S-1/A 1 d515389ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on May 6, 2013

Registration No. 333-187819

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

AMENDMENT NO. 1 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

WILLIAM LYON HOMES

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   1531   33-0864902

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

4695 MacArthur Court, 8th Floor

Newport Beach, California 92660

(949) 833-3600

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

William H. Lyon

Chief Executive Officer

William Lyon Homes

4695 MacArthur Court, 8th Floor

Newport Beach, California 92660

(949) 833-3600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

with copies to:

 

Cary K. Hyden, Esq.

Michael A. Treska, Esq.

Latham & Watkins LLP

650 Town Center Drive, 20th Floor

Costa Mesa, California 92626

(714) 540-1235

 

Neil J Wertlieb, Esq.

Deborah J. Conrad, Esq.

Milbank, Tweed, Hadley & McCloy LLP

601 South Figueroa Street, 30th Floor

Los Angeles, California 90017

(213) 892-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer    ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company    ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be

Registered

 

Proposed Maximum

Offering Price Per
Share of

Class A Common Stock

 

Proposed

Maximum Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Class A Common Stock, par value $0.01 per share

  10,005,000(3)   $24.00   $240,120,000  

$32,753

 

 

(1) Estimated solely for the purpose of calculating amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. Includes shares of Class A Common Stock subject to the underwriters’ option to purchase additional shares.
(2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum offering price. Of this amount, $27,280 has been previously paid. An additional $5,473 is being paid at the rate currently in effect with respect to the additional $40,120,000 included in the proposed maximum aggregate offering price.
(3) Includes shares of Class A Common Stock subject to the underwriters’ option to purchase additional shares.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 6, 2013

 

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William Lyon Homes

8,700,000 Shares of Class A Common Stock

 

 

We are selling 6,525,000 shares of our Class A Common Stock and the selling stockholder named in this prospectus is selling 2,175,000 shares of our Class A Common Stock. We will not receive any proceeds from the sale of shares by the selling stockholder, including any shares sold by the selling stockholder in connection with the exercise of the underwriters’ option to purchase additional shares. The initial public offering price of the Class A Common Stock is expected to be between $22.00 and $24.00 per share.

Following this offering, we will have two classes of authorized common stock, Class A Common Stock and Class B Common Stock. The rights of the holders of Class A Common Stock and Class B Common Stock are identical, except with respect to certain voting, conversion and preemptive rights. Each share of Class A Common Stock is entitled to one vote per share. Each share of Class B Common Stock is entitled to five votes per share and is convertible into one share of Class A Common Stock upon the occurrence of certain events.

Prior to this offering, there has been a limited market for our Class A Common Stock. We have applied to have the Class A Common Stock listed on The New York Stock Exchange under the symbol “WLH”.

The underwriters have an option to purchase an aggregate maximum of 1,305,000 additional shares from us and the selling stockholder, including 652,500 additional shares from us and 652,500 additional shares from the selling stockholder, to cover over-allotment of shares.

Investing in our Class A Common Stock involves risks. See “Risk Factors” on page 19.

 

     Price to
Public
   Underwriting
Discounts and
Commissions
   Proceeds to
Issuer
   Proceeds to
Selling
Stockholder

Per Share

           

Total

           

Delivery of the shares of Class A Common Stock will be made on or about                     , 2013.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Credit Suisse    

Citigroup

  J.P. Morgan  

 

Zelman Partners LLC

  Houlihan Lokey   Comerica Securities

The date of this prospectus is                     ,         .


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Table of Contents

 

TABLE OF CONTENTS

 

     Page  
PROSPECTUS SUMMARY      1   
SUMMARY FINANCIAL DATA      14   
RISK FACTORS      19   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     36   
USE OF PROCEEDS      37   
DIVIDEND POLICY      37   
CAPITALIZATION      38   
DILUTION      40   

UNAUDITED PRO FORMA OPERATING STATEMENT S

     41   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     43   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     47   
MARKET OPPORTUNITY      96   
DESCRIPTION OF OUR BUSINESS      123   
MANAGEMENT AND DIRECTORS      143   
EXECUTIVE COMPENSATION      156   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     174   
PRINCIPAL AND SELLING STOCKHOLDERS      178   
DESCRIPTION OF CAPITAL STOCK      181   
SHARES ELIGIBLE FOR FUTURE SALE      186   

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     189   
UNDERWRITING      193   
LEGAL MATTERS      201   
EXPERTS      201   

WHERE YOU CAN FIND MORE INFORMATION

     201   
FINANCIAL STATEMENTS      F-1   

 

 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Through and including              (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotment or subscription.

We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled “Prospectus Summary,” “Market Opportunity” and “Description of Our Business.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC, or JBREC, an independent research provider and consulting firm. We have paid JBREC a fee of $45,000 for that market study, plus an amount charged at an hourly rate for additional information we may require from JBREC from time to time in connection with that market study. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. Any forecasts prepared by JBREC are based on data (including third-party data), models and experience of various professionals, and are based on various assumptions (including the completeness and accuracy of third-party data), all of which are subject to change without notice. See “Market Opportunity—Use of Estimates and Forward-Looking Statements” and “Experts.” In addition, certain market and industry data has been taken from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. We have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus. See “Cautionary Statement Concerning Forward-Looking Statements.”


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PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. For a more complete understanding of this offering, we encourage you to carefully read this entire prospectus.

Unless otherwise indicated, market data is derived from a market study prepared for us in connection with this offering by JBREC.

Except as otherwise noted, all information in this prospectus:

 

   

gives effect to the 1-for-8.25 reverse stock split of our Class A Common Stock, or the Reverse Split, which will occur upon pricing of this offering;

 

   

gives effect to the conversion of all outstanding shares of our Class C Common Stock, Class D Common Stock (including shares underlying outstanding equity awards) and Convertible Preferred Stock into Class A Common Stock on a one-for-one basis and as automatically adjusted for the Reverse Split, or the Common Stock Conversion, which will occur immediately prior to the consummation of this offering;

 

   

gives effect to the adoption and effectiveness of our Third Amended and Restated Certificate of Incorporation, or the Certificate of Incorporation, which will become effective at the consummation of this offering and which gives effect to the 1-for-8.25 reverse stock split of our Class B Common Stock (which, together with the Reverse Split and the Common Stock Conversion, is referred to as the Common Stock Recapitalization);

 

   

assumes that our shares of Class A Common Stock will be sold at $23.00 per share, which is the midpoint of the price range set forth on the cover page of the prospectus; and

 

   

assumes that the underwriters do not exercise their option to purchase additional shares.

In this prospectus, unless otherwise stated or the context otherwise requires, the “Company,” “we,” “our,” and “us” refer to William Lyon Homes, a Delaware corporation, and its subsidiaries. In addition, unless otherwise stated or the context otherwise requires, “Parent” refers to William Lyon Homes, and “California Lyon” refers to William Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of Parent.

 

 

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DESCRIPTION OF OUR BUSINESS

Our Company

We are one of the largest Western U.S. regional homebuilders. Headquartered in Newport Beach, California, we are primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado. Our core markets include Orange County, Los Angeles, San Diego, the San Francisco Bay Area, Phoenix, Las Vegas and Denver. We have a distinguished legacy of more than 55 years of homebuilding operations, over which time we have sold in excess of 75,000 homes. Our markets are characterized by attractive long-term housing fundamentals and, based upon the Burns Home Value Index, eight of our markets have experienced double-digit year-over-year home price appreciation. We hold leading market share positions in most of our markets and we have a significant land supply with more than 13,200 lots owned or controlled as of March 31, 2013, representing an approximately 12-year supply of lots based upon our home closings during the twelve month period ended March 31, 2013.

