to $19.4 million in 1999 from $21.5 million in 1998 primarily as a result of reductions in advertising and sales office/model operation expenses, offset by increased direct sales expenses related to the increased sales volume. General and administrative expenses increased by $3.4 million to $19.4 million in 1999 from $16.0 million in 1998, primarily as a result of higher employment levels to support the increased level of operations and additional accruals for increased employee bonuses based upon improved operating results of the Company, partially offset by reimbursement of overhead expenses from joint ventures. Equity in income of unconsolidated joint ventures amounting to $17.9 million was recognized in the 1999 period, compared to $3.5 million in the comparable period for 1998. The Company did not begin investing in unconsolidated joint ventures until the fourth quarter of 1997 and limited operating results were realized in the first nine months of 1998. Total interest incurred during 1999 decreased $7.0 million to $24.5 million from $31.5 million in 1998 as a result of a decrease in the average amount of outstanding debt. Net interest expense decreased to $6.2 million in 1999 from $9.2 million for 1998 as a result of the decrease in the average amount of outstanding debt. As a result of the transactions as described previously in "General Overview", the Company incurred financial advisory expense of approximately $2.2 million for the year ended December 31, 1999. As a result of the retirement of certain debt as described previously in "General Overview", the Company has recognized a net gain of $4.2 million during the year ended December 31, 1999, after giving effect to income taxes and amortization of related loan costs. For the year ended December 31, 1999, post quasi-reorganization temporary differences, partially offset by temporary differences that existed prior to the quasi-reorganization, along with pre quasi-reorganization net operating loss carryforwards resulted in income tax expense, at Alternative Minimum Tax rates, of $245,000. For the year ended December 31, 1998, income tax benefits of $1,650,000 related to temporary differences resulting from the quasi-reorganization were excluded from the results of operations and credited to additional paid-in capital. Comparison of Years Ended December 31, 1998 and 1997. Total sales (which represent recorded revenues from closings) for the year ended December 31, 1998 were $368.3 million, an increase of $38.4 million (11.6%), from sales of $329.9 million for the year ended December 31, 1997. Revenue from sales of homes increased $41.1 million to $348.4 million in 1998 from $307.3 million in 1997. This increase was due primarily to an increase in the number of homes closed to 1,834 in 1998 from 1,597 in 1997, partially 21 24 offset by a decrease in the average sales prices of homes to $189,900 in 1998 from $192,000 in 1997 which resulted primarily from a change in product mix. Total operating income (loss) changed from a loss of $84.5 million in 1997 to an income of $12.1 million in 1998. The excess of revenue from sales of homes over the related cost of sales increased by $21.6 million, to $50.6 million in 1998 from $29.0 million in 1997. This increase was primarily due to (1) an increase of 14.8% in the number of units closed from 1,597 units in 1997 to 1,834 units in 1998, (2) changes in product delivered in 1998 compared to 1997 comprised of 10 new products introduced in 1998 with average gross margins of 18.5% on sales of $64.7 million compared with 27 old products closed out in 1997 with average gross margins of 13.4% on sales of $107.5 million, and (3) increases for continuing products delivered in both 1998 and 1997 in average sales prices to $187,300 from $179,600 (a 4.3% increase) and in average gross margins to 8.6% from 5.3% (a 61.6% increase) on sales of $283.3 million and $199.9 million, respectively. Impairment losses on real estate assets amounting to $74.0 million were recorded in 1997 compared to no impairment losses in 1998. Sales and marketing expenses decreased by $0.8 million (3.6%) to $21.5 million in 1998 from $22.3 million in 1997 primarily as a result of reductions in advertising and sales office/model operation expenses, offset by increased direct sales expenses related to the increased sales volume. General and administrative expenses decreased slightly in the 1998 period from the 1997 period, primarily as a result of the consolidation of certain California operations in the third quarter of 1997 and reimbursement of overhead expenses from joint ventures. Income from unconsolidated joint ventures amounting to $3.5 million was recorded in the 1998 period, with no corresponding amount in the comparable period for 1997. The Company did not begin investing in unconsolidated joint ventures until the fourth quarter of 1997. Total interest incurred during 1998 decreased $1.5 million to $31.5 million from $33.0 million in 1997 as a result of a decrease in the average amount of outstanding debt resulting from a reduction in real estate inventories. Net interest expense increased to $9.2 million in 1998 from $7.8 million for 1997. This increase was due primarily to a reduction in real estate assets which qualify for interest capitalization. As a result of the Company's engagement of a financial advisor in May 1998 as described previously in "General Overview", the Company has incurred costs of approximately $1.3 million for the year ended December 31, 1998. Other (income) expense, net increased $0.7 million to a net income of $3.2 million in 1998 from a net income of $2.5 million in 1997 primarily as a result of increased income from design center operations, mortgage company operations and interest income. As a result of the retirement of certain debt as described previously in "General Overview", the Company has recognized a net gain of $2.7 million during the year ended December 31, 1998, after giving effect to income taxes and amortization of related loan costs. 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 will provide a substantial portion of the capital required for certain projects. The Company currently maintains the following major credit 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 (including the repurchase obligation described in "General Overview" above) 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. 22 25 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. QUASI-REORGANIZATION In 1994, the Company's Board of Directors approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented a quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with a plan for capital restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting." Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations. As a result of the quasi-reorganization, any income tax benefits resulting from the utilization of net operating losses and other carryforwards existing at January 1, 1994 and temporary differences resulting from the quasi-reorganization, are excluded from the Company's results of operations and credited to paid-in capital. SENIOR NOTES The 12 1/2% Senior Notes due 2001 are obligations of William Lyon Homes (formerly named 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. 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 million for any two consecutive fiscal quarters, as well as from the proceeds of certain asset sales. Upon certain changes of control as described in the Indenture, Delaware Lyon must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. The Indenture governing the Senior Notes restricts Delaware Lyon and certain of its subsidiaries with respect to, among other things: (i) the payment of dividends on and redemptions of capital stock, (ii) the incurrence of indebtedness or the issuance of preferred stock, (iii) the creation of certain liens, (iv) consolidations or mergers 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. As of December 31, 1999, the outstanding 12 1/2% Senior Notes with a face value of $100 million were valued at a range from $88 million to $90 million, based on quotes from industry sources. 23 26 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 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 December 31, 1999 was approximately $95.5 million. The maximum loan under the Working Capital Facility is limited to $100.0 million and the principal outstanding under the Working Capital Facility at December 31, 1999 was $33.0 million. 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 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. CONSTRUCTION NOTES PAYABLE At December 31, 1999, the Company had construction notes payable amounting to $16.0 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 December 31, 1999, the Company had various notes payable outstanding related to land acquisitions for which seller financing was provided in the amount of $24.5 million. JOINT VENTURE FINANCING As of December 31, 1999, the Company and certain of its subsidiaries are general partners or members in nineteen joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned and, accordingly, 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 7 of "Notes to Consolidated Financial Statements" for condensed combined financial information for these joint ventures. Based upon current estimates, substantially all future development and 24 27 construction costs will be funded by the Company's venture partners or from the proceeds of construction financing obtained by the joint ventures. As of December 31, 1999, the Company's investment in such joint ventures was approximately $49.2 million and the Company's venture partners' investment in such joint ventures was approximately $130.9 million. In addition, certain joint ventures have obtained financing from land sellers or construction lenders which amounted to approximately $54.1 million at December 31, 1999. ASSESSMENT DISTRICT BONDS AND SELLER FINANCING 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 YEARS ENDED DECEMBER 31, 1999 AND 1998 Net cash provided by operating activities increased from $55.1 million in 1998 to $68.7 million in 1999 primarily as a result of increased income and reductions in real estate inventories. Net cash provided by investing activities decreased from $5.8 million in 1998 to $5.3 million in 1999 primarily as a result of decreased amounts received from investments in and advances to unconsolidated joint ventures offset by net increases in investments in notes receivable. Net cash used in financing activities increased from $41.5 million in 1998 to $95.8 million in 1999. The change was primarily due to repayment of debt, offset by borrowings on notes payable. CASH FLOWS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 Net cash provided by (used in) operating activities changed from a use of $14.1 million in 1997 to a source of $55.1 million in 1998. The change was primarily as a result of increased income and reductions in real estate inventories. Net cash provided by (used in) investing activities changed from a use of $8.7 million in 1997 to a source of $5.8 million in 1998 primarily as a result of investment activity with unconsolidated joint ventures. Net cash provided by (used in) financing activities changed from a source of $22.9 million in 1997 to a use of $41.5 million in 1998 primarily as a result of the repurchase of $40.0 million principal amount of 12 1/2% Senior Notes and reduced net borrowings from 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 25 28 software in October 1998 and completed extensive testing such software and developed programs to convert its current applications to the new version of the software. The Company completed this conversion 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. 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 affect 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 affect on the Company's results of operations, liquidity or financial condition. NEW YORK STOCK EXCHANGE LISTING 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 has 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 over a consecutive 30-day trading 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 will 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 July 28, 1999 notification. If the Company fails to achieve the quarterly milestones or if at the completion of the 12 months it is not in compliance with the new continued listing criteria, the Company will be suspended from trading on the NYSE and application will be made to the SEC for delisting. If the Company achieves all quarterly milestones and meets the NYSE continued listing criteria at the end of the 12 month period, the Company will be considered in "good standing" and no longer subject to business plan review. However, the Company would be subject to the NYSE's on-going listing review policies and procedures. Following consummation of the asset purchase from Old William Lyon Homes, the merger between The Presley Companies and Presley Merger Sub, Inc., and the 1 for 5 exchange ratio, the Company as of February 25, 2000, was in compliance with all NYSE listing criteria. As of February 25, 2000, the Company had a total market capitalization and total 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 over the consecutive 30-day trading period. There can be no assurance that the Company will achieve the quarterly milestones included in the plan, that the Company will comply with the new continued listing criteria at the completion of the 12 month period or maintain the $1 average closing price. 26 29 Failure to achieve any of the above minimum requirements at the appropriate time will result in the Company being suspended by the NYSE with application made to the SEC for delisting. 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 Annual Report on Form 10-K, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates", "hopes", and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined in the Act. Forward-looking statements are based upon expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company, economic and market factors and the homebuilding industry. Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company's actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates, 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 carryforwards, 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's revolving lines of credit with a total outstanding balance at December 31, 1999 of $33.0 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on the Company's consolidated financial statements would be to reduce income before taxes by approximately $120,000 based on amounts outstanding and rates in effect at December 31, 1999, as well as to increase capitalized interest by approximately $359,000 which would be amortized to cost of sales as unit closings occur. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of William Lyon Homes and the financial statements of the Significant Subsidiaries of William Lyon Homes, together with the reports of the independent auditors, listed 27 30 under Item 14, are submitted as a separate section of this report beginning on page 33 and are incorporated herein by reference. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2000 Annual Meeting of Holders of Common Stock to be held on May 9, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2000 Annual Meeting of Holders of Common Stock to be held on May 9, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2000 Annual Meeting of Holders of Common Stock to be held on May 9, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2000 Annual Meeting of Holders of Common Stock to be held on May 9, 2000. PART IV ITEM 14.EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS The following financial statements of the Company are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below:
PAGE ---- WILLIAM LYON HOMES Report of Independent Auditors.............................. 33 Consolidated Balance Sheets................................. 34 Consolidated Statements of Operations....................... 35 Consolidated Statements of Stockholders' Equity (Deficit)... 36 Consolidated Statements of Cash Flows....................... 37 Notes to Consolidated Financial Statements.................. 38 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES Report of Independent Auditors.............................. 62 Combined Balance Sheets..................................... 63 Combined Statements of Operations........................... 64 Combined Statements of Members' Capital..................... 65 Combined Statements of Cash Flows........................... 66 Notes to Combined Financial Statements...................... 67
28 31 (2) FINANCIAL STATEMENT SCHEDULES: Schedules are omitted as the required information is not present, is not present in sufficient amounts, or is included in the Consolidated Financial Statements or Notes thereto. (3) LISTING OF EXHIBITS:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1(1) Certificate of Ownership and Merger 3.1(2) Certificate of Incorporation of the Company. 3.3(2) Bylaws of the Company. 4.1(2) Specimen certificate of Common Stock. 4.2(3) Indenture dated June 29, 1994, between American Bank & Trust Company, as Trustee, and The Presley Companies and Presley Homes. 10.1 Form of Indemnity Agreement, between the Company and the Directors and Officers of the Company. 10.2(2) Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William Lyon Homes, Inc., William Lyon and William H. Lyon. 10.3(4) Amended and Restated 1991 Stock Option Plan of The Presley Companies, a Delaware corporation. 10.4(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and Wade H. Cable. 10.5(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and David M. Siegel. 10.6(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Nancy M. Harlan. 10.7(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Linda L. Foster. 10.8(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and W. Douglass Harris. 10.9(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and C. Dean Stewart. 10.10(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Alan Uman. 10.11(6) Fifth Amended and Restated Loan Agreement, dated as of July 6, 1998, between Presley Homes (formerly The Presley Companies), a California corporation, as the Borrower, and Foothill Capital Corporation, as the Lender. 10.12(7) Form of Severance Agreements dated September 24, 1998. 10.13(8) Presley Homes 1998 Bonus Plan. 10.14 Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999. 10.15 Mortgage Company Agreement between Presley Mortgage Company, a California corporation and Duxford Financial Services, Inc., executed as of November 5, 1999.
29 32
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.16 Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999. 21.1 List of Subsidiaries of the Company. 27 Financial Data Schedule.