We have a proven expertise in understanding the needs of our homebuyers and tailoring our product offerings to meet such needs, which allows us to maximize the yield on our land investments by pairing product with market demand. We build and sell across a diverse range of product lines at a variety of price points with an emphasis on sales to entry-level, first-time move-up and second-time move-up homebuyers. We are committed to achieving the highest standards in design, quality and customer satisfaction and have received numerous industry awards and commendations throughout our operating history recognizing our achievements.

In 2012 we delivered 950 homes, with an average selling price of approximately $275,000, and recognized home sales revenues and total revenues of $261.3 million and $398.3 million, respectively. In the three months ended March 31, 2013, we delivered 268 homes, with an average selling price of approximately $285,200, and recognized home sales revenues and total revenues of $76.4 million and $80.9 million, respectively.

We have experienced significant operating momentum since the beginning of 2012, during which time a variety of key housing, employment and other related economic statistics in our markets have increasingly demonstrated signs of recovery. This rebound in market conditions, when combined with our disciplined operating strategy, has resulted in five consecutive quarters of period over period growth in our net new home orders, home closings and sales backlog. As of March 31, 2013, we were selling homes in 22 communities and had a consolidated backlog of 498 sold but unclosed homes, with an associated sales value of $170.8 million, representing a 50% and 115% increase in units and dollars, respectively, as compared to the backlog at March 31, 2012. As of April 28, 2013, we had a consolidated backlog of more than 550 units with a sales value of more than $200 million. The average selling price for homes in our backlog as of April 28, 2013 was approximately $363,600, representing a significant increase relative to the average selling price of $285,200 for homes closed in the three month period ended March 31, 2013. We believe that the attractive fundamentals in our markets, our leading market share positions, our long-standing relationships with land developers, our significant land supply and our focus on providing the best possible customer experience position us to capitalize on meaningful growth as the U.S. housing market continues to rebound.

 

 

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Industry Overview

U.S. Housing Market

The U.S. housing market continues to improve from the cyclical low points reached during the 2008—2009 national recession. Between the 2005 market peak and 2011, new single-family housing sales declined 76%, according to data compiled by the U.S. Census Bureau, and median resale home prices declined 34%, as measured by the S&P Case-Shiller Index. In 2011, early signs of a recovery began to materialize in many markets around the country as a result of an improving macroeconomic backdrop and excellent housing affordability. In the year ended December 31, 2012, homebuilding permits increased 29% and the median existing single-family home price increased 6.6% year-over-year. Growth in new home sales outpaced growth in existing home sales over the same period, increasing 20% versus 9% for existing homes (which were propped up by foreclosure-related sales).

 

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Historically, strong housing markets have been associated with great affordability, a healthy domestic economy, positive demographic trends such as population growth and household formation, falling mortgage rates, increases in renters that qualify as homebuyers and locally based dynamics such as housing demand relative to housing supply. Many markets across the U.S. are exhibiting most of these positive characteristics. The recent economic growth trajectory in the United States has resulted in an increase in the ratio of newly-created jobs to number of new home permits issued during the last twelve months. Further, the inventory of resale and new unsold homes is well below historical averages and affordability is near its best level in more than 30 years, as measured by the ratio of homeownership costs to household income.

As a result of the improving fundamentals, home values are trending up, and the combination of historically low mortgage rates, a declining percentage of distressed sales, and low inventory levels should drive rising home values. JBREC estimates national home values appreciated by approximately 2% in 2012, and forecasts national appreciation of 7.2% in 2013 and 8.7% in 2014, slowing to 6.5% by 2015.

While the U.S. housing market continues to improve, regional strength varies. As of February 2013, Northern California, the Southwest, and Southern California rank as the top housing regions in the country based on demand, supply and affordability metrics according to JBREC.

 

 

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Source: John Burns Real Estate Consulting (February 2013)

Our Competitive Strengths

Our business is characterized by the following strengths:

Leading local presence in high-growth Western U.S. markets

We believe that our market presence positions us to meaningfully capitalize on the broader national housing market recovery. According to JBREC, as of February 2013, the Northern California, Southwest and Southern California regions of the U.S. represented the #1, #2 and #3 best housing market regions in the country, based upon recent and long-term housing and economic indicators.

We are highly disciplined in our selection of markets, based upon underlying supply and demand fundamentals, competitiveness and profitability drivers. Our land inventory is concentrated in markets that benefit from favorable housing demand drivers such as high population and job growth, positive migration patterns, housing affordability and desirable lifestyle and weather characteristics. Our markets have experienced and are projected to continue to experience significant home price appreciation. According to the Burns Home Value Index as of February 2013, eight of our markets have realized double-digit year-over-year appreciation. The table below illustrates, for each of our markets and for the U.S. average, current and projected growth in employment, single-family permits and home values.

 

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Source: JBREC, BLS, Census

*Represents Metro Division as defined by BLS as opposed to Metropolitan Statistical Area

N/A: JBREC does not produce a BHVI for this market

Note: Employment and permit data is current as of January 2013 while forecasts and all other data is current as of February 2013

 

 

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We believe that homebuilding is a very local business and that we benefit not only from being in attractive markets, but also from having significant scale in such markets. We hold leading market share positions in most of our markets, including a #3 ranking in Orange County and Los Angeles County and a #5 ranking in the Southern California region; a #3 ranking in Solano County, a #5 ranking in San Joaquin County and a #8 ranking in Contra Costa County, all in the San Francisco Bay Area; and a #13 ranking in Phoenix and Las Vegas, based upon 2012 home closings as reported by Hanley Wood. We experienced significant momentum in the first quarter of 2013, resulting in #3, #11 and #6 market share positions in Phoenix, Denver and Fort Collins, respectively. Our scale and significant operating experience within our markets have allowed us to cultivate long-standing relationships with local land owners, officials, subcontractors and suppliers and we believe that maintaining significant market share enables us to achieve economies of scale, maximize our visibility to land acquisition opportunities and differentiate ourselves from most of our competitors. We believe that our regional operating model, our intimate knowledge of local market conditions and our decades of operating and local market experience have enabled us to perform favorably compared to the local divisions of national homebuilders and we believe that we are well positioned to continue to do so as the U.S. housing market recovers.

Significant and high-quality land position recorded at an attractive basis

We benefit from a sizeable and well-located lot supply. As of March 31, 2013, we and our consolidated joint ventures owned 10,682 lots, all of which are entitled, and had options to purchase an additional 2,529 lots, equating to approximately 12 years of total land supply based upon our 1,090 home closings for the twelve months ended March 31, 2013. In addition, as of March 31, 2013 we had 1,165 lots contracted under signed non-binding letters of intent. There can be no assurance, however, that we will acquire any of these lots on the anticipated terms or timing, or at all.