- --------------- (1) Previously filed as an exhibit to the Company's Current Report on Form 8-K filed January 5, 2000 and incorporated herein by this reference. (2) Previously filed in connection with the Company's Registration Statement on Form S-4, and amendments thereto, (S.E.C. Registration No. 333-88569) and incorporated herein by this reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (4) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference. (5) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (7) Previously filed as an exhibit to the Company's Report on Form 8-K dated December 31, 1998. (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by this reference. (b) Reports on Form 8-K OCTOBER 22, 1999. A Report on Form 8-K (Item 5) was filed by the Company announcing that it had entered into the Asset Purchase Agreement with Old William Lyon Homes, William Lyon and William H. Lyon. NOVEMBER 15, 1999. A Report on Form 8-K (Item 2) was filed by the Company related to consummation of the acquisition of substantially all of the assets of Old William Lyon Homes. 30 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. WILLIAM LYON HOMES By: /s/ DAVID M. SIEGEL ------------------------------------ David M. Siegel Senior Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM LYON Chairman of the Board, Chief February 24, 2000 - ----------------------------------------------------- Executive Officer and William Lyon Director (Principal Executive Officer) /s/ WADE H. CABLE Director and President February 24, 2000 - ----------------------------------------------------- Wade H. Cable /s/ JAMES E. DALTON Director February 24, 2000 - ----------------------------------------------------- James E. Dalton /s/ RICHARD E. FRANKEL Director February 24, 2000 - ----------------------------------------------------- Richard E. Frankel /s/ WILLIAM H. LYON Director February 24, 2000 - ----------------------------------------------------- William H. Lyon /s/ WILLIAM H. MCFARLAND Director February 24, 2000 - ----------------------------------------------------- William H. McFarland /s/ MICHAEL L. MEYER Director February 24, 2000 - ----------------------------------------------------- Michael L. Meyer /s/ RAY A. WATT Director February 24, 2000 - ----------------------------------------------------- Ray A. Watt /s/ RANDOLPH W. WESTERFIELD Director February 24, 2000 - ----------------------------------------------------- Randolph W. Westerfield /s/ DAVID M. SIEGEL Senior Vice President, Chief February 24, 2000 - ----------------------------------------------------- Financial Officer and David M. Siegel Treasurer (Principal Financial Officer) /s/ W. DOUGLASS HARRIS Vice President and Corporate February 24, 2000 - ----------------------------------------------------- Controller (Principal W. Douglass Harris Accounting Officer)
31 34 INDEX TO FINANCIAL STATEMENTS
PAGE ---- WILLIAM LYON HOMES Report of Independent Auditors.............................. 33 Consolidated Balance Sheets................................. 34 Consolidated Statements of Operations....................... 35 Consolidated Statements of Stockholders' Equity (Deficit)... 36 Consolidated Statements of Cash Flows....................... 37 Notes to Consolidated Financial Statements.................. 38 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES Report of Independent Auditors.............................. 62 Combined Balance Sheets..................................... 63 Combined Statements of Operations........................... 64 Combined Statements of Members' Capital..................... 65 Combined Statements of Cash Flows........................... 66 Notes to Combined Financial Statements...................... 67
REQUIRED SCHEDULES Schedules are omitted as the required information is not present, is not present in sufficient amounts, or is included in the Consolidated Financial Statements or Notes thereto. 32 35 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders William Lyon Homes We have audited the accompanying consolidated balance sheets of William Lyon Homes as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Newport Beach, California February 17, 2000 33 36 WILLIAM LYON HOMES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE) (NOTES 2 AND 3) ASSETS
DECEMBER 31, --------------------- 1999 1998 -------- --------- Cash and cash equivalents................................... $ 2,154 $ 23,955 Receivables -- Note 5....................................... 12,063 8,613 Real estate inventories -- Notes 1 and 6.................... 184,271 174,502 Investments in and advances to unconsolidated joint ventures -- Note 7........................................ 50,282 30,462 Property and equipment, less accumulated depreciation of $4,167 and $3,156 at December 31, 1999 and 1998, respectively.............................................. 2,183 2,912 Deferred loan costs -- Note 1............................... 1,726 3,381 Goodwill -- Note 2.......................................... 8,382 -- Other assets................................................ 17,422 2,579 -------- --------- $278,483 $ 246,404 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 15,653 $ 17,364 Accrued expenses............................................ 32,899 27,823 Notes payable -- Note 8..................................... 76,630 55,393 12 1/2% Senior Notes Due 2001 -- Note 8..................... 100,000 140,000 -------- --------- 225,182 240,580 -------- --------- Commitments and contingencies -- Note 13 Stockholders' equity -- Notes 3 and 10 Common stock, par value $.01 per share; 30,000,000 shares authorized; 10,439,135 shares issued and outstanding at December 31, 1999 and 1998, respectively............... 104 104 Additional paid-in capital................................ 116,667 116,667 Accumulated deficit from January 1, 1994.................. (63,470) (110,947) -------- --------- 53,301 5,824 -------- --------- $278,483 $ 246,404 ======== =========
See accompanying notes. 34 37 WILLIAM LYON HOMES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS) (NOTES 2 AND 3)
YEAR ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 --------- --------- --------- Sales Homes................................................. $ 426,839 $ 348,352 $ 307,332 Lots, land and other -- Note 12....................... 13,142 19,930 22,610 --------- --------- --------- 439,981 368,282 329,942 --------- --------- --------- Operating costs Cost of sales -- homes................................ (357,153) (297,781) (278,299) Cost of sales -- lots, land and other................. (13,223) (20,992) (23,902) Impairment loss on real estate assets -- Note 1....... -- -- (74,000) Sales and marketing................................... (19,387) (21,463) (22,279) General and administrative............................ (19,368) (15,965) (15,996) Amortization of goodwill -- Note 2.................... (307) -- -- --------- --------- --------- (409,438) (356,201) (414,476) --------- --------- --------- Income from unconsolidated joint ventures -- Note 7..... 17,859 3,499 -- --------- --------- --------- Operating income (loss)................................. 48,402 15,580 (84,534) Interest expense, net of amounts capitalized -- Note 8..................................................... (6,153) (9,214) (7,812) Financial advisory expenses -- Note 2................... (2,197) (1,286) -- Other income (expense), net............................. 3,445 3,225 2,452 --------- --------- --------- Income (loss) before income taxes and extraordinary item.................................................. 43,497 8,305 (89,894) Provision for income taxes -- Notes 4 and 10............ (220) (1,191) -- --------- --------- --------- Income (loss) before extraordinary item................. 43,277 7,114 (89,894) Extraordinary item -- gain from retirement of debt, net of applicable income taxes -- Notes 4, 10 and 11...... 4,200 2,741 -- --------- --------- --------- Net income (loss)....................................... $ 47,477 $ 9,855 $ (89,894) ========= ========= ========= Basic and diluted earnings (loss) per common share: -- Note 1 Before extraordinary item............................. $ 4.15 $ 0.68 $ (8.61) Extraordinary item.................................... 0.40 $ 0.26 -- --------- --------- --------- After extraordinary item.............................. $ 4.55 $ 0.94 $ (8.61) ========= ========= =========
See accompanying notes. 35 38 WILLIAM LYON HOMES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) (NOTES 3 AND 4)
OLD STOCK ----------------------------------- NEW STOCK COMMON STOCK --------------- ----------------------------------- ACCUMULATED COMMON STOCK SERIES A SERIES B ADDITIONAL DEFICIT FROM --------------- ---------------- ---------------- PAID-IN JANUARY 1, SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL 1994 TOTAL ------ ------ ------- ------ ------- ------ ---------- ------------ -------- Balance -- December 31, 1996 as previously reported........... -- $ -- 17,839 $ 178 34,357 $ 344 $114,599 $ (30,908) $ 84,213 Adjustment for retroactive effect of merger with wholly-owned subsidiary and conversion of each share of Series A and Series B common stock into 0.2 common share of the surviving company -- Note 3............................. 10,439 104 (17,839) (178) (34,357) (344) 418 -- -- ------ ---- ------- ----- ------- ----- -------- --------- -------- Balance -- December 31, 1996, as adjusted...................... 10,439 104 -- -- -- -- 115,017 (30,908) 84,213 Net loss for the year........... -- -- -- -- -- -- -- (89,894) (89,894) ------ ---- ------- ----- ------- ----- -------- --------- -------- Balance -- December 31, 1997.... 10,439 104 -- -- -- -- 115,017 (120,802) (5,681) Net income for the year......... -- -- -- -- -- -- -- 9,855 9,855 Income tax benefits related to temporary differences existing prior to the quasi- reorganization -- Notes 4 and 10............................ -- -- -- -- -- -- 1,650 -- 1,650 ------ ---- ------- ----- ------- ----- -------- --------- -------- Balance -- December 31, 1998.... 10,439 104 -- -- -- -- 116,667 (110,947) 5,824 Net income for the year......... -- -- -- -- -- -- -- 47,477 47,477 ------ ---- ------- ----- ------- ----- -------- --------- -------- Balance -- December 31, 1999.... 10,439 $104 -- $ -- -- $ -- $116,667 $ (63,470) $ 53,301 ====== ==== ======= ===== ======= ===== ======== ========= ========
See accompanying notes. 36 39 WILLIAM LYON HOMES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (NOTES 2 AND 3)
YEAR ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 --------- --------- --------- Operating activities Net income (loss)......................................... $ 47,477 $ 9,855 $ (89,894) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................... 1,518 1,059 907 Impairment loss on real estate assets................... -- -- 74,000 Income from unconsolidated joint ventures............... (17,859) (3,499) -- Extraordinary gain on repurchase of Senior Notes........ (4,225) (3,200) -- Provision for income taxes.............................. 245 1,650 -- Net changes in operating assets and liabilities: Other receivables..................................... (7,418) (556) (4,273) Real estate inventories............................... 76,045 41,272 (680) Deferred loan costs................................... 1,280 (655) 1,081 Goodwill.............................................. (8,689) -- -- Other assets.......................................... (14,843) 17 6,470 Accounts payable...................................... (9,681) 4,510 (5,574) Accrued expenses...................................... 4,831 4,687 3,819 --------- --------- --------- Net cash provided by (used in) operating activities....... 68,681 55,140 (14,144) --------- --------- --------- Investing activities Investment in and advances to unconsolidated joint ventures................................................ (13,578) (19,886) (7,077) Distributions from unconsolidated joint ventures.......... 11,680 -- -- Proceeds from contribution of land to joint ventures...... 3,700 25,431 -- Mortgage notes receivable originations/issuances.......... (54,965) (234) (637) Mortgage notes receivable sales/repayments................ 58,933 828 483 Purchases of property and equipment....................... (482) (358) (1,473) --------- --------- --------- Net cash provided by (used in) investing activities....... 5,288 5,781 (8,704) --------- --------- --------- Financing activities Proceeds from borrowings on notes payable................. 243,339 132,953 171,964 Principal payments on notes payable....................... (303,709) (138,228) (139,097) Repurchase of 12 1/2% Senior Notes........................ (35,400) (36,260) (20,000) Sale of 12 1/2% Senior Notes held in treasury............. -- -- 10,000 --------- --------- --------- Net cash provided by (used in) financing activities....... (95,770) (41,535) 22,867 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ (21,801) 19,386 19 Cash and cash equivalents -- beginning of year.............. 23,955 4,569 4,550 --------- --------- --------- Cash and cash equivalents -- end of year.................... $ 2,154 $ 23,955 $ 4,569 ========= ========= ========= Supplemental disclosures of cash flow and non-cash activities Cash paid during the period for interest, net of amounts capitalized............................................. $ 7,198 $ 12,025 $ 7,277 ========= ========= ========= Issuance of notes payable for land acquisitions........... $ 22,181 $ 2,748 $ 22,411 ========= ========= ========= Debt assumed by joint venture in connection with contribution of land to joint venture................... $ 33,662 $ -- $ -- ========= ========= ========= Assumption of liabilities related to purchase of substantially all of the assets of William Lyon Homes, Inc. ................................................... $ 101,058 $ -- $ -- ========= ========= =========
See accompanying notes. 37 40 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations 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, New Mexico and Nevada. Basis of Presentation 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 are eliminated in consolidation. Segment Information 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 divisions and its mortgage operations. Because each of the Company's geographic home building divisions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building divisions have been aggregated into a single home building segment. Mortgage company operations did not meet the materiality thresholds which would require disclosure for the years ended December 31, 1999, 1998 and 1997, 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; less cost of sales, impairment losses on real estate, selling and marketing, and general and administrative expenses. Accordingly, operating income excludes certain expenses included in the determination of net income. Operating income (loss) from home building operations totaled $48.4 million, $15.6 million and $(84.5 million) for the years ended December 31, 1999, 1998 and 1997, respectively. 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 1999, 1998, or 1997. Real Estate Inventories and Related Indebtedness Real estate inventories are carried at cost net of impairment losses, if any. Real estate inventories consist primarily of raw land, lots under development, houses under construction and completed houses. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. Selling expenses and other marketing costs are expensed in the period incurred. A provision for warranty costs relating to the Company's limited warranty plans is included in cost of sales at the time the sale of a home is recorded. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. 38 41 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Interest incurred under the Working Capital Facility, the Senior Notes and other notes payable, as more fully discussed in Note 8, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred. 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"), 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. 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 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 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. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein. Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of projects are expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expensed during 1999, 1998 and 1997 was approximately $6,153,000, $9,214,000 and $7,812,000, respectively. Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to thirty-five years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the shorter of either their estimated useful lives or term of the lease. 39 42 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred Loan Costs Deferred loan costs are amortized over the term of the applicable loans using a method which approximates the interest method. Included in deferred loan costs at December 31, 1999 and 1998, net of related amortization, are $704,000 and $1,643,000, respectively, of costs associated with the issuance of the Company's Senior Notes. Goodwill Goodwill, which represents the excess of the purchase price over net assets acquired (Note 2), is amortized on a straight-line basis over an estimated useful life of seven years. Sales and Profit Recognition A sale is recorded and profit recognized when a sale is consummated, the buyer's initial and continuing investments are adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of Financial Accounting Standards Statement No. 66, "Accounting for Sales of Real Estate." When it is determined that the earnings process is not complete, profit is deferred for recognition in future periods. As of December 31, 1999 and 1998, there are no deferred profits. Income Taxes Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Financial Instruments Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash investments, receivables, and deposits. The Company typically places its cash investments in investment grade short-term instruments. Collateral on first trust deed notes receivable is primarily located in Southern California and Arizona. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers. For those instruments, as defined under Financial Accounting Standards Statement No. 107, "Disclosures About Fair Value of Financial Instruments," for which it is practical to estimate fair value, management has determined that the carrying amounts of the Company's financial instruments approximate their fair value at December 31, 1999, except for the 12 1/2% Senior Notes as described in Note 8. The Company is an issuer of, or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in connection with assessment district bonds. These off-balance sheet financial instruments are described in the applicable Notes. Cash and Cash Equivalents Short-term investments with a maturity of three months or less when purchased are considered cash equivalents. Basic and Diluted Earnings Per Common Share Earnings per share amounts for all periods presented conform to Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." Basic and diluted earnings per common share for each of the three years in the period ended December 31, 1999 are based on 10,439,135 shares of common stock outstanding, 40 43 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Use of Estimates 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 December 31, 1999 and 1998 and revenues and expenses for each of the three years in the period ended December 31, 1999. Accordingly, actual results could differ from those estimates in the near-term. NOTE 2 -- ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF WILLIAM LYON HOMES, INC. On November 5, 1999, The Presley Companies ("Presley"), which subsequently changed its name to William Lyon Homes on December 31, 1999 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. 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 renamed The Presley Companies, which in turn was renamed William Lyon Homes on December 31, 1999. On November 11, 1999, the certificate of ownership and merger was filed in the State of Delaware and the merger became effective. Beginning on November 12, 1999, the shares of the surviving 41 44 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) company (then named "The Presley Companies") commenced trading on the New York Stock Exchange under the symbol "PDC." 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 has incurred costs of approximately $2,197,000 and $1,286,000 for the years ended December 31, 1999 and 1998, respectively, which are reflected in the Consolidated Statement of Operations 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. NOTE 4 -- QUASI-REORGANIZATION In 1994, the Company's Board of Directors approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented a quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with a plan for capital restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting." Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations. As a result of the quasi-reorganization, any income tax benefits resulting from the utilization of net operating losses and other carryforwards existing at January 1, 1994 and temporary differences existing prior to or resulting from the quasi-reorganization, are excluded from the Company's results of operations and credited to additional paid-in capital. 42 45 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- RECEIVABLES Receivables consist of the following (in thousands):
DECEMBER 31, ----------------- 1999 1998 ------- ------ First trust deed mortgage notes receivable, pledged as collateral for notes payable under line of credit....... $ 3,222 $ -- First trust deed notes secured by real estate sold, interest rates generally ranging from 8.00% to 12.00%... 637 637 Other notes receivable.................................... 786 80 ------- ------ 4,645 717 Receivables from affiliates for management overhead fees and cost reimbursements................................. 2,010 970 Other receivables -- primarily escrow proceeds............ 5,408 6,926 ------- ------ $12,063 $8,613 ======= ======
NOTE 6 -- REAL ESTATE INVENTORIES Real estate inventories consist of the following (in thousands):
DECEMBER 31, 1999 --------------------------------------------- COMPLETED INVENTORY, LAND AND INCLUDING MODELS CONSTRUCTION AND COMPLETED DIVISION IN PROGRESS LOTS HELD FOR SALE TOTAL -------- ------------ ------------------- -------- Southern California............................ $ 58,925 $ 6,547 $ 65,472 San Diego...................................... 30,147 2,501 32,648 Northern California............................ 43,312 4,116 47,428 Arizona........................................ 11,139 1,628 12,767 New Mexico..................................... 1,443 1,266 2,709 Nevada......................................... 21,783 1,076 22,859 Other.......................................... 388 -- 388 -------- ------- -------- $167,137 $17,134 $184,271 ======== ======= ========
DECEMBER 31, 1998 --------------------------------------------- COMPLETED INVENTORY, LAND AND INCLUDING MODELS CONSTRUCTION AND COMPLETED DIVISION IN PROGRESS LOTS HELD FOR SALE TOTAL -------- ------------ ------------------- -------- Southern California............................ $ 39,739 $18,364 $ 58,103 San Diego...................................... 26,982 5,930 32,912 Northern California............................ 34,086 4,827 38,913 Arizona........................................ 17,412 707 18,119 New Mexico..................................... 6,793 1,822 8,615 Nevada......................................... 14,869 2,518 17,387 Other.......................................... 453 -- 453 -------- ------- -------- $140,334 $34,168 $174,502 ======== ======= ========
43 46 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES The Company and certain of its subsidiaries are general partners or members in nineteen joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned and, accordingly, 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 December 31, 1999 and 1998 is summarized as follows: CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1999 1998 -------- -------- ASSETS Cash and cash equivalents................................... $ 7,197 $ 304 Receivables................................................. 1,275 851 Real estate inventories..................................... 240,056 168,417 Other assets................................................ 735 1,034 -------- -------- $249,263 $170,606 ======== ======== LIABILITIES AND OWNERS' CAPITAL Accounts payable............................................ $ 8,558 $ 6,453 Accrued expenses............................................ 5,488 2,098 Notes payable............................................... 54,069 29,024 Advances from William Lyon Homes............................ 1,055 655 -------- -------- 69,170 38,230 -------- -------- Owners' Capital William Lyon Homes........................................ 49,227 29,807 Others.................................................... 130,866 102,569 -------- -------- 180,093 132,376 -------- -------- $249,263 $170,606 ======== ========
44 47 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 --------- -------- ------ Sales Homes....................................... $ 203,336 $ 41,081 $ -- Operating costs Cost of sales -- homes...................... (163,215) (32,883) -- Sales and marketing......................... (6,734) (1,861) -- --------- -------- ------ Operating income.............................. 33,387 6,337 -- Other income, net............................. 588 213 -- --------- -------- ------ Net income.................................... $ 33,975 $ 6,550 $ -- ========= ======== ====== Allocation to owners William Lyon Homes.......................... $ 17,859 $ 3,499 $ -- Others...................................... 16,116 3,051 -- --------- -------- ------ $ 33,975 $ 6,550 $ -- ========= ======== ======
NOTE 8 -- NOTES PAYABLE AND 12 1/2% SENIOR NOTES Notes payable and 12 1/2% Senior Notes consist of the following (in thousands):
DECEMBER 31, -------------------- 1999 1998 -------- -------- Notes payable: Working Capital Facility............................. $ 33,000 $ 44,000 Revolving line of credit -- consolidated joint venture........................................... -- 5,657 Construction notes payable........................... 15,960 -- Purchase money notes payable -- land acquisitions.... 24,537 5,736 Collateralized mortgage obligations under line of credit, secured by first trust deed mortgage notes receivable........................................ 3,133 -- -------- -------- 76,630 55,393 12 1/2% Senior Notes due 2001.......................... 100,000 140,000 -------- -------- $176,630 $195,393 ======== ========
Interest relating to the above debt consists of the following (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Interest incurred.................. $(24,500) $(31,475) $(32,970) Interest capitalized............... 18,347 22,261 25,158 -------- -------- -------- Interest expense................... $ (6,153) $ (9,214) $ (7,812) ======== ======== ========
Senior Notes In accordance with the bond indenture agreement governing the Company's Senior Notes which are due in 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 has been less than $60,000,000 beginning with the 45 48 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) quarter ended June 30, 1997, the Company would, effective on December 4, 1997, June 4, 1998, December 4, 1998, June 4, 1999 and December 4, 1999 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 and September 30, 1999 respectively. The Company acquired Senior Notes with a face amount of $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 and again after September 30, 1999 and prior to December 4, 1999, and therefore was not required to make offers to purchase Senior Notes. As a result of these transactions, the Company recognized as an extraordinary item net gains from retirement of debt totaling $4,200,000 and $2,741,000 during the years ended December 31, 1999 and 1998, after giving effect to income taxes and amortization of related loan costs. Every six months, until the Company's Consolidated Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20,000,000 of Senior Notes. At December 31, 1999, the Company's Consolidated Tangible Net Worth was $43,193,000. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. 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 is less than $60,000,000, the Company is 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 12 1/2% Senior Notes due 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. 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. Upon certain changes of control as described in the Indenture, Delaware Lyon must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. The Indenture governing the Senior Notes restricts Delaware Lyon and certain of its subsidiaries with respect to, among other things: (i) the payment of dividends on and redemptions of capital stock, (ii) the incurrence of indebtedness or the issuance of preferred stock, (iii) the creation of certain liens, (iv) consolidations or mergers with or transfer of all or substantially all of its 46 49 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assets and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions. As of December 31, 1999, the outstanding 12 1/2% Senior Notes with a face value of $100,000,000 have a fair value of approximately $88,000,000 to $90,000,000, based on quotes from industry sources. 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 DECEMBER 31, 1999 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------ DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------ ------------- ----------- ------------ 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 ======== ======== ======= ========= ========
47 50 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------- DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------- ------------- ----------- ------------ ASSETS Cash and cash equivalents.......... $ -- $ 22,605 $ 1,350 $ -- $ 23,955 Receivables........................ -- 7,157 1,456 -- 8,613 Real estate inventories............ -- 161,667 12,835 -- 174,502 Investments in and advances to unconsolidated joint ventures.... -- 3,225 27,237 -- 30,462 Property and equipment, net........ -- 2,614 298 -- 2,912 Deferred loan costs................ 1,643 1,708 30 -- 3,381 Other assets....................... -- 2,440 139 -- 2,579 Investments in subsidiaries........ 4,369 31,553 -- (35,922) -- Intercompany receivables........... 143,740 3,928 -- (147,668) -- -------- -------- ------- --------- -------- $149,752 $236,897 $43,345 $(183,590) $246,404 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................... $ -- $ 15,867 $ 1,497 $ -- $ 17,364 Accrued expenses................... -- 25,965 1,858 -- 27,823 Notes payable...................... -- 49,736 5,657 -- 55,393 12 1/2 Senior Notes................ 140,000 -- -- -- 140,000 Intercompany payables.............. 3,928 143,740 -- (147,668) -- -------- -------- ------- --------- -------- Total liabilities............. 143,928 235,308 9,012 (147,668) 240,580 Stockholders' equity............... 5,824 1,589 34,333 (35,922) 5,824 -------- -------- ------- --------- -------- $149,752 $236,897 $43,345 $(183,590) $246,404 ======== ======== ======= ========= ========
48 51 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------ DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------ ------------- ----------- ------------ Sales............................... $ -- $ 380,160 $ 59,821 $ -- $ 439,981 ------- --------- -------- -------- --------- Operating costs Cost of sales..................... -- (322,929) (47,447) -- (370,376) Sales and marketing............... -- (16,648) (2,739) -- (19,387) General and administrative........ -- (23,262) 3,894 -- (19,368) Amortization of goodwill.......... -- (307) -- -- (307) ------- --------- -------- -------- --------- -- (363,146) (46,292) -- (409,438) ------- --------- -------- -------- --------- Income from unconsolidated joint ventures.......................... -- 3,137 14,722 -- 17,859 ------- --------- -------- -------- --------- Income from subsidiaries............ 45,474 27,250 -- (72,724) -- ------- --------- -------- -------- --------- Operating income.................... 45,474 47,401 28,251 (72,724) 48,402 Interest expense, net of amounts capitalized....................... -- (3,759) (2,394) -- (6,153) Financial advisory expenses......... (2,197) -- -- -- (2,197) Other income (expense), net......... -- 2,131 1,314 -- 3,445 ------- --------- -------- -------- --------- Income before income taxes and extraordinary item................ 43,277 45,773 27,171 (72,724) 43,497 Provision for income taxes.......... -- (220) -- -- (220) ------- --------- -------- -------- --------- Income before extraordinary item.... 43,277 45,553 27,171 (72,724) 43,277 Extraordinary item -- gain from retirement of debt net of applicable income taxes........... 4,200 -- -- -- 4,200 ------- --------- -------- -------- --------- Net income.......................... $47,477 $ 45,553 $ 27,171 $(72,724) $ 47,477 ======= ========= ======== ======== =========
49 52 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------ DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------ ------------- ----------- ------------ Sales............................... $ -- $ 261,394 $106,888 $ -- $368,282 ------- --------- -------- -------- -------- Operating costs Cost of sales..................... -- (228,629) (90,144) -- (318,773) Sales and marketing............... -- (16,275) (5,188) -- (21,463) General and administrative........ -- (17,587) 1,622 -- (15,965) ------- --------- -------- -------- -------- -- (262,491) (93,710) -- (356,201) ------- --------- -------- -------- -------- Income from unconsolidated joint ventures.......................... -- 6 3,493 -- 3,499 ------- --------- -------- -------- -------- Income from subsidiaries............ 8,400 17,955 -- (26,355) -- ------- --------- -------- -------- -------- Operating income.................... 8,400 16,864 16,671 (26,355) 15,580 Interest expense, net of amounts capitalized....................... -- (7,784) (1,430) -- (9,214) Financial advisory expenses......... (1,286) -- -- -- (1,286) Other income (expense), net......... -- (392) 3,617 -- 3,225 ------- --------- -------- -------- -------- Income before income taxes and extraordinary item................ 7,114 8,688 18,858 (26,355) 8,305 Provision for income taxes.......... -- (1,191) -- -- (1,191) ------- --------- -------- -------- -------- Income before extraordinary item.... 7,114 7,497 18,858 (26,355) 7,114 Extraordinary item -- gain from retirement of debt net of applicable income taxes........... 2,741 -- -- -- 2,741 ------- --------- -------- -------- -------- Net income.......................... $ 9,855 $ 7,497 $ 18,858 $(26,355) $ 9,855 ======= ========= ======== ======== ========
50 53 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------ DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------ ------------- ----------- ------------ Sales............................ $ -- $ 270,284 $ 59,658 $ -- $ 329,942 -------- --------- -------- ------- --------- Operating costs Cost of sales.................. -- (248,655) (53,546) -- (302,201) Impairment loss on real estate assets...................... -- (74,000) -- -- (74,000) Sales and marketing............ -- (18,492) (3,787) -- (22,279) General and administrative..... -- (15,777) (219) -- (15,996) -------- --------- -------- ------- --------- -- (356,924) (57,552) -- (414,476) -------- --------- -------- ------- --------- Income (loss) from subsidiaries................... (89,894) 3,730 -- 86,164 -- -------- --------- -------- ------- --------- Operating income (loss).......... (89,894) (82,910) 2,106 86,164 (84,534) Interest expense, net of amounts capitalized.................... -- (7,677) (135) -- (7,812) Other income (expense), net...... -- 91 2,361 -- 2,452 -------- --------- -------- ------- --------- Net income (loss)................ $(89,894) $ (90,496) $ 4,332 $86,164 $ (89,894) ======== ========= ======== ======= =========
51 54 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------ DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------ ------------- ----------- ------------ Cash flows from operating activities: Net income.................................. $ 47,477 $ 45,553 $ 27,171 $(72,724) $ 47,477 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............ -- 1,490 28 -- 1,518 Income from unconsolidated joint ventures............................... -- (3,137) (14,722) -- (17,859) Income from subsidiaries................. (45,474) (27,250) -- 72,724 -- Extraordinary gain on repurchase of Senior Notes........................... (4,225) -- -- -- (4,225) Provision for income taxes............... -- 245 -- -- 245 Net changes in operating assets and liabilities: Other receivables...................... -- (6,825) (593) -- (7,418) Intercompany receivables/payables...... 1,658 (1,658) -- -- -- Real estate inventories................ -- 72,964 3,081 -- 76,045 Deferred loan costs.................... 564 686 30 -- 1,280 Goodwill............................... -- (8,689) -- -- (8,689) Other assets........................... -- (14,960) 117 -- (14,843) Accounts payable....................... -- (8,622) (1,059) -- (9,681) Accrued expenses....................... -- 4,991 (160) -- 4,831 -------- -------- -------- -------- -------- Net cash provided by operating activities..... -- 54,788 13,893 -- 68,681 -------- -------- -------- -------- -------- Cash flows from investing activities: Net change in investments in and advances to unconsolidated joint ventures............ -- (9,867) 7,969 -- (1,898) Proceeds from contribution of land to joint venture.................................. -- 3,700 3,700 (3,700) 3,700 Net change in mortgage notes receivable..... -- 7,190 (3,222) -- 3,968 Purchases of property and equipment......... -- (684) 202 -- (482) Investment in subsidiaries.................. -- 15,284 -- (15,284) -- Advances to affiliates...................... 35,400 -- -- (35,400) -- -------- -------- -------- -------- -------- Net cash provided by investing activities..... 35,400 15,623 8,649 (54,384) 5,288 -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from borrowings on notes payable... -- 185,785 57,554 -- 243,339 Principal payments on notes payable......... -- (243,631) (60,078) -- (303,709) Repurchase of 12 1/2% Senior Notes.......... (35,400) -- -- -- (35,400) Distributions to/contributions from shareholders............................. -- 1,574 (20,558) 18,984 -- Advances to affiliates...................... -- (35,400) -- 35,400 -- -------- -------- -------- -------- -------- Net cash used in financing activities......... (35,400) (91,672) (23,082) 54,384 (95,770) -------- -------- -------- -------- -------- Net decrease in cash and cash equivalents..... -- (21,261) (540) -- (21,801) Cash and cash equivalents at beginning of year........................................ -- 22,605 1,350 -- 23,955 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year...... $ -- $ 1,344 $ 810 $ -- $ 2,154 ======== ======== ======== ======== ========
52 55 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------ DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------ ------------- ----------- ------------ Cash flows from operating activities: Net income...................................... $ 9,855 $ 7,497 $18,858 $(26,355) $ 9,855 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. -- 988 71 -- 1,059 Income from unconsolidated joint ventures..... -- (6) (3,493) -- (3,499) Income from subsidiaries...................... (8,400) (17,955) -- 26,355 -- Extraordinary gain on repurchase of Senior Notes....................................... (3,200) -- -- -- (3,200) Provision for income taxes.................... -- 1,650 -- -- 1,650 Net changes in operating assets and liabilities: Other receivables........................... -- (846) 290 -- (556) Intercompany receivables/payables........... 970 (970) -- -- -- Real estate inventories..................... -- 34,218 7,054 -- 41,272 Deferred loan costs......................... 775 (1,418) (12) -- (655) Other assets................................ -- (1) 18 -- 17 Accounts payable............................ -- 3,997 513 -- 4,510 Accrued expenses............................ -- 3,296 1,391 -- 4,687 -------- -------- ------- -------- --------- Net cash provided by operating activities......... -- 30,450 24,690 -- 55,140 -------- -------- ------- -------- --------- Cash flows from investing activities: Investment in unconsolidated joint ventures..... -- (2,054) (17,832) -- (19,886) Proceeds from contribution of land to joint venture....................................... -- 25,431 -- -- 25,431 Issuance of/payments on notes receivable........ -- 594 -- -- 594 Purchases of property and equipment............. -- (195) (163) -- (358) Investment in subsidiaries...................... -- 2,800 -- (2,800) -- Advances to affiliates.......................... 36,260 -- -- (36,260) -- -------- -------- ------- -------- --------- Net cash provided by (used in) investing activities...................................... 36,260 26,576 (17,995) (39,060) 5,781 -------- -------- ------- -------- --------- Cash flows from financing activities: Proceeds from borrowings on notes payable....... -- 95,873 37,080 -- 132,953 Principal payments on notes payable............. -- (97,365) (40,863) -- (138,228) Repurchase of 12 1/2% Senior Notes.............. (36,260) -- -- -- (36,260) Distributions to/contributions from shareholders.................................. -- (1,046) (1,754) 2,800 -- Advances from affiliates........................ -- (36,260) -- 36,260 -- -------- -------- ------- -------- --------- Net cash used in financing activities............. (36,260) (38,798) (5,537) 39,060 (41,535) -------- -------- ------- -------- --------- Net increase in cash and cash equivalents......... -- 18,228 1,158 -- 19,386 Cash and cash equivalents at beginning of year.... -- 4,377 192 -- 4,569 -------- -------- ------- -------- --------- Cash and cash equivalents at end of year.......... $ -- $ 22,605 $ 1,350 $ -- $ 23,955 ======== ======== ======= ======== =========