Our lot supply reflects our balanced approach to land investment. We have a diverse mix of finished lots available for near-term homebuilding operations and longer-term strategic land positions to support future growth. We believe that our current inventory of owned and controlled lots is sufficient to supply the vast majority of our projected future home closings for the next three years and a portion of future home closings for a multi-year period thereafter. Our meaningful supply of owned lots allows us to be selective in identifying new land acquisition opportunities, with a primary focus on optioning and acquiring land to drive closings, revenues and earnings growth in 2015 and beyond, and largely insulates us from the heavy competition for near-term finished lots.

 

Book Value of Owned Inventory by Geography

(at March 31, 2013)

($ in millions)

   Book Value of Owned Inventory by Development Status

(at March 31, 2013)

($ in millions)

 

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We believe we also benefit from an attractive book value basis in our inventory, which was adjusted to fair value in February 2012 in conjunction with our restructuring and in accordance with fresh start accounting requirements. To facilitate the adoption of fresh start accounting, we engaged a third-party valuation firm to assist us in a comprehensive assessment of our enterprise value and the allocation of value to our assets and liabilities. In our assessment, we generally utilized assumptions for future home sales paces and prices based upon then-prevailing market conditions in late 2011, which we believe represented conditions near the trough of the recent U.S. housing downturn. In conjunction with our year-end 2011 impairment analysis and as part of our fresh start accounting in February 2012, we recorded a net write-down of our inventory of approximately $129.5 million. As of March 31, 2013, our homebuilding inventory on which we have recognized write-downs through either our periodic impairment analyses or for fresh start accounting had a book basis of $214.2 million, which reflected an approximately 47% discount to such inventory’s cost basis. The attractive current carrying value of our inventory is illustrated by our adjusted homebuilding gross margin percentage for our 2012 successor period and three months ended March 31, 2013 of 26.2% (16.9% non-adjusted) and 23.2% (17.1% non-adjusted), respectively, which we believe to be favorable compared to our public company peers. In addition, impairments to our real estate inventory have significantly contributed to our $120.0 million of net deferred tax assets as of March 31, 2013, against which we currently have recorded a full valuation allowance. We believe that the location and attractive book basis of our inventory, as well as our substantial net deferred tax assets, position us to benefit from an improving U.S. housing market and will continue to contribute to favorable gross margins, profitability and cash flow.

Land acquisition and development expertise

We believe our ability to identify, acquire and develop land in desirable locations and on favorable terms is key to our success. Unlike many of our peers, we retained our senior land acquisition and development personnel throughout the recent housing downturn, allowing us to maintain our acquisition and development capabilities and our strong relationships with local and regional land sellers. We have purchased land and built and sold homes in highly desirable master-planned communities and developments such as The Irvine Ranch, Rancho Mission Viejo and Summerlin and we have worked with land developers such as Lewis Community Developers and Five Points throughout our and their operating histories. We believe these long-standing relationships provide us with a significant competitive advantage in our markets, where relationships are frequently just as important as, or more important than, price in the sourcing of land acquisitions.

We opportunistically engage in land development in certain markets. Our key senior land acquisition and development professionals have an average of 30 years of industry experience, providing our organization with the necessary expertise to successfully progress land through the entire development cycle, including the entitlement process. Some of our land holdings represent multi-phase, master-planned communities, which provide us with the opportunity to add value to our undeveloped land through re-entitlements or repositioning, particularly in those markets with highly fragmented land ownership or those lacking market participants capable of assembling and developing large land parcels. Further, engagement in land development affords us the ability to execute upon opportunistic bulk land sales when such sales translate into attractive returns comparable to or in excess of our operating projections.

Strategically diversified across buyer segments and product offerings

We offer a broad portfolio of products, including single-family detached and attached homes designed for and marketed to targeted customer segments, strategically focused to match product and price points to areas of the market with the greatest depth of demand. Our products are differentiated by size, design, livability, features and amenities in order to serve the specific needs of our markets, with an emphasis on sales to entry-level, first-time move-up and second-time move-up home buyers. Despite the diversity of our product offerings, we generally standardize 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, which enables us to better

 

 

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control and reduce construction costs and cycle times. We believe that our diversified product strategy enables us to best serve multiple customer segments and to quickly adapt to market conditions and consumer preferences. Further, our ability to deliver a wide spectrum of product types to different buyer demographics allows us to pursue a broader array of land acquisition opportunities, both in terms of geographic location and land parcel size.

 

Home Closings by Average Selling Price

(for the three months ended 3/31/2013)

 

Home Closings and Average Selling Price by

Buyer Type

(for the three months ended 3/31/2013)

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We carefully study and design our products with the assistance of third-party architects, engineers, designers, consultants and homeowner focus groups. Within each of our markets, we determine the profile of buyers we hope to address and we design neighborhoods and homes taking into account the specific needs of those buyers. We believe that our customer and product diversification strategies grant us the flexibility to respond effectively to changes in consumer preferences and quickly adapt to evolving community demographics.

Long-standing reputation for delivering superior quality and customer service

We believe that our leadership positions in our markets are due in large part to our long-standing reputation as a producer of high-quality homes and our industry-leading, award-winning customer support services. Our Company and divisions have received numerous industry awards and commendations throughout our operating history, including “Professional Builder of the Year” from Professional Builder Magazine, “Builder of the Year” from Builder and Developer Magazine and, most recently in 2013, 20 Eliant Homebuyer Choice Awards, the most of any homebuilder, in categories such as “Overall Purchase Experience,” “Design Selection Experience,” “Construction Experience,” “Overall First-Year Quality,” “Highest Percent of Sales from Referrals” and “Overall Home Purchase & Ownership Experience.”

We market and sell our homes under the William Lyon Homes brand in all of our markets except for in Colorado. Our strong brand and reputation for quality have been established and maintained over decades by consistently delivering high-quality homes and support services to our buyers. In Colorado, we operate under the Village Homes brand. Established in 1984 and acquired by us in 2012, Village Homes shares our commitment to and has an outstanding reputation for quality and service and has received numerous industry awards, including “America’s Best Builder” by Builder Magazine in 2002, numerous J.D. Power Awards and, most recently, the Homebuilders Association of Denver’s 2012 “Community of the Year” award.

We focus on building and selling homes that combine high-quality craftsmanship with locally-influenced design characteristics that ultimately reflect the various lifestyles and aspirations of our multiple customer

 

 

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segments. We strive to provide the highest level of customer service during the sales process and after a home is sold. We typically engage our sales personnel on a long-term, rather than project-by-project, basis, which we believe results in a more motivated and loyal sales force with an extensive knowledge of the Company’s operating policies and products. We also employ a variety of programs and services to ensure customer satisfaction and help us improve production efficiency, reduce warranty costs and increase customer referrals. We believe that delivering high-quality homes and industry-leading customer service provides for a differentiated buying experience and provides us with a competitive advantage based upon repeat customers, high referral rates and strong brand recognition, allowing us to lower customer acquisition costs and increase unit sales rates.

Deep and experienced management team with significant tenure at our Company

We benefit from a highly experienced management team, with our executive officers and regional and division presidents averaging approximately 28 years of experience in the homebuilding and development industries within California or the Southwestern United States. Our Chief Executive Officer, William H. Lyon, our President and Chief Operating Officer, Matthew Zaist, and our Chief Financial Officer, Colin Severn, have closely managed the operational and financial aspects of our business and each brings significant experience, operational and market knowledge and professional relationships within the industry. Our regional and division presidents have substantial industry knowledge and local market expertise, with an average of approximately 12 years at the Company and an average of approximately 27 years in the homebuilding industry. Reporting directly to our division presidents, we have a deep and long-tenured team of 23 management professionals with an average within each of our divisions of 25 or more years of experience in the homebuilding industry and 10 or more years of experience at our Company. We believe this level of experience and the resulting long-standing relationships provide us with a competitive advantage, particularly as it relates to dealings with land sellers, subcontractors and material suppliers, and enable us to identify, evaluate and capitalize on market opportunities, attract and retain new customers and adjust to changing national, regional and local business conditions. We strive to ensure that we have the best team available and we believe our reputation, market presence and consistency of values and cultures have enabled us to attract and maintain top talent.

General William Lyon (USAF Ret.), our Company’s namesake and our Executive Chairman, has 58 years of operating history within the homebuilding industry and his experience, his knowledge of our operations and the markets in which we compete and his extensive professional relationships within our industry enable him to serve as a valuable leader to our Company. General Lyon provides senior leadership to our management team and to our board of directors, ensuring that the business principles that have made our Company successful in the past are an integral part of our ongoing culture. In addition to the contributions of General Lyon, we have a strong board of directors with a diverse range of industry backgrounds and experience. We believe that our board of directors provides us with an additional point of reference on strategic operating and corporate decisions and various members bring significant real estate knowledge and relationships from which we benefit.

Our Business Strategy

Drive revenue growth by opening new communities on existing land supply

We intend to capitalize on our existing land supply, which we believe is largely sufficient to supply the vast majority of future home closings for the next three years and a portion of future home closings for a multi-year period thereafter. We currently own or have an option to purchase 100% of the land on which we currently expect to close homes during 2013 and 2014, and approximately 75% of the land on which we currently expect to close homes during 2015. We expect to open 23 new communities in 2013, with more than half in California and the remaining in Nevada and Colorado, and anticipate ending the year with approximately 35 active selling communities, representing an estimated 52% net increase from our 23 active selling communities as of

 

 

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December 31, 2012. As of March 31, 2013, we were selling homes in 22 communities. We continually evaluate opportunities for evolving our product mix within our communities, and in our communities coming online in 2013 and 2014, we currently expect to include a higher percentage of offerings targeted to what we believe to be an underserved move-up market. We expect this shift in mix to result in an increase in our average selling price as we deliver homes from such communities.

Employ disciplined land acquisition strategies to support future growth

We believe that, next to our people, our land is our most valuable asset. As a result of our strong reputation for quality and consistency and our well-established operating history of between 17 years and 56 years in our markets, we have developed long-standing relationships with local land sellers, master-planned community developers, financial institutions and other builders. We intend to leverage these deep relationships, along with our extensive knowledge of local market dynamics and trends, to continue to source well-positioned land parcels in our markets.

Our land acquisition strategy is dynamic, nimble and responsive to prevailing and projected future market conditions. During the recent housing downturn, our land acquisition strategy was to undertake projects with shorter life-cycles in order to reduce land development and market risk while maintaining an inventory of owned lots sufficient to fulfill our projected unit closings for a two-to-three year period. Currently, in order to capitalize on the housing industry recovery and strong demand for new homes in our markets, and to capture what we believe to be a meaningful opportunity to grow our business, our land acquisition strategy has shifted to projects with somewhat longer life-cycles in order to increase risk-adjusted land development and market returns.

We attempt to maximize allocation of our capital utilizing land acquisition transaction structures that minimize up-front capital requirements while maximizing long-term returns through purchase options and land banking arrangements, rolling lot takedowns, purchase contracts that provide for payment to land sellers upon closing of homes built on land purchased from them, and non-recourse or seller financing, when possible.

Leverage and expand leading positions in high growth markets

We believe that our markets exhibit positive demographic trends and offer attractive long-term growth prospects. We intend to increase or maintain our market share within such markets, enabling us to enhance profitability by achieving economies of scale and optimizing the size of our business in each of our markets in order to appropriately leverage operating efficiencies.

We intend to pursue growth within our current markets, and potentially in select additional Western U.S. markets, to the extent that we believe such growth is consistent with our disciplined operating strategy, balanced land policies and overall commitment to superior product quality. In the future, we may grow our business through selective opportunistic acquisitions, joint ventures and other strategic transactions with third-party homebuilders and other industry participants. Our December 2012 acquisition of Village Homes, providing our entry into the attractive Denver and Fort Collins markets, was consistent with our strategy of pursuing growth in attractive Western U.S. markets, and we believe it aligns well with our balanced land policies and disciplined operating strategy.

Maintain disciplined operating platform and low cost structure with focus on profitability and cash flow

We combine a decentralized management approach to those aspects of our business where detailed knowledge of local market conditions is important with a centralized management approach to those areas where we believe central control is required, including, in particular, land investment. Our local and regional management teams are responsible for monitoring homebuyer demand trends and managing construction, land

 

 

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development, sales and marketing and governmental processing activities, while our corporate staff provides back-office support for financial, treasury, human resources, information technology and legal matters. We focus on minimizing construction costs and overhead, a strategy which we believe is critical to maintaining competitive margins and profitability. We believe that we have built a scalable foundation which will support and foster revenue growth without a proportionate corresponding increase in our selling, general and administrative expenses.

Prudent focus on balance sheet optimization and investor returns

We have sought and will continue to seek to optimize our balance sheet by further enhancing our liquidity and cash position and improving our credit metrics. We eliminated approximately $180 million of debt and reduced annual cash interest by approximately 45% through our restructuring, and we further improved our capital structure with our November 2012 senior unsecured notes offering, extending the maturity date of the substantial majority of our current debt to 2020 while further reducing annual cash interest expense. Although we are comfortable with our current leverage, we are focused on continuing to reduce our total leverage, including through the potential future reversal of our deferred tax asset valuation allowance, and lowering our overall cost of capital as part of our long-term capitalization strategy and we will continue to implement strategies that we believe will enhance our financial flexibility and long-term equity and maximize shareholder value. In addition, we expect to enhance our liquidity by entering into a new $100 million credit facility following completion of this offering.

Risks Related to Our Business

The Company’s business is subject to numerous risks, as more fully described in the section of this prospectus entitled “Risk Factors,” including the following:

 

   

Adverse changes in general economic conditions or conditions in our industry could reduce the demand for homes and, as a result, could negatively impact our results of operations, especially if such changes occur within the regions in which we operate.

 

   

Our long-term growth depends upon our ability to acquire land at reasonable prices.

 

   

Our sales, results of operations, financial condition and business would be negatively impacted by a decline in the general economy or the homebuilding industry in the regions in which we are concentrated.

 

   

Limitations on the availability and increases in the cost of mortgage financing can adversely affect demand for housing.

 

   

Increases in our cancellation rate could have a negative impact on our home sale revenue and home building margins.

 

   

Governmental laws and labor regulations may increase our expenses, limit the number of homes that we can build or delay completion of projects.

 

   

Material and labor shortages could delay or increase the cost of home construction and reduce our sales and earnings.

 

   

Our high level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations. At March 31, 2013, the total outstanding principal amount of our debt was $347.3 million.

 

   

Concentration of ownership of the voting power of our capital stock may prevent other stockholders from influencing corporate decisions and create perceived conflicts of interest.