53 56 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------ DELAWARE WILLIAM LYON NON-GUARANTOR ELIMINATING CONSOLIDATED LYON HOMES, INC. SUBSIDIARIES ENTRIES COMPANY ----------- ------------ ------------- ----------- ------------ Cash flows from operating activities: Net income (loss)...................... $(89,894) $(90,496) $ 4,332 $ 86,164 $(89,894) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization....... -- 844 63 -- 907 Impairment loss on real estate assets............................ -- 74,000 -- -- 74,000 Income (loss) from subsidiaries..... 89,894 (3,730) -- (86,164) -- Net changes in operating assets and liabilities: Other receivables................. -- (2,975) (1,298) -- (4,273) Intercompany receivables/payables........... (1,301) 1,301 -- -- -- Real estate inventories........... -- 4,719 (5,399) -- (680) Deferred loan costs............... 1,301 (202) (18) -- 1,081 Other assets...................... -- 6,405 65 -- 6,470 Accounts payable.................. -- (6,019) 445 -- (5,574) Accrued expenses.................. -- 3,812 7 -- 3,819 -------- -------- -------- -------- -------- Net cash used in operating activities.... -- (12,341) (1,803) -- (14,144) -------- -------- -------- -------- -------- Cash flows from investing activities: Investment in unconsolidated joint ventures............................ -- (1,165) (5,912) -- (7,077) Issuance of/payments on notes receivable.......................... -- (154) -- -- (154) Purchases of property and equipment.... -- (1,447) (26) -- (1,473) Investment in subsidiaries............. -- 2,354 -- (2,354) -- Advances to affiliates................. 10,000 -- -- (10,000) -- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities............................. 10,000 (412) (5,938) (12,354) (8,704) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from borrowings on notes payable............................. -- 133,026 38,938 -- 171,964 Principal payments on notes payable.... -- (109,599) (29,498) -- (139,097) Repurchase/sale of 12 1/2% Senior Notes............................... (10,000) -- -- -- (10,000) Distributions to/contributions from shareholders........................ -- 626 (2,980) 2,354 -- Advances from affiliates............... -- (10,000) -- 10,000 -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities............................. (10,000) 14,053 6,460 12,354 22,867 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................ -- 1,300 (1,281) -- 19 Cash and cash equivalents at beginning of year................................ -- 3,077 1,473 -- 4,550 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year................................... $ -- $ 4,377 $ 192 $ -- $ 4,569 ======== ======== ======== ======== ========
54 57 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $100,000,000 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 December 31, 1999 was approximately $95,500,000. The maximum loan under the Working Capital Facility is limited to $100,000,000 and the principal outstanding under the Working Capital Facility at December 31, 1999 was $33,000,000. 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 8.0%. 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 $2,000,000, 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 earnings tests. The Working Capital Facility also provides for 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 $20,000,000 in the principal operating accounts of the Company. Construction Notes Payable At December 31, 1999, the Company had various construction notes payable outstanding amounting to $15,960,000 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%. Purchase Money Notes Payable -- Land Acquisitions At December 31, 1999, the Company had various notes payable outstanding related to land acquisitions for which seller financing was provided in the amount of $24,537,000. The prime rate averaged 7.99%, 8.35% and 8.46% for 1999, 1998 and 1997, respectively, and was 8.50% and 7.75% at December 31, 1999 and 1998, respectively. 55 58 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- STOCK OPTIONS AND INCENTIVE COMPENSATION PLANS Stock Option Plan Effective May 20, 1994, Delaware Lyon (formerly Delaware Presley) amended the 1991 Stock Option Plan (the "Plan") to increase the number of shares authorized for options to be granted to 2,642,000 shares of common stock. 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 or upon a change of control. On May 20, 1994, Delaware Lyon (formerly Delaware Presley) issued options to purchase a total of 2,035,000 shares of common stock at $2.875 per share. Subsequently, options to purchase 440,000 shares were canceled due to employee terminations and options held by William Lyon to purchase 750,000 shares were canceled as described in Note 2, resulting in 845,000 options outstanding. The options outstanding vested at various times and became fully vested on May 20, 1997 and expire five years from the date of vesting. In connection with a new incentive compensation plan (as described below), 725,000 stock options outstanding were repriced effective January 1, 1997 from $2.875 to $1.00. After giving effect to the conversion exchange ratio in the merger as described in Note 3, options to purchase Common Stock outstanding at December 31, 1999 are as follows: 145,000 options priced at $5.00 and 24,000 options priced at $14.375. Pursuant to the provisions of Financial Accounting Standards Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation," issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB Opinion 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been recognized in the financial statements related to stock options awarded to officers, directors and employees under the Stock Option Plan. As required by Statement No. 123, for disclosure purposes only, the Company has measured the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The Company estimated the fair value of the stock options at date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.25%; a dividend yield of 0.00%, a volatility factor for the market price of the Company's common stock of 0.514; and a weighted average expected life of four years for the stock options. Incentive Compensation Plan Effective on January 1, 1997, the Company's Board of Directors approved a new incentive compensation plan for all of the Company's full-time, salaried employees, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), Executives, Managers, Field Construction Supervisors, and certain other employees. Under the terms of this new plan, the CEO and CFO are eligible to receive bonuses at the discretion of the Compensation Committee of the Board; in addition, the stock options outstanding and held by the CEO and CFO (totaling 725,000 options) were repriced from $2.875 to $1.00. After giving effect to the conversion exchange as described in Note 3, the outstanding options became 145,000 priced at $5.00. 56 59 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In addition, the 1999 and 1998 Executive Bonus Plans stipulate annual setting of individual bonus targets, expressed as a percent of each executive's salary, with awards based on performance against goals pertaining to each participant's operating area. All awards are prorated downward if the sum of all calculated awards for the entire Company exceeds 20% of the Company's consolidated pre-tax income before bonuses. Awards are paid out over three years, with 50% paid following the determination of bonus awards, 25% paid one year later and 25% paid two years later. The deferred amounts will be forfeited in the event of termination for any reason except retirement, death or disability. NOTE 10 -- INCOME TAXES The following summarizes the provision for income taxes (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- ------- -------- Current Federal....................................... $ (189) $ -- $ -- State......................................... (56) (7) (6) -------- ------- -------- (245) (7) (6) -------- ------- -------- Deferred Federal....................................... -- (1,650) -- State......................................... -- 7 6 -------- ------- -------- -- (1,643) 6 -------- ------- -------- $ (245) ($1,650) $ -- ======== ======= ======== Provision for income taxes before extraordinary item.......................................... $ (220) $(1,191) $ -- Provision for income taxes on extraordinary item.......................................... (25) (459) -- -------- ------- -------- $ (245) $(1,650) $ -- ======== ======= ========
Income taxes differ from the amounts computed by applying the applicable Federal statutory rates due to the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- ------- -------- (Provision) credit for Federal income taxes at the statutory rate............................ $(13,516) $(2,907) $ 31,463 (Provision) credit for state income taxes, net of Federal income tax benefits................ 1,516 (661) 2,583 Extraordinary item -- gain from retirement of debt.......................................... (1,437) (1,120) -- Valuation allowance for deferred tax asset...... 13,305 3,038 (34,046) Other........................................... (113) -- -- -------- ------- -------- $ (245) $(1,650) $ -- ======== ======= ========
57 60 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Temporary differences giving rise to deferred income taxes consist of the following (in thousands):
DECEMBER 31, -------------------- 1999 1998 -------- -------- Deferred tax assets Reserves deducted for financial reporting purposes not allowable for tax purposes............................. $ 3,322 $ 27,785 Compensation deductible for tax purposes when paid.............................................. 4,437 1,231 Net operating loss and alternative minimum tax credit carryovers............................................. 28,147 49,930 Valuation allowance....................................... (33,640) (96,331) State income tax provisions deductible when paid for Federal tax purposes................................... 1,314 15,315 Effect of book/tax differences for joint ventures......... (943) 5,221 Other..................................................... (100) (280) -------- -------- 2,537 2,871 -------- -------- Deferred tax liabilities Interest capitalized for financial reporting purposes and deducted currently for tax purposes.................... (2,537) (2,871) -------- -------- (2,537) (2,871) -------- -------- $ -- $ -- ======== ========
As discussed in Note 4, the Company implemented a quasi-reorganization 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 the quasi-reorganization, are excluded from results of operations and credited to additional paid-in capital. For the year ended December 31, 1999, post quasi-reorganization temporary differences which reduce taxable earnings, partially offset by temporary differences that existed prior to the quasi-reorganization, along with pre quasi-reorganization net operating loss carryforwards, resulted in income tax expense, at Alternative Minimum Tax rates, of $245,000. For the year ended December 31, 1998, income tax benefits of $1,650,000 related to temporary differences resulting from the quasi-reorganization were excluded from the results of operations and credited to additional paid-in capital. At December 31, 1999 the Company has net operating loss carryforwards for Federal tax purposes (both pre and post quasi-reorganization) of approximately $106,178,000, of which $12,862,000 expires in 2008, $27,378,000 expires in 2009, $35,840,000 expires in 2010, $13,668,000 expires in 2011, $16,402,000 expires in 2012 and $28,000 expires in 2018. Due to the transactions discussed in Note 4, the future benefits associated with the utilization of the net operating loss carryforwards may be substantially limited. NOTE 11 -- GAIN FROM RETIREMENT OF DEBT 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 from the purchase was $1,789,000, after giving effect to income taxes and amortization of related deferred loan costs. In October and November 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 $2,411,000, after giving effect to income taxes and amortization of related deferred loan costs. In June 1998, the Company purchased $20,000,000 principal amount of its outstanding Senior Notes at a cost of $18,825,000. The net gain resulting from the purchase, after giving effect to income taxes and amortization of related deferred loan costs, was $522,000. 58 61 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In October 1998, the Company purchased $20,000,000 principal amount of its outstanding Senior Notes at a cost of $17,435,000. The net gain resulting from the purchase, after giving effect to income taxes and amortization of related deferred loan costs, was $2,219,000. NOTE 12 -- 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 $680,400 during the year ended December 31, 1999 from an entity controlled by William Lyon and William H. Lyon. For the year ended December 31, 1999, the Company earned management fees and accrued on-site labor costs of $268,100 and $367,800, respectively, for managing and selling real estate owned by entities controlled by William Lyon and William H. Lyon of which $133,000 was due the Company at December 31, 1999. In addition, the Company earned fees of $50,100 for tax and accounting services performed for entities controlled by William Lyon and William H. Lyon. For the year ended December 31, 1999, the Company incurred charges of $145,500 related to rent on its corporate office, from an entity controlled by William Lyon and William H. Lyon. Sales of lots, land and other for the year ended December 31, 1998 include a bulk lot sale of $6,996,000 to Old William Lyon Homes. The Company received the full purchase price in cash and recognized a gain of $265,000 on the sale. NOTE 13 -- COMMITMENTS AND CONTINGENCIES The Company's commitments and contingent liabilities include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Company's consolidated financial position. The Company is a defendant in various lawsuits related to its normal business activities. In the opinion of management, disposition of the various lawsuits will have no material effect on the consolidated financial statements of the Company. In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, "Accounting for Special Assessment and Tax Increment Financing Entities" issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, and recorded as liabilities in the Company's consolidated balance sheet, if the amounts are fixed and determinable. NOTE 14 -- UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information is presented as if the acquisition of substantially all of the assets of Old William Lyon Homes, as described further in Note 2, had occurred at the beginning of the periods presented. 59 62 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 ---------- ---------- (IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS) Sales....................................................... $533,952 $436,041 Operating income............................................ $ 47,637 $ 15,413 Income before income taxes and extraordinary item........... $ 43,098 $ 9,519 Net income.................................................. $ 47,078 $ 10,899 Basic and diluted earnings per common share(1).............. $ 4.51 $ 1.04
- --------------- (1) 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. NOTE 15 -- UNAUDITED SUMMARIZED QUARTERLY FINANCIAL INFORMATION Summarized quarterly financial information for the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands except per common share amounts):
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1999 1999 1999 1999 --------- --------- ------------- ------------ Sales........................................ $ 82,297 $ 95,715 $ 88,363 $ 173,606 Costs and expenses, net...................... (75,996) (86,741) (75,846) (157,901) -------- --------- -------- --------- Income before income taxes and extraordinary item....................................... 6,301 8,974 12,517 15,705 Benefit (provision) for income taxes......... (905) (1,286) (1,797) 3,768 -------- --------- -------- --------- Income before extraordinary item............. 5,396 7,688 10,720 19,473 Extraordinary item -- gain from retirement of debt, net of applicable income taxes....... -- 1,789 -- 2,411 -------- --------- -------- --------- Net income................................... $ 5,396 $ 9,477 $ 10,720 $ 21,884 ======== ========= ======== ========= Basic and diluted earnings per common share -- Note 1 Before extraordinary item.................. $ 0.51 $ 0.74 $ 1.03 $ 1.87 Extraordinary item......................... -- 0.17 -- $ 0.23 -------- --------- -------- --------- After extraordinary item................... $ 0.51 $ 0.91 $ 1.03 $ 2.10 ======== ========= ======== =========
60 63 WILLIAM LYON HOMES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 --------- --------- ------------- ------------ Sales........................................ $ 66,478 $ 80,530 $ 89,509 $ 131,765 Costs and expenses, net...................... (69,676) (80,301) (86,007) (123,993) -------- --------- -------- --------- Income (loss) before income taxes and extraordinary item......................... (3,198) 229 3,502 7,772 Credit (provision) for income taxes.......... -- 363 (203) (1,351) -------- --------- -------- --------- Income (loss) before extraordinary item...... (3,198) 592 3,299 6,421 Extraordinary item -- gain from retirement of debt, net of applicable income taxes....... -- 522 -- 2,219 -------- --------- -------- --------- Net income (loss)............................ $ (3,198) $ 1,114 $ 3,299 $ 8,640 ======== ========= ======== ========= Basic and diluted earnings per common share -- Note 1 Before extraordinary item.................. $ (0.06) $ 0.01 $ 0.06 $ 0.13 Extraordinary item......................... -- 0.01 -- $ 0.04 -------- --------- -------- --------- After extraordinary item................... $ (0.06) $ 0.02 $ 0.06 $ 0.17 ======== ========= ======== =========
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 --------- --------- ------------- ------------ Sales........................................ $ 67,795 $ 97,566 $ 68,349 $ 96,232 Costs and expenses, net...................... (71,369) (173,020) (71,549) (103,898) -------- --------- -------- --------- Loss before income taxes..................... (3,574) (75,454) (3,200) (7,666) Credit (provision) for income taxes.......... -- -- -- -- -------- --------- -------- --------- Net loss(1).................................. $ (3,574) $ (75,454) $ (3,200) $ (7,666) ======== ========= ======== ========= Basic and diluted earnings per common share -- Note 1..................... $ (0.07) $ (1.45) $ (0.06) $ (0.15) ======== ========= ======== =========
- --------------- (1) Results for the three months ended June 30, 1997 were adversely affected by a $74,000,000 reduction of certain real estate assets to their estimated net realizable value as described in Note 1. 61 64 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders William Lyon Homes We have audited the accompanying combined balance sheets of the Significant Subsidiaries of William Lyon Homes, as defined in Note 1, as of December 31, 1999 and 1998, and the related combined statements of operations, members' capital and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Significant Subsidiaries of William Lyon Homes at December 31, 1999 and 1998, and the combined results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Newport Beach, California February 17, 1999 62 65 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- 1999 1998 ------------ ----------- Cash........................................................ $ 4,249,000 $ 374,000 Receivables................................................. 1,169,000 784,000 Real estate inventories (Note 2)............................ 165,421,000 97,595,000 Other assets................................................ 150,000 -- ------------ ----------- $170,989,000 $98,753,000 ============ =========== LIABILITIES AND MEMBERS' CAPITAL Accounts payable and accrued liabilities.................... $ 7,870,000 $ 5,786,000 Amounts due to members (Note 4)............................. 836,000 410,000 Notes payable (Note 3)...................................... 33,318,000 9,375,000 ------------ ----------- 42,024,000 15,571,000 Commitments and contingencies (Note 5) Members' capital............................................ 128,965,000 83,182,000 ------------ ----------- $170,989,000 $98,753,000 ============ ===========