 

 

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Prepackaged Joint Plan of Reorganization

On February 25, 2012, Parent and certain of its subsidiaries consummated the principal transactions of a Prepackaged Joint Plan of Reorganization, or the Plan, which had been approved by the bankruptcy court following the filing by Parent and certain of its subsidiaries of voluntary bankruptcy petitions, and which Plan included the issuance of shares of Parent’s Class A Common Stock and 12% Senior Subordinated Secured Notes due 2017, or the Old Notes, in exchange for claims held by the holders of the formerly outstanding notes of California Lyon, an amendment dated February 25, 2012, or the Amended Term Loan, of California Lyon’s then-outstanding loan agreement, or the Prepetition Term Loan, in each case, with ColFin WLH Funding, LLC and certain other lenders, the issuance of shares of Parent’s Class B Common Stock and a warrant to purchase additional shares of Class B Common Stock in exchange for cash consideration invested by the Lyon family, and the issuance of shares of Parent’s Convertible Preferred Stock and Class C Common Stock in exchange for cash consideration. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Chapter 11 Reorganization” for additional disclosure regarding the Plan.

After giving effect to the Common Stock Recapitalization and this offering, the principal holders of securities issued in connection with the Plan are entities affiliated with Luxor Capital Group, LP, or Luxor, which holds shares of Class A Common Stock with 20.1% of the total voting power of the Company’s outstanding capital stock, and Lyon Shareholder 2012, LLC, an entity managed by, and held for the benefit of, William H. Lyon, which holds shares of Class B Common Stock with 51.6% of the total voting power of the Company’s outstanding capital stock, assuming exercise in full of its warrant to purchase additional shares of Class B Common Stock.

Common Stock Recapitalization

As noted above, we will consummate a Common Stock Recapitalization in connection with this offering, consisting of the following elements:

 

   

a 1-for-8.25 reverse stock split of our Class A Common Stock, or the Reverse Split, which will occur upon pricing of this offering;

 

   

the conversion of all outstanding shares of our Class C Common Stock, Class D Common Stock (including shares underlying outstanding equity awards) and Convertible Preferred Stock into Class A Common Stock, on a one-for-one basis and as automatically adjusted for the Reverse Split, which will occur immediately prior to consummation of this offering;

 

   

a 1-for-8.25 reverse stock split of our Class B Common Stock, which will occur upon consummation of this offering; and

 

   

the adoption and effectiveness of our Third Amended and Restated Certificate of Incorporation, which implements the above elements and makes certain other changes to our charter, and which will become effective upon consummation of this offering.

 

 

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THE OFFERING

 

Common stock offered by us

6,525,000 shares of Class A Common Stock

 

Common stock offered by the selling stockholder

2,175,000 shares of Class A Common Stock

 

Underwriters’ option to purchase additional shares

We and the selling stockholder have granted the underwriters a 30-day option to purchase up to an aggregate of 1,305,000 additional shares of Class A Common Stock, including 652,500 shares from us and 652,500 shares from the selling stockholder, at the initial public offering price less the underwriting discount.

 

Class A Common Stock to be outstanding after this offering

26,971,129 shares(1)

 

Class B Common Stock to be outstanding after this offering

3,813,885 shares(2)

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $137.7 million (assuming an initial public offering price of $23.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated expenses payable by us.

 

  We will not receive any proceeds from the sale of shares by the selling stockholder, including any shares sold by the selling stockholder in connection with the exercise of the underwriters’ option to purchase additional shares.

 

  We intend to use the net proceeds from this offering for growth capital, including the acquisition of land currently under contract or non-binding letters of intent, and for general corporate purposes.

 

Voting Rights

After the completion of this offering, our common stock will consist of two classes: Class A Common Stock and Class B Common Stock. Purchasers in this offering will acquire Class A Common Stock. Class A Common Stock and Class B Common Stock are identical except with respect to certain voting, conversion and preemptive rights. Holders of Class A Common Stock are entitled to one vote per share, and holders of Class B Common Stock are entitled to five votes per share, on all matters to be voted on by our common stockholders. Shares of Class A and Class B Common Stock vote together as a single class on all matters submitted to a vote of stockholders. See “Description of Capital Stock—Common Stock.”

 

(1) The number of shares of Class A Common Stock that will be outstanding after the consummation of this offering excludes:

 

   

576,633 shares of Class A Common Stock issuable upon exercise of outstanding stock options, of which 384,422 were vested as of May 1, 2013; and

 

   

2,389,058 additional shares of Class A Common Stock that are reserved for issuance under our incentive award plan.

 

(2) The number of shares of Class B Common Stock that will be outstanding after the consummation of this offering excludes a warrant to purchase 1,907,550 additional shares of Class B Common Stock, held by the current holder of all outstanding shares of the Class B Common Stock.

 

 

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Dividend Policy

We do not anticipate paying any cash dividends on our common stock following this offering. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors. The payment of cash dividends is restricted under the terms of the indenture, or the Indenture, governing the 8.5% Senior Notes due 2020, or the New Notes, and other agreements related to our indebtedness.

 

Proposed New York Stock Exchange Symbol

WLH

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A Common Stock.

General Corporate Information and History

The Company’s predecessor, The Presley Companies, or Presley, was formed in 1956. In 1987, General William Lyon purchased 100% of the stock of Presley, which subsequently went public in 1991 and was listed on the New York Stock Exchange under the symbol “PDC.” In 1999, Presley acquired William Lyon Homes, Inc., a California corporation, and changed its name to William Lyon Homes and its ticker symbol to “WLS.” The Company was subsequently taken private in 2006 by way of a tender offer by General William Lyon for the shares of the Company that were then publicly owned.

Today, the Company’s principal executive offices are located at 4695 MacArthur Court, 8th Floor, Newport Beach, California 92660 and its telephone number is (949) 833-3600. The Company’s website address is www.lyonhomes.com. Information contained on the Company’s website is not a part of this prospectus and the inclusion of the website address in this prospectus is an inactive textual reference only. Parent was incorporated in the State of Delaware on July 15, 1999.

 

 

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SUMMARY FINANCIAL DATA

The following table sets forth certain of the Company’s historical financial data. The selected historical consolidated statement of operations data, other financial data and operating data for the period from February 25, 2012 through December 31, 2012, the period from January 1, 2012 through February 24, 2012 and the years ended December 31, 2011 and 2010 has been derived from the Company’s audited consolidated financial statements and the related notes included elsewhere herein. The selected historical consolidated statement of operations data, other financial data and operating data for the quarterly period ended March 31, 2013 and the period from February 25, 2012 through March 31, 2012 and balance sheet data as of March 31, 2013 have been derived from our unaudited financial statements and the related notes included elsewhere herein.

The selected historical consolidated financial data set forth below are not necessarily indicative of the results of future operations. Upon emergence from In re William Lyon Homes, et al., Case No. 11-14019, or the Chapter 11 Cases, on February 25, 2012, or the Emergence Date, we adopted fresh start accounting as prescribed under Accounting Standards Codification No. 852, Reorganizations, or ASC 852, which required us to value our assets and liabilities at their related fair values. In addition, we adjusted our accumulated deficit to zero at the Emergence Date. Items such as accumulated depreciation, amortization and accumulated deficit were reset to zero. We allocated the reorganization value to the individual assets and liabilities based on their estimated fair values. Items such as accounts receivable, prepaid and other assets, accounts payable, certain accrued liabilities and cash, whose fair values approximated their book values, reflected values similar to those reported prior to the Emergence Date. Items such as real estate inventories, property, plant and equipment, certain notes receivable, certain accrued liabilities and notes payable were adjusted from amounts previously reported. Unless otherwise stated or the context otherwise requires, reference hereinafter to the “Successor” reflects the operations of the Company after the Emergence Date, and after giving effect to the application of ASC 852, from February 25, 2012 through March 31, 2012 and December 31, 2012, as applicable, and any reference to the “Predecessor” refers to the operations of the Company prior to the Emergence Date. Because we adopted fresh start accounting at emergence from bankruptcy and because of the significance of liabilities subject to compromise that were relieved upon emergence from bankruptcy, the historical financial statements of the Predecessor and the financial statements of the Successor are not comparable. Refer to the notes to our consolidated financial statements included in this prospectus for further details relating to fresh start accounting.

 

 

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You should read this summary in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical consolidated financial statements and accompanying notes included elsewhere herein.

 

     Successor(1)    

 

   Predecessor(1)  
     Three  Months
Ended
March 31,  2013
(unaudited)
    Period From
February 25,
through
December 31,
2012
    Period  from
February 25,
through March  31,
2012
(unaudited)
          Period From
January 1,
through
February 24,
2012
    Year Ended
December 31,
 
($ in thousands except per share data)               2011     2010  

Statement of Operations Data

                 

Revenues

                 

Home sales

   $ 76,434      $ 244,610      $ 15,109           $ 16,687      $ 207,055      $ 266,865   

Lots, land and other sales

     —          104,325        —               —          —          17,204   

Construction services

     4,419        23,825        3,195             8,883        19,768        10,629   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Total revenues

     80,853        372,760        18,304             25,570        226,823        294,698   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (812     4,666        (2,962          (2,684     (148,015     (117,843

Loss before reorganization items and (provision) benefit from income taxes

     (2,009     (4,325     (4,629          (4,961     (171,706     (135,867

Reorganization items, net(2)

     (464     (2,525     (353          233,458        (21,182     —     

Net (loss) income

     (2,473     (6,861     (4,982          228,497        (192,898     (135,455

Net (loss) income available to common stockholders

   $ (3,522   $ (11,602   $ (5,351        $ 228,383      $ (193,330   $ (136,786
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

(Loss) income per common share:

                 

Basic and diluted

   $ (0.03   $ (0.11   $ (0.06        $ 228,383      $ (193,330   $ (136,786

Weighted average common shares outstanding

                 

Basic and diluted

     120,300,654        103,037,842        92,368,169             1,000        1,000        1,000   
 

Other Financial Data:

                 

Adjusted homebuilding gross margin(3)

   $ 17,738      $ 64,135      $ 3,173           $ 3,449      $ 40,468      $ 57,876   

Adjusted homebuilding gross margin percentage(3)

     23.2     26.2     21.0          20.7     19.6     21.7

Adjusted EBITDA(4)

   $ 4,593      $ 39,792      $ (728        $ (8,435   $ (21,357   $ 16,612   

Adjusted EBITDA margin percentage(5)

     5.7     10.7     (4.0 %)           (33.0 %)      (9.4 %)      4.5
 

Operating Data (including consolidated joint ventures) (unaudited):

                 

Number of net new home orders

     361        956        146             175        669        650   

Number of homes closed

     268        883        61             67        614        760   

Average sales price of homes closed

   $ 285      $ 277      $ 248           $ 249      $ 337      $ 351   

Cancellation rate

     12     15     8          8     18     19

Average number of sales locations

     23        18        20             20        19        18   

Backlog at end of period, number of homes(6)

     498        406        332             246        139        84   

Backlog at end of period, aggregate sales value(6)

   $ 170,798      $ 115,449      $ 79,408           $ 63,434      $ 29,329      $ 30,077   

 

(1)

Successor refers to William Lyon Homes and its consolidated subsidiaries on and after the Emergence Date, after giving effect to: (i) the cancellation of shares of our common stock issued prior to February 25, 2012; (ii) the issuance of shares of new common stock, and settlement of existing debt and other adjustments in accordance with the Plan; and (iii) the application of fresh start accounting. Predecessor refers to William Lyon Homes and its consolidated subsidiaries up to the Emergence Date. In relation to the adoption of fresh start accounting in conjunction with the confirmation of the Plan, the results of operations for 2012 separately present the period from January 1, 2012 through February 24, 2012 as the pre-emergence,

 

 

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predecessor entity and the periods from February 25, 2012 through March 31, 2012 and from February 25, 2012 through December 31, 2012 as the successor entity. As such, the application of fresh start accounting as described in Note 3 of the “Notes to Consolidated Financial Statements” is reflected in the period from February 25, 2012 through December 31, 2012 and not the period from January 1, 2012 through February 24, 2012. Certain statistics including (i) net new home orders, (ii) average number of sales locations, (iii) backlog, (iv) number of homes closed, (v) homes sales revenue and (vi) average sales price of homes closed are not affected by the fresh start accounting.

(2) The Company recorded reorganization items of $(0.5) million, $(2.5) million, $(0.4) million, $233.5 million and $(21.2) million during the three months ended March 31, 2013, the period from February 25, 2012 through December 31, 2012, the period from February 25, 2012 through March 31, 2012, the period from January 1, 2012 through February 24, 2012, and the year ended December 31, 2011, respectively. See Note 4 of “Notes to Consolidated Financial Statements.”
(3) Adjusted homebuilding gross margin is a financial measure that is not prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. It is used by management in evaluating operating performance and in making strategic decisions regarding sales pricing, construction and development pace, product mix and other operating decisions. We believe this information is meaningful as it isolates the impact that interest has on homebuilding gross margin and allows investors to make better comparisons with our competitors. A reconciliation of adjusted homebuilding gross margin to homebuilding gross margin is provided as follows:

 

    Successor(1)          Predecessor(1)  
    Three  Months
Ended

March 31, 2013
(unaudited)
    Three  Months
Ended
December  31,
2012
    Period from
February 25
through
December  31,
2012
    Period from
February 25,
through
March  31,
2012
(unaudited)
         Period from
January 1
through
February  24,
2012
    Three  Months
Ended
December  31,
2011
   

Year Ended December 31,

 
                  2011     2010  

(dollars in thousands)

             

Home sales revenue

  $ 76,434      $ 98,633      $ 244,610      $ 15,109          $ 16,687      $ 58,983      $ 207,055      $ 266,865   

Cost of home sales

    (63,328     (81,048     (203,203     (13,063         (14,598     (54,849     (184,489     (225,751
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross margin

    13,106        17,585        41,407        2,046            2,089        4,134        22,566        41,114   

Add: Interest in cost of sales

    4,632        11,528        22,728        1,127            1,360        6,565        18,082        16,762   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin

  $ 17,738      $ 29,113      $ 64,135      $ 3,173          $ 3,449      $ 10,699      $ 40,648      $ 57,876   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin percentage