See accompanying notes. 63 66 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ----------- ----------- (UNAUDITED) REVENUES Sales of homes..................................... $114,109,000 $26,725,000 $ -- Interest and other income.......................... 526,000 127,000 -- ------------ ----------- ----------- 114,635,000 26,852,000 -- ------------ ----------- ----------- COSTS AND EXPENSES Cost of homes sold................................. 85,583,000 19,801,000 -- Sales, marketing and administrative expenses....... 4,212,000 1,091,000 -- ------------ ----------- ----------- 89,795,000 20,892,000 -- ------------ ----------- ----------- NET INCOME......................................... $ 24,840,000 $ 5,960,000 $ -- ============ =========== ===========
See accompanying notes. 64 67 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES COMBINED STATEMENTS OF MEMBERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (UNAUDITED)
COMMON TOTAL LYON UNAFFILIATED MEMBERS' MEMBERS MEMBERS CAPITAL ------------- ------------ ------------ Initial contributions (unaudited)................. $ 5,912,000 $ 16,943,000 $ 22,855,000 ----------- ------------ ------------ BALANCE -- December 31, 1997 (unaudited).......... 5,912,000 16,943,000 22,855,000 Contributions..................................... 10,396,000 70,099,000 80,495,000 Distributions..................................... (506,000) (25,622,000) (26,128,000) Net income........................................ 3,276,000 2,684,000 5,960,000 ----------- ------------ ------------ BALANCE -- December 31, 1998...................... 19,078,000 64,104,000 83,182,000 Contributions..................................... 10,737,000 115,471,000 126,208,000 Distributions..................................... (8,242,000) (97,023,000) (105,265,000) Net income........................................ 14,046,000 10,794,000 24,840,000 =========== ============ ============ BALANCE -- December 31, 1999...................... $35,619,000 $ 93,346,000 $128,965,000 =========== ============ ============
See accompanying notes. 65 68 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ------------- ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income...................................... $ 24,840,000 $ 5,960,000 $ -- Adjustments to reconcile net income to net cash used in operating activities Increase in receivables.................... (385,000) (34,000) (750,000) Additions to real estate inventories....... (32,319,000) (74,726,000) (22,869,000) Increase in other assets................... (150,000) -- -- Increase in accounts payable and accrued liabilities.............................. 2,084,000 5,076,000 709,000 Increase in amounts due to members......... 426,000 338,000 73,000 ------------- ------------ ------------ Net cash used in operating activities........... (5,504,000) (63,386,000) (22,837,000) ------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Contributions from members...................... 124,363,000 80,495,000 22,855,000 Distributions to members........................ (105,265,000) (26,128,000) -- Proceeds from notes payable..................... 4,122,000 9,375,000 -- Repayment of notes payable...................... (13,841,000) ------------- ------------ ------------ Net cash provided by financing activities....... 9,379,000 63,742,000 22,855,000 ------------- ------------ ------------ NET INCREASE IN CASH............................ 3,875,000 356,000 18,000 CASH -- beginning of year....................... 374,000 18,000 -- ------------- ------------ ------------ CASH -- end of year............................. $ 4,249,000 $ 374,000 $ 18,000 ============= ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NON-CASH ACTIVITIES Cash paid for interest.......................... $ 1,376,000 $ 1,000,000 $ -- ============= ============ ============ Debt assumed by joint venture in connection with contribution of land to joint venture......... $ 33,662,000 $ -- $ -- ============= ============ ============ Contribution of land, net of assumed debt....... $ 1,845,000 $ -- $ -- ============= ============ ============
See accompanying notes. 66 69 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The combined financial statements are presented in accordance with Rule 3-09 of SEC Regulation S-X ("Rule 3-09") and represent the combined financial position, results of operations and cash flows of the subsidiaries of William Lyon Homes ("Lyon", formerly The Presley Companies) which have a common unaffiliated member and are deemed "significant" when aggregated for purposes of Rule 3-09 (collectively, the "Significant Subsidiaries of William Lyon Homes") as of December 31, 1999 and 1998. The significant subsidiaries of William Lyon Homes were not deemed "significant" when aggregated for purposes of Rule 3-09 as of December 31, 1997, and as such, unaudited combined financial statements are presented as of and for the year ended December 31, 1997. Organization The Significant Subsidiaries of William Lyon Homes are all Delaware limited liability companies consisting of second-tier wholly-owned Lyon subsidiaries (the "Lyon Member") as one member and an unaffiliated common member (the "Unaffiliated Member") as the other member. The Significant Subsidiaries of William Lyon Homes were formed for the purpose of acquiring, developing and selling single-family homes in the state of California. Net income and losses are allocated to the members in accordance with the respective Limited Liability Operating Agreements (the "Agreements"). The Agreements provide among other things that the Unaffiliated Member is entitled to receive a construction loan equivalent return consisting of a rate of interest that ranges from prime plus 1% to prime plus 4.75% on between 100% and 70% of the Unaffiliated Member's unrecovered capital which is payable by the companies in all events. Additionally, the Unaffiliated Member is entitled to receive a preferred return consisting of a rate of interest that ranges from prime plus 1% to prime plus 4.75% on between 0% and 30% of the Unaffiliated Member's unrecovered capital and the Lyon Member is entitled to receive a preferred return consisting of a rate of interest that ranges from prime plus 1% to prime plus 4.75% on the Lyon Member's unrecovered capital. Both the construction loan equivalent returns and preferred returns are reflected as priority allocations of net income in the accompanying combined financial statements and the approved project pro formas. As of December 31, 1999, the cumulative construction loan equivalent returns on the Unaffiliated Member's unrecovered capital totaled $11,387,000 of which $2,304,000 has not been distributed, the cumulative preferred returns on the Unaffiliated Member's unrecovered capital totaled $4,348,000 of which $314,000 has not been distributed and the cumulative preferred returns on the Lyon Member's unrecovered capital totaled $3,719,000 of which $3,285,000 has not been distributed. Cash flow, as defined in the Agreements, is generally distributed first, to the Unaffiliated Member to the extent of its unpaid preferred returns and to the extent required to reduce the balance of the Unaffiliated Member's unrecovered capital account to zero; second to Lyon Member to the extent of its unpaid preferred returns and to the extent required to reduce the balance of the Lyon Member's unrecovered capital account to zero; thereafter, between 25% to 80% to the Lyon Member and between 20% to 75% to the Unaffiliated Member. Use of Estimates The preparation of the Significant Subsidiaries of William Lyon Homes' combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 1999 and 1998 and 67 70 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) the revenues and expenses for the years then ended. Actual results could materially differ from these estimates in the near term. Real Estate Inventories Real estate inventories are carried at cost. Project costs include direct and indirect land costs, offsite costs and onsite improvement costs, as well as carrying charges (principally interest and property taxes) which are capitalized to real estate inventories while under active development. Selling costs are expensed as incurred. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to individual homes within a phase based upon the relative sales value of the homes. The Significant Subsidiaries of William Lyon Homes account for their real estate inventories in accordance with Financial Accounting Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("Statement No. 121"). Statement No. 121 requires impairment losses to be recorded on assets to be held and used by the Significant Subsidiaries of William Lyon Homes when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets, excluding future interest, are less than the carrying amount of the assets. Under Statement No. 121, when an asset to be held and used by the Significant Subsidiaries of William Lyon Homes is determined to be impaired, the related carrying amount of the asset is adjusted to its estimated fair value. 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 costs of disposal. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties; that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Significant Subsidiaries of William Lyon Homes' projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Significant Subsidiaries of William Lyon Homes may be materially different from the estimated fair values as described herein. Management has evaluated the projects and determined that no indicators of impairment are present as of December 31, 1999 and 1998. Revenue and Profit Recognition A sale is recorded and profit recognized when a sale is consummated, the buyer's initial and continuing investments are adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real Estate." When it is determined that the earnings process is not complete, profit is deferred for recognition in future periods. As of December 31, 1999 and 1998, there are no deferred profits. Warranty Costs The Significant Subsidiaries of William Lyon Homes account for warranty costs under the reserve method. As homes are sold, an estimate of warranty costs is charged to the cost of homes sold and an accrual for future warranty costs is established. As actual costs are incurred, the warranty reserve is reduced. 68 71 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Income Taxes The Significant Subsidiaries of William Lyon Homes are not taxable entities and the results of operations are included in the tax returns of the members. Accordingly, no provision for income taxes is reflected in the combined financial statements. 2. REAL ESTATE INVENTORIES Real estate inventories consist of the following as of December 31:
1999 1998 1997 ------------ ----------- ----------- (UNAUDITED) Land under development............. $106,711,000 $75,784,000 $22,869,000 Construction and completed homes in process.......................... 58,710,000 21,811,000 -- ------------ ----------- ----------- $165,421,000 $97,595,000 $22,869,000 ============ =========== ===========
3. NOTES PAYABLE The notes payable are collateralized by first deeds of trust on certain real estate projects with an inventory balance of $65,670,000 and $26,970,000 as of December 31, 1999 and 1998, respectively, and bear interest at 8% and prime plus .5% per annum. Future maturities of the notes payable at December 31, 1999 are as follows: 2000........................................................ $ 3,125,000 2001........................................................ 23,190,000 2002........................................................ 7,003,000 ----------- $33,318,000 ===========
During the years ended December 31, 1999 and 1998, the Significant Subsidiaries of William Lyon Homes incurred $1,377,000 and $938,000, respectively, of interest cost, all of which was capitalized to the real estate inventories. The prime rate averaged 7.99% and 8.35% for 1999 and 1998, respectively, and was 8.50% and 7.75% at December 31, 1999 and 1998, respectively. 4. RELATED PARTY TRANSACTIONS The Agreements provide for builder overhead fees to be paid to the Lyon Member in monthly installments during construction of the projects and a project commitment fee to the Unaffiliated Member, one-third to one-half of which is paid upon the Unaffiliated Member's initial capital funding with the remaining balance paid in equal monthly installments. Additionally, the Lyon member is reimbursed for compensation costs related to certain construction, customer service and sales office personnel. The following amounts were incurred and capitalized to real estate inventories during the years ended December 31:
1999 1998 1997 ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Lyon Member fees............................... $3,060,000 $1,885,000 $135,000 Lyon Member compensation cost reimbursements... 867,000 267,000 -- Unaffiliated Member fees....................... 2,277,000 671,000 360,000 ---------- ---------- -------- $6,204,000 $2,823,000 $495,000 ========== ========== ========
69 72 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1999, 1998 and 1997, $836,000, $410,000 and $73,000, respectively, is due Lyon Member for fees and compensation cost reimbursements. 5. COMMITMENTS AND CONTINGENCIES The Significant Subsidiaries of William Lyon Homes' commitments and contingencies include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Significant Subsidiaries of William Lyon Homes' financial position or results of operations. 70 73 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION FILE ------- ----------- ------------ 2.1(1) Certificate of Ownership and Merger 3.1(2) Certificate of Incorporation of the Company. 3.3(2) Bylaws of the Company. 4.1(2) Specimen certificate of Common Stock. 4.2(3) Indenture dated June 29, 1994, between American Bank & Trust Company, as Trustee, and The Presley Companies and Presley Homes. 10.1 Form of Indemnity Agreement between the Company and the Directors and Officers of the Company. 10.2(2) Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William Lyon Homes, Inc., William Lyon and William H. Lyon. 10.3(4) Amended and Restated 1991 Stock Option Plan of The Presley Companies, a Delaware corporation. 10.4(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and Wade H. Cable. 10.5(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and David M. Siegel. 10.6(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Nancy M. Harlan. 10.7(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Linda L. Foster. 10.8(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and W. Douglass Harris. 10.9(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and C. Dean Stewart. 10.10(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Alan Uman. 10.11(6) Fifth Amended and Restated Loan Agreement, dated as of July 6, 1998, between Presley Homes (formerly The Presley Companies), a California corporation, as the Borrower, and Foothill Capital Corporation, as the Lender. 10.12(7) Form of Severance Agreements dated September 24, 1998. 10.13(8) Presley Homes 1998 Bonus Plan. 10.14 Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999. 10.15 Mortgage Company Agreement between Presley Mortgage Company, a California corporation and Duxford Financial Services, Inc., executed as of November 5, 1999.
74
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION FILE ------- ----------- ------------ 10.16 Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999. 21.1 List of Subsidiaries of the Company. 27 Financial Data Schedule.
- --------------- (1) Previously filed as an exhibit to the Company's Current Report on Form 8-K filed January 5, 2000 and incorporated herein by this reference. (2) Previously filed in connection with the Company's Registration Statement on Form S-4, and amendments thereto, (S.E.C. Registration No. 333-88569) and incorporated herein by this reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (4) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference. (5) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (7) Previously filed as an exhibit to the Company's Report on Form 8-K dated December 31, 1998. (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by this reference. EX-10.1 2 FORM OF INDEMNITY AGREEMENT 1 EXHIBIT 10.1 INDEMNITY AGREEMENT This Indemnity Agreement (the "Agreement") is made as of ___________, by and between WILLIAM LYON HOMES, a Delaware corporation (the "Company"), and ___________________ (the "Indemnitee"), a director and/or officer of the Company. RECITALS A. The Company desires the benefits of having Indemnitee serve as an officer and/or director of the Company secure in the knowledge that any expenses, liability and/or losses incurred by him or her in his or her good faith service to the Company will be borne by the Company or its successors and assigns. B. The Indemnitee is currently serving as a director and/or officer of the Company and/or a subsidiary and in such capacity is rendering valuable services to the Company. C. The Company's Certificate of Incorporation and Bylaws allow and require the Company to indemnify its directors, officers, employees and agents to the maximum extent permitted under Delaware law. D. The Company has investigated the availability and sufficiency of liability insurance and Delaware statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance and statutory provisions may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and officers. E. In order to induce and encourage highly experienced and capable persons such as the Indemnitee to continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. AGREEMENT NOW, THEREFORE, in consideration of the continued services of the Indemnitee and in order to induce the Indemnitee to continue to serve as a director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought in the name of the Company or -1- 2 otherwise and whether of a civil, criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. (b) The term "Expenses" includes, without limitation, attorney's fees, disbursements and retainers, accounting and witness fees, travel and deposition costs, expenses of investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee in accordance with the provisions of this section if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other than a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by Delaware law and/or the provisions of the Certificate of Incorporation, as may be amended to provide broader indemnification rights than Delaware law; provided that any settlement of a Proceeding be approved in writing by the Company. The right to indemnification conferred in the Certificate of Incorporation shall be presumed to have been relied upon by Indemnitee in serving or continuing to serve the Company as a director or officer and shall be enforceable as a contract right. Without in any way diminishing the scope of the indemnification provided by the Certificate of Incorporation and this Section 2, the Company shall indemnify Indemnitee if and whenever he or she is or was a witness, party or is threatened to be made a witness or a party to any Proceeding, by reason of the fact that he or she is or was an officer, director, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise by reason of anything done or not done, or alleged to have been done or not done, by him in such capacity, against all Expenses actually and reasonably incurred by Indemnitee or on his behalf in connection with the investigation, defense, settlement or appeal of such Proceeding. 3. Indemnification in Proceedings By or In the Name of the Company. The Company shall indemnify the Indemnitee in accordance with the provisions of this section if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that Indemnitee was or is a director or officer of the Company, or was or is serving at -2- 3 the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by Delaware law and/or the Certificate of Incorporation. 4. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, as defined by Delaware law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the stockholders of the Company by majority vote of a quorum thereof consisting of stockholders who are not parties to the Proceeding due to which a claim is made under this Agreement, or (iii) in a written opinion by independent legal counsel, selection of whom has been approved by the Indemnitee in writing. No initial finding by the Board of Directors, the stockholders of the Company or any independent legal counsel shall be effective to deprive Indemnitee of the protection of this indemnity, nor shall a court or other forum to which Indemnitee may apply for enforcement of this indemnity give any weight to any such adverse finding in deciding any issue before it. Upon making a request for indemnification, Indemnitee shall be presumed to be entitled to indemnification under this Agreement and the Company shall have the burden of proof to overcome that presumption in reaching any contrary determination. The termination of any Proceeding by judgment, order, settlement, arbitration award or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, (a) adversely affect the rights of Indemnitee to indemnification except as indemnification may be expressly prohibited under this Agreement, (b) create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or (c) with respect to any criminal action or proceeding, create a presumption that Indemnitee had reasonable cause to believe that his conduct was unlawful. 5. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by Delaware law and/or the Certificate of Incorporation. 6. Advances of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by Delaware law and/or the Certificate of Incorporation; provided that as long as Delaware law requires such an undertaking, the Indemnitee shall undertake in writing to repay any advances to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification. 7. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, -3- 4 penalties or ERISA excise taxes actually and reasonably incurred by him in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his Expenses, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 8. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company will not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within sixty (60) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the directors or stockholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. (c) The Indemnitee's Expenses incurred in connection with any Proceeding concerning his right to indemnification or advances in whole or in part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such a Proceeding, unless a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in the Proceeding was not made in good faith or was frivolous. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee under this Agreement for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employ his own counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has -4- 5 been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, or (iii) the Company shall not in fact have employed counsel to assume the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advanced by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has made the conclusion that there may be a conflict of interest between the Company and the Indemnitee. 9. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee for Expenses with respect to Proceedings initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Delaware law, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgments, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) To indemnify the Indemnitee for any Expenses, judgments, fines or penalties sustained in any Proceeding for an accounting of profits made for the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; (d) To indemnify the Indemnitee for any Expenses, judgments, fines, penalties or ERISA excise taxes resulting from the Indemnitee's conduct which is finally adjudged to have been willful misconduct, knowingly fraudulent or deliberately dishonest; or (e) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 10. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. -5- 6 (b) In all D&O Insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 11. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Certificate of Incorporation, Bylaws, any agreement, vote of stockholders or disinterested directors, provision of Delaware law, or otherwise, both as to action in his or her official capacity and as to action in another capacity on behalf of the Company while holding such office. 12. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company) and shall inure to the benefit of Indemnitee and his or her spouse, assigns, heirs, devisees, executors, administrators and other legal representatives. 13. Separability. Each provision of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. To the extent required, any provision of this Agreement may be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under Delaware law. 14. Savings Clause. If this Agreement or any provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties or ERISA excise taxes incurred with respect to any Proceeding to the fullest extent permitted by any applicable provision of this Agreement that has not been invalidated or by any other applicable provision of Delaware law. 15. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the internal laws of the State of Delaware without regard to the rules relating to conflict of laws. -6- 7 16. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Certificate of Incorporation, Bylaws or by other agreements, including D&O Insurance policies. 17. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 18. Entire Agreement. This Agreement constitutes the entire understanding and agreement of the parties to this Agreement with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, inducements or conditions, express or implied, written or oral, between the parties with respect to this Agreement. 19. Absence of Third Party Beneficiary Rights. No provision of this Agreement is intended nor shall be interpreted to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder or partner of any party to this Agreement or any other person; unless specifically provided otherwise herein, and except as so provided, all provisions hereof shall be personal solely between the parties to this Agreement. 20. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure those rights and to enable the Company to bring suit to enforce those rights. 21. Duration and Scope of Agreement; Binding Effect. This Agreement shall continue so long as Indemnitee shall be subject to any possible Proceeding subject to indemnification by reason of the fact that he or she is or was a director or officer of the Company and shall be applicable to any Proceeding commenced or continued after execution of this Agreement, whether arising from acts or omissions occurring before or after such execution. 22. Notices. Any notice required to be given under this Agreement shall be directed to William Lyon Homes, at 4490 Von Karman Avenue, Newport Beach, California 92660, Telephone Number (949) 833-3600, Fax Number (949) 476-8604, Attention: General Counsel and to Indemnitee at _______________________ __________________________, or to such other address as either party shall designate in writing. A copy of any notice under this Agreement shall be directed to Keith Bishop, Irell & Manella, LLP, 840 Newport Center Drive, Suite 400, Newport Beach, CA 92660, Telephone Number (949) 760-0991, Fax Number (949) 760-5200. -7- 8 [SIGNATURE PAGE FOLLOWS] -8- 9 IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. WILLIAM LYON HOMES By:_____________________________ Its:_____________________________ INDEMNITEE ________________________________ -9- EX-10.14 3 PROPERTY MANAGEMENT AGREEMENT 1 EXHIBIT 10.14 PROPERTY MANAGEMENT AGREEMENT This MANAGEMENT AGREEMENT ("Agreement") is effective as of November 5, 1999, between Corporate Enterprise, Inc, a California corporation ("Owner") and William Lyon Homes, Inc., a California corporation ("Manager"). RECITALS 1. Owner is the record owner of directly, or holds a majority and controlling interest in the record owner of, certain real properties described on SCHEDULE A attached hereto (a "Property" or the "Properties"). 2. Owner desires to engage Manager to manage, develop, market and operate the Properties. AGREEMENT NOW, THEREFORE, in consideration of their promises herein, Owner and Manager agree as follows: ARTICLE 1. PROPERTIES 1.1. PROPERTIES. The Properties are listed, described and identified on SCHEDULE A. SCHEDULE A describes the nature of the rights of Owner with respect to each Property, whether as the owner or otherwise. and also sets forth the Management Fee payable (in accordance with Article 12) to the Manager with respect to each Property. 1.2. TERMINATION ON SALE. At Manager's option, this Agreement shall terminate automatically and immediately as to any Property upon (i) the sale thereof by Owner, (ii) termination of Owner's rights in such Property, or (iii) the judicial or non-judicial foreclosure of a lien encumbering such Property. In the event of termination, Manager shall be entitled to receive a pro-rata portion of the Management Fee earned by Manager in fulfilling its duties hereunder less any payments made prior to the date of termination of this Agreement. 1.3. ENGAGEMENT. Owner hereby engages Manager as property manager to render all usual and customary property and project management services necessary or incidental to the management and development of the Properties and the related financial affairs of Owner, all as more fully described herein, and Manager hereby accepts such engagement. In this connection, Manager hereby represents to Owner that Manager is generally familiar with the business of developing residential real property and managing such property and has reviewed and is familiar with Owner's business, the Business Plan (described herein), and the Properties. 1.4. COMPENSATION. In addition to the reimbursement of costs as provided in Section 8 of this Agreement, Manager shall be paid by Owner a management fee of three per cent (3%) of the gross sales. 1 2 ARTICLE 2. COMMENCEMENT DATE; TERM Manager's duties and responsibilities under this Agreement shall begin on (a) if Owner has not yet acquired direct title to the Properties or a majority or controlling interest in the entity that will acquire the Properties, the date that Owner acquires title to the Properties, or (b) if Owner has already acquired title to the Properties or a majority or controlling interest in the entity that owns the Property, the date first set forth above. Manager's duties and responsibilities under this Agreement shall continue until terminated as provided herein. ARTICLE 3. MANAGER'S RESPONSIBILITIES 3.1. MANAGEMENT. Manager shall manage, develop, operate and maintain the Properties in an efficient and professional manner. Manager shall act in a fiduciary capacity with respect to the proper protection of and accounting for Owner's assets covered by this Agreement. In this capacity, Manager shall deal at arms length with all third parties and Manager shall serve Owner's interests at all times. 3.2. INDEPENDENT CONTRACTOR. This Agreement is not one of agency by Manager for Owner but one by which Manager shall be engaged independently, for the business of managing properties on its own behalf, as an independent contractor. All employment arrangements are therefore solely its concern and Owner shall have no liability with respect thereto. Notwithstanding Manager's status as an independent contractor, Manager shall be agent of Owner for the limited purpose of entering into certain contracts which this Agreement provides shall be in the name of Owner. 3.3. PERSONNEL. Manager shall have in its employment at all times a sufficient number of qualified employees to enable it to professionally, adequately, safely and efficiently manage, operate, maintain, and account for each Property. All matters pertaining to the employment, supervision, compensation, promotion and discharge of such employees are the responsibility of Manager, which is in all respects the employer of such employees. Manager shall fully comply with all applicable laws and regulations having to do with workman's compensation, social security, unemployment insurance, hours of labor, wages, working conditions, and other employer-employee related subjects. Manager represents that it is and will continue to be an equal opportunity employer in compliance with all applicable employment laws. Manager shall provide on-site personnel who shall be engaged in the direct development or management of each Property subject to this Agreement ("On-Site Personnel"). On-Site Personnel include, but are not limited to, superintendents, assistant superintendents, laborers, sales personnel, hosts/hostesses, and customer service personnel and others who work "on-site" at a Property or primarily spend their time in the field at one or more of the Properties. Manager shall also provide and retain sufficient additional personnel to manage the Properties and Owner's related financial affairs at one or more off-site locations where Manager may maintain offices ("Off-Site Personnel"). 2 3 3.4. COMPLIANCE WITH LAWS. Manager shall be responsible for full compliance with federal, state and municipal laws, ordinances, regulations and orders relative to each Property. Manager shall promptly remedy any violation of any such law, ordinance, rule, regulation or order which comes to its attention. Expenses incurred because of Manager's gross negligence or willful misconduct will not be reimbursed from an Operating Account (as hereinafter defined). Manager shall be responsible for assisting Owner to be in full compliance with all terms and conditions contained in any loan agreement, mortgage, deed of trust or other security instruments affecting a Property, provided, however, Manager shall not be required to make any payment or incur any liability on account thereof. 3.5. MANAGER'S DUTIES. Subject to Owner's approval, Manager will supervise and oversee; (a) Negotiation with lenders and other sources of capital and financing, and the providing of information to such lenders during negotiation and following loan origination. (b) Financial reporting necessary to comply with applicable ownership and loan agreements, including annual and quarterly reports and the maintenance of adequate accounting and computer software systems and related services in connection therewith. (c) Analysis and preparation of business plans and operating projections and budgets, as required by all loan agreements of Owner and by Sections 3.6 and 3.7 below. (d) At Owner's expense, acquisition and maintenance of all completion bonds and/or other surety bonds (collectively "Bonds") reasonably and customarily required by lenders, public entities or other interested parties in connection with the construction of improvements on the Buildout Properties, or required by any loan agreement between Owner and its lenders. The acquisition and maintenance of any bonds shall be in the name of Owner when possible, but may be in the name of Manager if certain requirements for obtaining such bonds disqualify Owner from obtaining them in its own name. In the event Manager must obtain a Bond for Owner under Manager's name, Manager shall provide a copy or description of such Bond to Owner. (e) Preparation of tax projections and compliance with requirements of relevant taxing authorities, including employment of outside accountants, legal counsel, and tax consultants. (f) Maintenance of financial controls and compliance with applicable financial reporting requirements. (g) Management and reporting of the accounts payable of Owner. 3 4 (h) Submission of loan draw requests and disbursement of loan ftinds under loan agreements or any other credit arrangement of Owner. 3.6. BUSINESS PLAN. At such time as Owner shall request, Manager shall prepare a "Business Plan" for each Property or Project, setting forth Manager's assessments, goals, projections and other data with respect to the Property or any Project. 3.7. APPROVED BUDGETS. Based on the appropriate Business Plan and other criteria provided by Owner or deemed relevant by Manager, Manager shall prepare and submit to Owner a proposed budget ("Budget") for the promotion, operation, development and buildout, sale and disposition, and repair and maintenance of each Property or Project for the calendar year beginning with the date the Business Plan is first requested. The Owner will consider the proposed Budgets and then will consult with Manager in order to agree on an "Approved Budget" for each Property or Project. Each Approved Budget agreed to by Owner and Manager will be dated and signed to indicate its having been approved. Manager will employ all reasonable efforts to ensure that the actual costs of developing, maintaining and operating each Property or Project shall not exceed the approved Budget pertaining thereto either in total or in any one accounting category. All expenses must be charged to the proper account as specified in the Approved Budget for the Property or Project and no expense may be classified or reclassified for the purpose of avoiding an excess in an Approved Budget specified amount for an accounting category. Manager shall secure Owner's prior written approval for any expenditure that will result in an increase in that item in the Approved Budget by more than five percent (5%) or such other amount as Owner and Manager may specify from time to time. As early as possible, Manager shall inform Owner of any major increases in costs and expenses that were not foreseen during the budgeting process period and thus were not reflected in an Approved Budget. 3.8. REVENUES. In accordance with each Business Plan, Manager shall use diligent efforts to market and sell homes, lots or other units. 3.9. LITIGATION. Manager shall have no authority to commence a lawsuit against a homebuyer, subcontractor, material provider or any other party without Owner's consent. 3.10. COMPETITIVE PRICING. Manager shall make every reasonable effort to obtain competitive market pricing from all subcontractors and suppliers for repairs, capital improvements, goods and services. 3.11. REPAIRS; WARRANTIES. Manager shall attend to the making and supervision of all warranty, ordinary and extraordinary repairs, decorations and alterations subject to the limits of the approved Operating Budget (defined below) for the applicable Property. 3.12. THIRD PARTY CONTRACTS. Manager shall not enter into any contract for developing, maintaining, repairing or servicing any Property or any of the constituent parts 4 5 of any Property that is not specified in an Approved Budget without Owner's prior consent. As a condition to obtaining such consent, if requested, Manager shall supply Owner with a copy of the proposed contract and shall state to Owner the relationship, if any, between Manager (or the person or persons in control of Manager) and the party proposed to supply such goods or services, or both. Except as expressly stated otherwise in this Agreement, all third party contracts shall: (a) be in the name of Manager, (b) be assignable, at Owner's option, to Owner or Owner's nominee, (c) if appropriate, include a provision for cancellation thereof without penalty by Owner or Manager upon thirty (30) days written notice, (d) shall require the contract provider to deliver appropriate lien releases in accordance with Section 3262 of the California Civil Code upon payment or as otherwise reasonably required by Owner or Manager following partial payment, and (e) shall require that all contractors provide evidence of sufficient insurance. 3.13. TAXES, MORTGAGES. Manager shall obtain and verify bills for real estate and personal property taxes, improvement assessments and other like charges which are or may become liens against each Property and recommend payment or appeal as it may decide in its reasonable judgment. Provided Owner has the funds, Manager shall pay such bills before delinquency and shall forward proof of payment to Owner. 3.14. ADVERTISING. Manager shall prepare or cause to be prepared advertising plans and promotional material to be used to market homes, lots or other units within a Property or Project. Such plans or advertising material shall only be used if approved in advance by Owner, and in conformance with such approval. Advertising and promotional material shall be prepared in full compliance with federal, state and municipal laws, ordinances, regulations and orders. 