    23.2     29.5     26.2     21.0         20.7     18.1     19.6     21.7
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(4) Adjusted EBITDA is a financial measure that is not prepared in accordance with U.S. GAAP. Adjusted EBITDA means net (loss) income plus (i) provision for (benefit from) income taxes, (ii) interest expense, (iii) amortization of capitalized interest included in cost of sales, (iv) non-cash impairment charges, (v) gain (loss) on retirement of debt, (vi) loss on sale of fixed assets, (vii) depreciation and amortization, (viii) distributions of income from unconsolidated joint ventures less equity in income of unconsolidated joint ventures, (ix) equity in (income) loss of unconsolidated joint ventures less equity in income of unconsolidated joint ventures, (x) stock based compensation expense and (xi) non-cash reorganization items. Other companies may calculate adjusted EBITDA differently. Adjusted EBITDA is presented herein because management believes the presentation of adjusted EBITDA provides useful information to the Company’s investors regarding the Company’s financial condition and results of operations because adjusted EBITDA is a widely utilized indicator of a company’s operating performance. Adjusted EBITDA should not be considered as an alternative for net (loss) income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. A reconciliation of net (loss) income attributable to the Company to adjusted EBITDA is provided as follows:

 

     Successor(1)      Predecessor(1)  
     Three
Months
Ended
March 31,
2013

(unaudited)
    Period From
February 25,
through
December 31,

2012
    Period
From
February 25
through
March  31,
2012
(unaudited)
     Period From
January 1,
through
February 24,

2012
    Year Ended
December 31,
 
              2011     2010  

Net (loss) income attributable to William Lyon Homes

   $ (2,548   $ (8,859   $ (5,059    $ 228,383      $ (193,330   $ (136,786

Provision for (benefit from) income taxes

     —          11        —           —          10        (412
 

Interest expense

               
 

Interest incurred

     7,151        30,526        4,234         7,145        61,464        62,791   

Interest capitalized

     (5,867     (21,399     (2,520      (4,638     (36,935     (39,138

Amortization of capitalized interest included in cost of sales

     4,632        27,791        1,127         1,360        18,082        16,762   

Non-cash impairment charge

     —          —          —           —          128,314        111,860   

Gain (loss) on extinguishment of debt

     —          1,392        —           —          —          (5,572

Loss on sale of fixed assets

     —          —          —           —          83        122   

Depreciation and amortization

     914        6,631        1,490         586        3,875        3,718   

Distributions of income from unconsolidated joint ventures

     —          —          —           —          685        4,183   

Equity in (income) loss of unconsolidated joint ventures

     —          —          —           —          (3,605     (916

Stock-based compensation

     311        3,699        —           —          —          —     

Non-cash reorganization items

     —          —          —           (241,271     —          —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 4,593      $ 39,792      $ (728    $ (8,435   $ (21,357   $ 16,612   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(5) Adjusted EBITDA margin percentage is calculated as Adjusted EBITDA, as defined in (4) above, divided by total revenues during the period.
(6) Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2012, 352 represent homes completed or under construction and 54 represent homes not yet under construction.

 

 

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The table below reflects our balance sheet data as of March 31, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the Common Stock Recapitalization; and

 

   

on a pro forma as adjusted basis to give further effect to the sale of 6,525,000 shares of Class A Common Stock in this offering at an assumed initial public offering price of $23.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of March 31, 2013  
     Actual (unaudited)      Pro Forma(1)      Pro Forma
As Adjusted(1)(2)
 
(in thousands)                     

Consolidated Balance Sheet Data

        

Cash and cash equivalents

   $ 66,404       $ 65,056       $ 202,800   

Real estate inventories—Owned

     439,491         439,491         439,491   

Real estate inventories—Not owned

     39,029         39,029         39,029   

Total assets

     598,906         597,558         735,302   

Total debt

     347,269         347,269         347,269   

Total liabilities

     458,240         458,240         458,240   

Redeemable convertible preferred stock

     71,571         —           —     

Total William Lyon Homes stockholders’ equity

     59,501         129,724         267,467   

 

(1) Reflects a cash payment of $1,347,688 by the Company to the holders of Convertible Preferred Stock upon conversion of all outstanding shares of Convertible Preferred Stock into Class A Common Stock, which represents the amount of accrued but unpaid preferred stock dividends as of March 31, 2013.

 

(2) A $1.00 increase (decrease) in the assumed initial public offering price of $23.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) adjusted cash and cash equivalents, working capital, total assets and William Lyon Homes stockholders’ equity by approximately $6.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and William Lyon Homes stockholders’ equity by approximately $21.4 million, assuming the assumed initial public offering price per share, as set forth on the cover page of this prospectus, remains the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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RISK FACTORS

Investing in our Class A Common Stock entails the following risks and uncertainties. These risk factors should be carefully considered when evaluating any investment in our Class A Common Stock. Any of these risks and uncertainties could cause the actual results to differ materially from the results contemplated by the forward-looking statements set forth herein, and could otherwise have a significant adverse impact on the Company’s business, prospects, liquidity, financial condition or results of operations. In addition, please read “Cautionary Statement Concerning Forward-Looking Statements” in this prospectus, where we describe additional uncertainties associated with our business and the forward-looking statements included in this prospectus.

Risks Related to Our Business

Adverse changes in general economic conditions or conditions in our industry could reduce the demand for homes and, as a result, could negatively impact the Company’s results of operations.

The homebuilding industry is cyclical and highly sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, availability of financing and interest rate levels. The national recession, credit market disruption, high unemployment levels, the absence of home price stability, and the decreased availability of mortgage financing, among other factors, have adversely impacted the homebuilding industry and our operations and financial condition over the last several years. Although the housing market appears to be recovering in most of the geographies in which we operate, we cannot predict the pace or scope of the recovery. If market conditions deteriorate or do not improve as anticipated, our results of operations and financial condition could be adversely impacted.

These changes may occur on a national scale or may acutely affect some of the regions or markets in which we operate more than others. An oversupply of alternatives to new homes, including foreclosed homes, homes held for sale by investors and speculators, other existing homes and rental properties, can also adversely impact our ability to sell new homes, depress new home prices and reduce our margins on the sales of new homes. High levels of foreclosures not only contribute to additional inventory available for sale, but also reduce appraised values for new homes, potentially resulting in lower sales prices.

We cannot predict the duration or ultimate magnitude of any economic downturn or reversal in the recovery of the homebuilding industry or the extent or sustainability of a recovery, particularly the sustainability of current improvements in the homebuilding market. Nor can we provide assurance that our response to a homebuilding downturn or the government’s attempts to address the troubles in the overall economy would be successful.

Our long-term growth depends upon our ability to acquire land at reasonable prices.

The Company’s business depends on its ability to obtain land for the development of its residential communities at reasonable prices and with terms that meet its underwriting criteria. The Company’s ability to obtain land for new residential communities may be adversely affected by changes in the general availability of land, the willingness of land sellers to sell land at reasonable prices given the deterioration in market conditions, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density, and other market conditions. If the supply of land appropriate for development of residential communities is limited because of these factors, or for any other reason, the number of homes that the Company builds and sells may continue to decline. Additionally, the ability of the Company to open new projects could be impacted if the Company elects not to purchase lots under option contracts. To the extent that the Company is unable to purchase land timely or enter into new contracts for the purchase of land at reasonable prices, due to the lag time between the time the Company acquires land and the time the Company begins selling homes, the Company’s home sales revenue and results of operations could be negatively impacted and/or the Company could be required to scale back the Company’s operations in a given market.