3.15. DEVELOPMENT AND BUILDOUT. Manager's duties and responsibilities with respect to Buildout Properties shall include, but not be limited to, the following: (a) Acting as a construction manager in the supervision and management of development and construction, including: (i) assisting Owner in the preparation of building, grading, landscape, street improvement and utility plans for any Buildout Property or Project; (ii) Coordination of development and construction under contracts between Owner and others as subcontractors within the parameters of Approved Budgets; (iii) monitoring all Approved Budgets and other construction budgets and cost accounting; (iv) obtaining necessary building permits and other governmental approvals; (v) obtaining necessary bonds, set asides or other security required by governmental agencies; 5 6 (vi) preparation and submission of loan draw requests and payment and disbursement of loan draw funds, on behalf of Owner, with respect to all draws, fees and progress payments to contractors, suppliers and other providers of construction services or materials and the receipt of appropriate mechanics' and materialman's lien, releases and other releases; (vii) coordination of inspections; (viii) obtaining certificates of occupancy; and (ix) managing warranty work and punch list items. (b) Marketing of units or lots within a Property, including: (i) acting as a real estate broker or engaging the services of real estate brokers to sell units or lots or other portions of each Property at commission rates established by Owner and Manager from time to time; (ii) preparing all advertising and promotional materials and constructing and decorating model homes or units; (iii) assisting Owner in the setting of sales prices for units, homes, lots or other portions of each Property; and (iv) processing all escrows for sales of units, homes, lots or other portions of each Property, the collecting and distribution to Owner of all net sales proceeds, after payment of lender required release prices, closing costs, the Management Fee and other amounts due or payable. (c) Payment from funds of all debt service, and all other invoices, bills and obligations relating to a Property. (d) Without being responsible for any amounts due thereunder, assisting Owner in the compliance with all loan agreements with the lender(s) of Owner and related loan and security documents entered into or assumed by Owner applicable to the Properties, including, without limitation, compliance with all loan disbursement requirements and conditions. ARTICLE 4. INSURANCE 4.1. OWNER'S INSURANCE OBLIGATIONS. (a) Owner, at its expense, will obtain and keep in force adequate insurance against physical damage (e.g., fire with extended coverage endorsement, boiler 6 7 and machines, etc.) and, a) Comprehensive General Liability with Combined Single Limit Bodily injury/ Property Damage per occurrence $1,000,000 or b) Commercial General Liability with the following limits i) each Occurrence Limit $1,000,000 ii) Personal Advertising Injury Limit$1,000,000 iii) Products Completed Operations Aggregate Limit $1,000,000 iv) General Aggregate Limit (Other than Products-Completed Operations) $1,000,000. (b) Both policy forms must include: i) Premises and operations with no x, c or u exclusions, ii) Products and completed operations coverage, iii) Blanket Contractual coverage with Employee Exclusion deleted, iv) Broad Form Property Damage including completed operations or its equivalent, v) An endorsement naming Manager as additional insured, vi) an endorsement stating: "Such Coverage as is afforded by this policy for the benefit of the additional insured is primary and any other coverage maintained by such additional insured shall be non-contributing with the coverage provided under the policy," and vii) coverage on an "occurrence" form. (c) Owner agrees to maintain this coverage for a minimum of one (1) year following completion of the Projects and to continue to name Manager as Additional Insured(s) for the entire one (1) year period. (d) Other Requirements. (i) All policies must contain an endorsement affording an unqualified thirty (30) days notice of cancellation to the Manager in the event of cancellation of coverage. (ii) Certificates of Insurance with the required endorsements evidencing the coverage must be delivered to the Manager prior to commencement of any services under this Agreement. (iii) If the Owner fails to secure and maintain the insurance required in Section 4.1 of this Agreement, Manager shall have the right (without any obligation to do so, however) to secure same in the name and for the account of the Owner in which event the Owner shall pay the costs thereof and furnish upon demand all information that may be required in connection therewith. If Owner fails to secure and maintain the insurance required in Section 4.1 of this Agreement, the Manager shall be entitled to terminate this Agreement with twenty four (24) hours notice. 4.2. ADDITIONAL INSURANCE REQUIREMENTS Manager agrees to: (a) notify Owner and the insurance carrier within the time period required by any policy (and in any case Manager shall promptly notify Owner) after Manager receives notice of any such loss, damage or injury; 7 8 (b) take no action which might bar Owner from obtaining any protection afforded by any policy Owner may hold or which might prejudice Owner in its defense to a claim based on such loss, damage or injury; and (c) give Owner the exclusive right, as between Manager and Owner at its option, to conduct the defense to any claim, demand or suit within limits prescribed by the policy or policies or insurance. Manager shall furnish whatever information is required by Owner for the purpose of establishing the placement of insurance coverages and shall aid and cooperate in every reasonable way with respect to such insurance and any loss hereunder. If available, Owner shall include in its hazard policy covering each Property, personal property, fixtures and equipment located thereon, and Manager shall include in any fire policies for its furniture, furnishing or fixtures situated at each Property, appropriate clauses pursuant to which the respective insurance carriers shall waive all rights of subrogation with respect to losses payable under such policies. 4.3. ADDITIONAL INSURANCE. Manager must furnish a certificate evidencing workers' compensation insurance in a form acceptable to Owner. The workers' compensation insurance certificate shall have attached thereto an endorsement that Owner will be given at least thirty (30) days prior written notice of cancellation of or any material change in such policy. Owner will not reimburse Manager for Manager's cost of any such insurance specified in this Section 4.4, or for any and all coverages that Manager obtains for its own account. 4.4. SUBCONTRACTOR'S INSURANCE. Manager shall require that all subcontractors that enter a Property have insurance coverage at the subcontractor's expense, in the following minimum amounts (subject to changes as Owner may from time to time require): (a) Workers' Compensation - Statutory Amount (b) Employer's Liability (in those states where it is required) - Statutory Amount (c) Comprehensive General Liability (i) $1,000,000 Bodily Injury per person $1,000,000 Per occurrence, and $500,000 Property Damage or (ii) $1,000,000 Combined Single Limit Manager must obtain the Owner's permission to waive any of the above requirements. Limits and amounts shall be as designated in an Approved Budget or by Owner from time to time. Manager shall obtain and keep on file certificates of insurance evidencing the compliance by subcontractors of the foregoing requirements. 8 9 4.5. INDEMNITY. At Owner's sole expense, Owner (to the fullest extent permitted by applicable law) shall indemnify, hold harmless, protect, and at the Manager's request (and through legal counsel acceptable to the Manager) shall defend the Manager and each of its officers, directors, affiliates, employees, representatives and agents, from and against any and all legal proceedings, judgments, claims, losses, damages, costs and expenses, including reasonable attorneys' fees, of whatever kind or character ("Claims"), including without limitation Claims related to or arising from the death or bodily injury to persons or injury or damage to any property, including the loss of use thereof, arising from, in whole or in part, the performance of this Agreement by Manager, its officers, directors, affiliates, employees, representatives and agents, except for Claims arising solely our of Manager's wilful misconduct or gross negligence. ARTICLE 5. FINANCIAL REPORTING AND RECORDKEEPING 5.1. BOOKS OF ACCOUNTS. Manager, in the conduct of its responsibilities to Owner, shall maintain on behalf of Owner adequate and separate books and records for each Property or Project, as appropriate or as directed by Owner, the entries to which shall be supported by sufficient documentation to ascertain that said entries are properly and accurately recorded as to each Property. Such books and records shall be maintained by manager at Manager's address stated in Section 14 or at such other location as may be mutually agreed upon in writing. Such books and records shall be the property of Owner. Manager shall ensure such control over accounting and financial transactions as is reasonably required to protect Owner's assets from theft, error or fraudulent activity on the part of Manager's employees or other agents. 5.2. ACCOUNT CLASSIFICATION. If requested by Owner, Manager shall adopt or use Owner's accounts, classifications or accounting program. 5.3. FINAL REPORTS. Manager shall furnish monthly reports of all transactions occurring in each calendar month by the tenth (10th) day of the next calendar month. The reports will show all costs and receipts, and other matters pertaining to the development, management, operation, and maintenance of each Property during such month. The reports shall include unit, home or lot sales reports, profit and loss statements, balance sheets, schedules of delinquencies of uncollectible items, and construction status updates. 5.4. SUPPORTING DOCUMENTATION. As additional support to the monthly financial report, Manager shall provide copies of the following: (a) All bank statements, bank deposit slips and bank reconciliations, (b) Detailed cash receipts and disbursement records, (c) Detailed trail balance (if available), (d) General ledger listing (Owner may periodically request copies of all invoices paid during a specific period), (e) All invoices for capital expenditures and non-recurring items, 9 10 (f) Summaries of adjusting journal entries, (g) Summaries of home, unit, lot or other sales closed and in escrow, and (h) Supporting documentation for payroll, payroll taxes and employee benefits. 5.5. ACCOUNTS. Manager shall comply with all material agreements to which Owner is a party with respect to the establishment and maintenance of all accounts and funds relating to the Properties. The schedule for the transfer of funds and the balance permitted to remain in each Operating Account (defined below) may be changed from time to time by written instructions from the Owner. If separate bank accounts are maintained for each Property, Owner shall issue separate instructions for the transfer of funds for each account for a Property. Checks or remittances due Owner should be delivered to Owner, independent of required financial reports, in the most expeditious manner possible as directed by Owner. At the option of the Owner, any remittance to Owner shall be the net of the Manager's fee. In any event, checks or payment for the Management Fee shall be delivered, no earlier than the fifteenth (15th) of the calendar month and no later than the twenty-fifth (25th) of each calendar month. 5.6. ACCOUNTING PRINCIPLES. All financial statements and reports required by Owner will be prepared in accordance with generally accepted accounting principles with the exception that, unless Owner specifies otherwise, the statements will be prepared on a cash basis. ARTICLE 6. OWNER'S RIGHT TO AUDIT 6.1. RIGHT TO CONDUCT AUDIT. Owner reserves the right for Owner's employees, or others appointed by Owner, to conduct examinations, without notification, of the books and records maintained for Owner by Manager no matter where the books and records are located. Owner also reserves the right to perform any and all additional audit tests relating to Manager's activities either at the Property or at any office of Manager provided such audit tests are related to those activities performed by Manager for Owner. 6.2. DISCREPANCY CORRECTION. If, during the course of any audit, Owner or its employees or appointees discover weaknesses in internal control or errors in record keeping, Manager shall correct such discrepancies either upon delivery or within a reasonable period of time. Manager shall inform Owner of the action taken to correct such audit discrepancies. 6.3. AUDIT COSTS. Any and all audits conducted, whether by Owner or its employees or appointees, will be at the sole expense of Owner, unless such audit shall disclose a discrepancy of greater than five percent (5%) or a breach by Manager of any of its obligation under this Agreement in any material respect, in which case such audit shall be at Manager's expense. 10 11 ARTICLE 7. BANK ACCOUNTS Manager shall deposit all sales proceeds, rents and other funds collected from the operation of each Property or Project, in a bank approved by Owner (each an "Operating Account"), as designated by Owner from time to time. Out of each account, Manager shall pay the operating expenses of the respective Property and any other payments relative to the Property as required by the terms of this Agreement. If more than one account is required to operate a Property, each account must have a unique name. ARTICLE 8. 8.1. NON-REIMBURSABLE COSTS. The following expenses or costs incurred by or on behalf of Manager in connection with the management and leasing of any particular Property shall be at the sole cost and expense of Manager and shall not be reimbursed by Owner: (a) General accounting and reporting services which are considered to be within the reasonable scope of Manager's responsibility to Owner. (b) Political or charitable contributions, except that certain charitable contributions may be made after prior consent by Owner. (c) Cost attributable to losses arising from gross negligence, willful misconduct or fraud on the part of Manager, or Manager's associates, agents, affiliates or employees. (d) Training expenses. (e) Employment fees unless specifically approved by Owner. (f) Costs or advances made to employees and costs of travel by Manager's employees or agents to and from each Property. (g) Cost of fidelity bonds purchased by Manager for its own account. 8.2. SEGREGATION OF ACCOUNTS. Manager shall segregate the income and expenses of each Property so that cash and gross income from each Property as set forth in SCHEDULE B or will be applied only to the bills and charges from that Property. ARTICLE 9. SALE OF PROPERTY 9.1. MANAGER MARKETING. Manager shall be entitled to market and receive a commission or other compensation upon the sale of any Property if authorized under the Business Plan or Approved Budget or if authorized under SCHEDULE B attached hereto. 9.2. COOPERATION WITH OUTSIDE SALES BROKER. If Owner executes a listing agreement with a broker (other than Manager) for sale of any of the Properties, Manager 11 12 shall cooperate with such broker to the end that the respective activities of Manager and broker may be carried on without interference with tenants and occupants. Manager will the broker to exhibit any particular Property during reasonable business hours provided the broker has secured the Manager's permission in advance. Any Owner's instruction that Manager shall pay brokerage commissions to a listing or other broker that Owner hires shall not reduce or impair the Management Fees due Manager hereunder. ARTICLE 10. COOPERATION If any claims, demands, suits or other legal proceedings be made or instituted by any person against Owner or the record title holder of any Property which arise out of any of the matters relating to this Agreement, Manager shall give Owner all pertinent information and reasonable assistance in the defense or other disposition thereof. ARTICLE 11. TERMINATION 11.1. TERMINATION FOR CAUSE ON 90-DAY NOTICE. In addition to the provisions of Section 1.2, either party may terminate this Agreement for cause by giving the other party at least ninety (90) days notice in writing specifying the cause therefore. 11.2. IMMEDIATE TERMINATION WITH NOTICE. In addition to the provisions of Section 13.1, if Manager's continued performance immediately and irreparably endangers or threatens the value of the Properties or Owner's rights and interests therein, Owner may immediately terminate this Agreement immediately upon written notice to that effect on the Manager. In such case, if Manager is entitled to any Management Fees pursuant to Article 12 or other compensation. 11.3. TERMINATION WITHOUT NOTICE. Owner may immediately terminate this Agreement upon written notice to Manager, upon the occurrence of (a) the dissolution or termination of the corporate existence of Manager by merger, consolidation or otherwise; (b) the termination or suspension of Manager's real estate brokerage license or general contractor's license, if such licenses are required as conditions to developing and managing any Properties; or (c) the cessation on Manager's part to continue to do business. 11.4. FINAL ACCOUNTING. Upon termination of this Agreement for any reason or upon termination as to any Property for any reason, Manager shall deliver to Owner upon Owner's written request the following items with respect to each Property or with respect to the Property so terminated, as the case may be: (a) A final accounting, reflecting the balance of income and expenses on each such Property as of the date of termination to be delivered within thirty (30) days after such termination. (b) Any balance or monies belonging to Owner, or security deposits, or other funds, held by Manager with respect to each Property. (c) All original records, reports, contracts, leases, plans, specifications, receipts for deposits, unpaid bills and other papers or documents which pertain to each 12 13 Property, for which, upon such termination, Owner will assume responsibility for payment of all approved or authorized unpaid bills. (d) All materials and supplies, keys, contracts and documents, and such other accounting, papers and records pertaining to this Agreement as Owner shall request. (e) Confirmation of the assignment to Owner of any and all rights Manager may have in and to any existing contracts, licenses, permits, project names and trademarks relating to the operation and maintenance of the Property as Owner shall require. ARTICLE 12. ASSIGNMENT; APPROVALS 12.1. NO ASSIGNMENT. This Agreement and all rights and obligations hereunder, shall not be assignable by either party hereto (except as may be required by a surety company in a matter of subrogation); provided, however, that Owner may assign this Agreement to any lender who has made loan secured by a Property. 12.2. CONSENT AND APPROVALS. Owner's consents or approvals may be given only by authorized representative of Owner from time to time designated by Owner. ARTICLE 13. MISCELLANEOUS 13.1. PRONOUNS. The pronouns used in the Agreement referring to Manager shall be understood and construed to apply whether Manager be an individual, co-partnership, corporation or an individual or individuals doing business under a firm or trade name. 13.2. AMENDMENTS. Except as otherwise herein provided, any and all amendments, additions or deletions to this Agreements shall be null and void unless approved by Owner and Manager in writing. 13.3. HEADINGS. All headings herein are inserted only for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement. 13.4. REPRESENTATIONS. Manager represents and warrants that it will at all times relevant be fully qualified and licensed, to the extent required by law, to develop and construct real property improvements and to manage real estate and perform the obligations assumed by Manager hereunder. Manager agrees to comply with all such laws now or hereafter in effect. 13.5. INDEMNIFICATION BY OWNER. Owner shall indemnify, defend and hold Manager harmless from any claim relating to toxic contamination of any Property or any hazardous substances thereon or therein or any construction or other defect, whether patent or latent, on any Property or in any improvements located on any Property. 13.6. COMPLETE AGREEMENT. This Agreement and the Schedules attached hereto and made a part hereof, supersede and take place of any and all previous written or oral agreements entered into between the parties hereto relating to the Properties covered by this Agreement. 13 14 13.7. OWNER'S SOLE DISCRETION. Whenever the Owner is entitled under this Agreement to make a decision or determination in its "sole discretion," it shall mean that the Owner shall be entitled to make such decision or determination in its absolute and unfettered discretion, which may be exercised at any time, for any reason or for no reason, and either with cause or without cause. 13.8. GOVERNING LAW. The laws of the State of California shall govern the validity, enforcement, and interpretation of this Agreement. 13.9. COUNTERPART EXECUTION. This Agreement may be executed in several counterparts, each of which shall be fully effective as an original and all of which together shall constitute one and the same instrument. 13.10. ATTORNEYS' FEES. If it shall be necessary for either Owner or Manager to employ an attorney to enforce or defend its rights under this Agreement, the non-prevailing party shall reimburse the prevailing party for its actual reasonable attorneys' fees and costs of suit. 13.11. TIME OF THE ESSENCE. Time is of the essence of this Agreement and of the obligations of the parties hereunder. 13.12. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. MANAGER: WILLIAM LYON HOMES, INC., a California corporation By: /s/ NANCY M. HARLAN ---------------------------------- Nancy M. Harlan Its: Senior Vice President By: /s/ W. DOUGLASS HARRIS ---------------------------------- W. Douglass Harris Its: Vice President OWNER: CORPORATE ENTERPRISE, INC., a California corporation By: /s/ RICHARD S. ROBINSON ---------------------------------- Richard S. Robinson Its: Senior Vice President By: /s/ MICHAEL D. GRUBBS ---------------------------------- Michael D. Grubbs Its: Vice President 14 15 SCHEDULE A I. For Placentia #117, L.P. and Lyon Lakeside #119, L.P., Corporate Enterprises, Inc. will receive G&A fees paid by partnership until November 30, 1999. William Lyon Homes, Inc. to receive G&A fees paid by partnership after November 30, 1999. II. Manager shall be entitled to payment for amounts spent in connection with materials and all fully-burdened labor used by it in connection with the following: a. Corporate Enterprises, Inc. bond exonerations b. Entitlement work for TTM 23187 located in Murrietta, California c. Books and records for Corporate Enterprises, Inc. d. Risk Management for Corporate Enterprises, Inc. e. Entitlement work for Stonebridge project in Lathrop, CA 15 EX-10.15 4 MORTGAGE COMPANY AGREEMENT 1 EXHIBIT 10.15 MORTGAGE COMPANY AGREEMENT THIS AGREEMENT ("Agreement") is executed as of this 5th day of November by and between PRESLEY MORTGAGE COMPANY, a California corporation ("Presley") and DUXFORD FINANCIAL SERVICES, INC., a California corporation ("Duxford"), with reference to the following: RECITALS A. William Lyon Homes, Inc., a California corporation ("Lyon Inc."), William Lyon, an individual, William H. Lyon, an individual, Presley Homes, a California corporation ("Presley Homes"), and The Presley Companies, a Delaware corporation, have entered into that certain Purchase Agreement and Escrow Instructions dated as of October 7, 1999 (the "Purchase Agreement") in which, among other things, Presley Homes agreed to buy substantially all of Lyon Inc.'s real estate assets and certain other assets related thereto pursuant to the terms and conditions of the Purchase Agreement. B. Duxford is a privately owned mortgage company that has made mortgage loans in connection with residential projects built by Lyon Inc. or other builders ("Loans"). C. Duxford intends to engage in an orderly shut-down of its business and liquidation following the closing of the Purchase Agreement. D. Presley desires to offer employment to the employees of Duxford pursuant to the terms and conditions set forth in this Agreement. E. In connection with the Purchase Agreement and Duxford's contemplated orderly shut-down, Presley and Duxford desire to enter into this Agreement pursuant to the terms and conditions contained herein. AGREEMENT 1. Definitions. All initially capitalized terms not otherwise defined herein shall have the definitions assigned to such terms in the Purchase Agreement. 2. Employee Matters. (a) Effective as of the November 5, 1999 ("Closing Date"), Presley will offer employment on an "at will" basis to officers, employees and sales agents of Duxford on such terms and conditions of employment that are substantially similar in the aggregate to the terms and conditions applicable to similarly situated employees of Presley. Presley shall credit each Duxford employee who accepts such offer of employment for his or her services with Duxford for purposes of eligibility and vesting with respect to vacation, personal and sick days and benefits under each ERISA Plan (as herein defined) maintained by Presley and provided to such Duxford employees. (b) Duxford shall take all actions necessary to comply with the applicable requirements of Section 4908B of the Internal Revenue Code (the "Code") and part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended 1 2 ("ERISA") and any comparable state or local law with respect to the termination of its employees in connection with the transactions contemplated by this Agreement. Duxford and their ERISA Affiliates (defined below) will continue any group health plan coverage to their employees to the extent necessary to prevent Presley from being deemed to be a successor employer of Duxford or any of their ERISA Affiliates within the meaning of Proposed Treasury Regulations Section 54.4980B-9 Q&A-8(c). (c) Presley and Duxford acknowledge and agree that, for the purposes of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq., (the "WARN Act"), any person who is a Duxford employee who accepts Presley's offer of employment made pursuant to this Agreement shall be considered to be an employee of Presley immediately upon the Closing and Presley and Duxford agree to comply with any applicable requirements of the WARN Act with respect to such Duxford employees. 3. Employment Contracts and Benefits. (a) Duxford has previously delivered to Presley copies, descriptions and/or a list of all employment contracts and collective bargaining agreements, and all compensation, pension, retirement, deferred compensation, health care, bonus, profit-sharing, stock option or other plans, trusts, funds, agreement or arrangements, providing for employee remuneration or benefits to any of Duxford's present officers, employees and sales agents (collectively, "Employee Benefit Plans") and to which Duxford is a party or by which Duxford is bound. Such copies, descriptions and list, taken together, sets forth for Duxford's present officers', employees' and sales agents' complete information with respect to withholding accounts, accrued vacation, sick leave and other amounts, and all other accruals and accounts held for employee benefit, including but not limited to, any insurance policies or accounts. Except as set forth in such copies or descriptions or on such list, Duxford has not entered into any severance or similar arrangement in respect of any present or former officer, employee or sales agent that will result in any absolute or contingent obligation of Presley to make any payment to any present or former officer, employee or sales agent following termination of employment. (b) To Duxford's knowledge: (i) Neither Duxford nor any entity (an "ERISA Affiliate") which, together with any of them, is deemed a "single employer" within the meaning of Section 4001(a)(15) of ERISA, nor any of the plans so listed which is an "employee welfare benefit plan" or "employee pension benefit plan" as such terms are defined in Sections 3(1) and 3(2) of ERISA (such plans being referred to herein as "ERISA Plans"), nor any trust created thereunder, nor any trustee or administrator thereof, has engaged in a transaction or has taken or failed to take any action in connection with which Presley could be subject to a tax imposed pursuant to Section 4980B of the Code. (ii) Each of the plans so listed or described has been operated and administered in all material respects in accordance with applicable laws, including but not limited to ERISA and the Code. 2 3 (iii) Each of the ERISA Plans that is intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified. (iv) No amounts payable under the plans so listed or any other agreement or arrangement to which Duxford or any ERISA Affiliate is a party will fail to be deductible for federal income tax purposes by virtue of Section 280G of the Code. (v) No "leased employee," as that term is defined in Section 414(n) of the Code, performs services for Duxford. (vi) There are no liens under Section 412(n) of the Code or Sections 302(f) or 4068 of ERISA. (vii) Neither Duxford nor any of its respective ERISA Affiliates is, or at anytime during the previous six (6) years was, obligated to contribute to any "multi-employer plan" within the meaning of Section 3(37) of ERISA or any plan subject to Title IV of ERISA. (viii) Presley shall have no obligation with respect to compensation or employee benefits accruing to employees of Duxford for any period prior to the Closing Date, and shall have no obligation to contribute to, or any liability in respect of, any Employee Benefit Plan sponsored or maintained by Duxford or any ERISA Affiliate, or to which Duxford or any ERISA Affiliate is or was obligated to contribute. 4. Transfer of Loans. (a) All Loans originated and identified in writing by Duxford prior to the Closing Date ("Pre-Existing Loans") shall be the property of and for the continued economic benefit of Duxford. Duxford shall be responsible for meeting all obligations relating to the Pre-Existing Loans, including, without limitation, paying all commissions relating to the Pre-Existing Loans. All Loans originated after the Closing Date ("Pre-Existing Loans") (b) Presley shall use it's best efforts to close all Pre-Existing Loans as soon as commercially reasonable after the Closing Date. In recognition of Presley's obligations with respect to the Pre-Existing Loans, Duxford shall pay Presley Fifty Five Thousand and 00/100 Dollars ($55,000.00) per month for the first ninety (90) days following the Closing Date, which amount represents fifty percent (50%) of Duxford's allocated overhead, determined in accordance with Duxford's General and Administrative Expense Report. Duxford shall pay such amount in monthly installments for the first three (3) months following the Closing Date upon receipt of an invoice for such amount from Presley. (c) Catellus Contract. Duxford has previously entered into an agreement with Catellus for supplying mortgage services to Catellus' projects until December 31, 1999 (the "Catellus Contract"). The Catellus Contract shall continue to be the property of and for the economic benefit of Duxford for its current term expiring December 31, 1999. Duxford shall use its best efforts to assign or renew the Catellus Contract so that the Catellus Contract shall be for the benefit of Presley after the expiration of the current term. 3 4 5. Miscellaneous. (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, and the final, complete and exclusive expression of the terms and conditions thereof. All prior agreements, representations, negotiations and understandings of the parties hereto, oral or written, express or implied, are hereby superseded and merged herein. (b) Captions. The captions used herein are for convenience only and are not a part of this Agreement and do not in any way limit or amplify the terms and provisions hereof. (c) Time of Essence. Time is of the essence of every provision of this Agreement in which time is an element. (d) Governing Law. This Agreement has been negotiated and executed in the State of California and shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of laws principles. (e) Invalidity of Provision. If any provision of this Agreement as applied to either party to any circumstance shall be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the same shall in no way affect (to the maximum extent permissible by law) any other provision of this Agreement, the application of any such provision under circumstances different from those adjudicated by the court, or the validity or enforceability of the Agreement as a whole. (f) Amendments. No addition to or modification of any provision contained in this Agreement shall be effective unless fully set forth in writing by both Presley and Duxford. (g) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. PRESLEY: PRESLEY MORTGAGE COMPANY, a California corporation By: /s/ DAVID M. SIEGEL --------------------------------- David M. Siegel Title: Senior Vice President By: /s/ W. Douglass Harris --------------------------------- W. Douglass Harris Title: Vice President DUXFORD: DUXFORD FINANCIAL SERVICES, INC., a California corporation By: /s/ MARK CARVER --------------------------------- Mark Carver Title: President 4 EX-10.16 5 WARRANTY SERVICE AGREEMENT 1 EXHIBIT 10.16 WARRANTY SERVICE AGREEMENT This WARRANTY SERVICE AGREEMENT (this "AGREEMENT") is entered into as of the 5th day of November, 1999, by and Corporate Enterprises, Inc, a California corporation ("ENTERPRISES"), and among William Lyon Homes, Inc., a California corporation ("LYON"). W I T N E S S E T H WHEREAS, Enterprises is in the business of developing, selling and managing the Real Property (as defined in the Purchase Agreement, which is defined below) and during the ordinary course of such business may provide express or implied warranties as to the construction, workmanship and condition of the Real Property, or any portion thereof (the "WARRANTIES"). These Warranties may, from time to time, require Enterprises to expend money, resources and labor to repair product, remedy work or settle claims arising under such Warranties. WHEREAS, Enterprises and Lyon are parties to that certain Purchase Agreement and Escrow Instructions dated as of October 7, 1999, by and among Lyon, William Lyon, an individual, William H. Lyon, an individual (William Lyon and William H. Lyon are collectively referred to herein as the "LYONS"), Enterprises, and the Presley Companies, a Delaware corporation ("PRESLEY") whereby Enterprises sold substantially all of its real estate assets to Lyon (the "PURCHASE AGREEMENT"). Lyon is a wholly-owned subsidiary of Presley. Enterprises is wholly owned by the Lyons. Defined terms used herein shall have the same meaning as set forth in the Purchase Agreement unless otherwise defined in this Agreement. WHEREAS, pursuant to Section 5.1 of the Purchase Agreement, certain obligations and liabilities relating to Warranties ("WARRANTY OBLIGATIONS") and construction defects ("CONSTRUCTION DEFECT LIABILITIES") are deemed to be "Excluded Assets" as defined in the Purchase Agreement, and were excluded from the asset purchase contemplated by the Purchase Agreement. WHEREAS, Enterprises and Lyon desire for Lyon to service (without assuming or otherwise becoming liable for) Enterprises's Warranty Obligations, if any, relating to or arising out of those portions of the real property on which Enterprises deeded homes to third party homebuyers prior to the date of this Agreement. NOW, THEREFORE, in consideration of the premises and the respective agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. 1. WARRANTY OBLIGATIONS. Subject to the limitations and conditions contained in this Agreement, Enterprises does hereby hire Lyon and Lyon hereby agrees to perform and discharge all of the Warranty Obligations, including, without limitation, such obligations or liabilities that are asserted on or after the date hereof but relate to events or circumstances arising or in existence prior to the date hereof. 1 2 2. LIMITATIONS. Nothing herein shall be deemed to be an assignment or assumption of any Warranty Obligations, or shall give rise to any other obligations or liabilities on the part of Lyon with respect to any homebuyer, landowner or other third party, nor shall Lyon be deemed a guarantor or similarly obligated party with respect to any Warranty Obligations or otherwise. 3. CONDITIONS. Without limiting the generality of Section 2, above, under no circumstances shall Lyon be deemed liable in any manner, or to any extent, for any liabilities or obligations incurred, arising from or out of, or in connection with or as a result of, any Construction Defect Liabilities, including, without limitation, any alleged or actual defect, with respect to any portion of the Real Property (including all improvements thereon) worked on by Enterprises, the Partnerships (as defined in the Purchase Agreement) or any of their respective contractors, subcontractors or other affiliates prior to the Closing Date. 4. CONSIDERATION. In consideration for its obligations hereunder, Enterprises agrees to pay Lyon, at such time and manner as Lyon may reasonably request, an amount equal to the total expenditures made by Lyon in connection with servicing the Warranty Obligations. Without limiting the generality of the foregoing, the parties hereby agrees that Lyon shall be entitled to payment for amounts spent in connection with materials and all fully burdened labor used by it in connection with servicing the Warranty Obligations. 5. INDEMNIFICATION. Enterprises agrees to indemnify, defend and hold harmless Lyon from any and all costs, expenses, claims, suits, damages or other losses ("LOSSES") incurred by Lyon in connection with any Warranty Obligations or Construction Defect Liabilities, provided, however, that Enterprises shall not be liable for any Losses incurred as a result, and to the extent, of Lyon's negligence, gross negligence, fraud or willful acts or omissions in the performance of the Warranty Obligations. 6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. None of the parties hereto may assign any of their rights or obligations under this Agreement without the prior written consent of all parties hereto. 7. GOVERNING LAW. All questions with respect to this Agreement and the rights and liabilities of the parties shall be governed by the laws of the State of California, regardless of the choice of law provisions of that state or any other jurisdiction. 8. FURTHER ASSURANCES. Each of Lyon and Enterprises agrees to (a) cooperate fully with the other party, (b) execute such further instruments, documents and agreements, and (c) give such further written assurances as may be reasonably requested by Lyon or Enterprises, as the case may be, to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 9. PRECEDENCE OVER CONFLICTING PROVISIONS. As between Lyon and Enterprises, to the extent the provisions of the Purchase Agreement conflict with any of the provisions hereof, the relevant provision(s) of this Agreement shall govern and remain in full force and effect. 2 3 10. COUNTERPARTS. This Agreement may be executed simultaneously in counterparts, each of which will be deemed an original, but both of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ENTERPRISES: Corporate Enterprises, Inc., a California Corporation By: /s/ RICHARD ROBINSON ------------------------------- Richard Robinson Its: Senior Vice President By: /s/ MICHAEL D. GRUBBS ------------------------------- Michael D. Grubbs Its: Vice President LYON: William Lyon Homes, Inc., a California corporation By: /s/ NANCY M. HARLAN ------------------------------ Nancy M. Harlan Its: Senior Vice President By: /s/ W. DOUGLASS HARRIS ------------------------------ W. Douglass Harris Its: Vice President 3 EX-21.1 6 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES William Lyon Homes, Inc. (formerly Presley Homes) State of Incorporation: California Presley Homes State of Incorporation: California California Equity Funding, Inc. State of Incorporation: California PH Institutional Ventures State of Incorporation: California Duxford Interiors State of Incorporation: California PH Ventures -- San Jose State of Incorporation: California Presley CMR, Inc. State of Incorporation: California HSP Inc. State of Incorporation: California Duxford Financial, Inc. (formerly Presley Mortgage Company) State of Incorporation: California The Presley Companies State of Incorporation: California Presley Southwest, Inc. State of Incorporation: Arizona William Lyon Southwest, Inc. State of Incorporation: Arizona Mountain Gate Ventures, Inc. State of Incorporation: Arizona 2 PH - LP Ventures State of Incorporation: California PH - Rielly Ventures State of Incorporation: Arizona Other names under which The Presley Companies conducts business: Presley of Southern California Presley of Northern California Presley of San Diego Presley of Arizona Presley of New Mexico Presley of Nevada Horsethief Canyon Partners Oakhurst Country Club Presley Homes Thousand Oaks, LP Presley Torrey I Associates, LLC Presley Torrey II Associates, LLC Presley Mercy Associates, LLC Cerro Plata Associates, LLC Stonecrest - San Diego, L.P. White Cloud Estates - Simi Valley, L.P. Meadowlark - San Marcos, L.P. CP at Forster Ranch, L.P. East Grove, L.P. Fairway Farms, LLC PHI Otay Ranch Associates, LLC PHI Castle Creek Associates, LLC Lyon Manor at Thomas Ranch, LLC Lyon Plantation at Thomas Ranch, LLC Lyon Ridge, LLC LP Homes #1, LLC St. Helena Westminster Estates, L.L.C. Laurel Creek Associates, LLC EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) ANNUAL REPORT ON FORM 10-K. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,154 0 12,063 0 184,271 0 6,350 4,167 278,483 0 176,630 0 0 104 53,197 278,483 439,981 439,981 370,376 370,376 19,955 0 6,153 43,497 220 43,277 0 4,200 0 47,477 4.55 4.55
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