 

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Limitations on the availability and increases in the cost of mortgage financing can adversely affect demand for housing.

In general, housing demand is negatively impacted by the unavailability of mortgage financing, as a result of declining customer credit quality, tightening of mortgage loan underwriting standards and factors that increase the upfront or monthly cost of financing a home such as increases in interest rates, insurance premiums or limitations on mortgage interest deductibility. Most buyers finance their home purchases through third-party lenders providing mortgage financing. Over the last several years, many third-party lenders have significantly increased underwriting standards, and many subprime and other alternate mortgage products are no longer available in the marketplace in spite of a decrease in mortgage rates. If these trends continue and mortgage loans continue to be difficult to obtain, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes would be adversely affected, which would adversely affect the Company’s results of operations through reduced home sales revenue, gross margin and cash flow.

Even if potential customers do not need financing, changes in the availability of mortgage products or increases in mortgage costs may make it harder for them to sell their current homes to potential buyers who need financing, which has in some cases led to lower demand for new homes. Mortgage interest rates have recently been at historic lows, and there can be no assurance that such rates will remain low and increases in interest rates could adversely affect the Company’s results of operations through reduced home sales and cash flow.

Difficulty in obtaining sufficient capital could result in increased costs and delays in completion of projects.

The homebuilding industry is capital-intensive and requires significant up-front expenditures to acquire land and begin development. We expect that we will seek additional capital from time to time from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. Land acquisition, development and construction activities may be adversely affected by any shortage or increased cost of financing or the unwillingness of third parties to engage in joint ventures. Any difficulty in obtaining sufficient capital for planned development expenditures could cause project delays and any such delay could result in cost increases and may adversely affect the Company’s sales and future results of operations and cash flows. Although we expect to enter into a new $100 million credit facility following consummation of this offering, we have not received commitments for such a facility and there can be no assurance that we will be able to enter into such a facility on terms that are satisfactory to us. In addition, even if we are able to enter into a new credit facility, there can be no assurance that we will be able to satisfy the conditions to borrowing thereunder.

The Company’s business is geographically concentrated, and therefore, the Company’s sales, results of operations, financial condition and business would be negatively impacted by a decline in the general economy or the homebuilding industry in such regions.

The Company presently conducts all of its business in five geographic regions: Southern California, Northern California, Arizona, Nevada and, beginning in December 2012, Colorado. The Company’s geographic concentration could adversely impact the Company if the homebuilding business in its current markets should decline, since there may not be a balancing opportunity in a stronger market in other geographic regions.

In addition, a prolonged economic downturn in one or more of these areas, particularly within California, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. The Company generates a significant portion of its revenue and a significant amount of its profits from, and holds approximately one-half of the dollar value of its real estate inventory in, California. During the downturn from 2008 to 2010, land values, the demand for new homes and home prices have declined

 

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substantially in California, negatively impacting the Company’s profitability and financial position. In addition, the state of California is experiencing severe budget shortfalls and is considering raising taxes and increasing fees to offset the deficit. There can be no assurance that the profitability and financial position of the Company will not be further impacted if the challenging conditions in California continue or worsen.

Increases in the Company’s cancellation rate could have a negative impact on the Company’s home sales revenue and home building gross margins.

During the years ended December 31, 2012, 2011 and 2010, the Company experienced cancellation rates of 14%, 18% and 19%, respectively. In the three months ended March 31, 2013, the Company experienced a cancellation rate of 12%, compared to 9% during the same period in 2012. Cancellations negatively impact the number of closed homes, net new home orders, home sales revenue and the Company’s results of operations, as well as the number of homes in backlog. Home order cancellations can result from a number of factors, including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, homebuyers’ inability to sell their existing homes, homebuyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions. Many of these factors are beyond the Company’s control. Increased levels of home order cancellations would have a negative impact on the Company’s home sales revenue and financial and operating results.

Financial condition and results of operations may be adversely affected by any decrease in the value of land inventory, as well as by the associated carrying costs.

The Company continuously acquires land for replacement and expansion of land inventory within the markets in which it builds. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases, and thus, the Company may have bought and developed land on which homes cannot be profitably built and sold. The Company employs measures to manage inventory risks which may not be successful.

We incur many costs even before we begin to build homes in a community, including costs of preparing land and installing roads, sewage and other utilities, as well as taxes and other costs related to ownership of the land on which we plan to build homes. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market, and the Company may have to sell homes at significantly lower margins or at a loss, which conditions may persist for extended periods of time. If the rate at which we sell and deliver homes slows or falls, or if we delay the opening of new home communities for sales due to adjustments in our marketing strategy or other reasons, each of which has occurred throughout the housing downturn, we may incur additional costs and it will take a longer period of time for us to recover our costs, including the costs we incurred in acquiring and developing land.

Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect the Company’s business, prospects, liquidity, financial condition or results of operations.

As a homebuilder, the Company is subject to numerous risks, many of which are beyond management’s control, such as droughts, floods, wildfires, landslides, soil subsidence, earthquakes and other weather-related and geologic events which could damage projects, cause delays in completion of projects, or reduce consumer demand for housing, and shortages in labor or materials, which could delay project completion and cause increases in the prices for labor or materials, thereby affecting the Company’s sales and profitability. Many of the Company’s projects are located in California, which has experienced significant earthquake activity and seasonal wildfires. Areas in Colorado have also been subjected to seasonal wildfires and soil subsidence. In addition to directly damaging the Company’s projects, earthquakes or other geologic events could damage roads and highways providing access to those projects, thereby adversely affecting the Company’s ability to market homes in those areas and possibly increasing the costs of completion.

 

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There are some risks of loss for which the Company may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes and other geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could adversely affect the Company’s business, prospects, liquidity, results of operations or financial condition.

The Company’s business and results of operations are dependent on the availability and skill of subcontractors.

Substantially all construction work is done by subcontractors with the Company acting as the general contractor. Accordingly, the timing and quality of construction depend on the availability and skill of the Company’s unaffiliated, third party subcontractors. While the Company has been able to obtain sufficient materials and subcontractors during times of material shortages and believes that its relationships with suppliers and subcontractors are good, the Company does not have long-term contractual commitments with any subcontractors or suppliers.

The Company may not be able to compete effectively against competitors in the homebuilding industry.

The homebuilding industry is highly competitive and there are relatively low barriers to entry. Homebuilders compete for, among other things, homebuying customers, desirable properties, financing, raw materials and skilled labor. The Company competes both with large homebuilding companies, some of which have greater financial, marketing and sales resources than the Company, and with smaller local builders. Our competitors may independently develop land and construct housing units that are substantially similar to our products. Many of these competitors also have long-standing relationships with subcontractors and suppliers in the markets in which we operate. We currently build in several of the top markets in the nation and, therefore, we expect to continue to face additional competition from new entrants into our markets. The Company also competes for sales with individual resales of existing homes and with available rental housing. These competitive conditions can result in:

 

   

our delivering fewer homes;

 

   

our selling homes at lower prices;

 

   

our offering or increasing sales incentives, discounts or price concessions for our homes;

 

   

our experiencing lower housing gross profit margins, particularly if we cannot raise our selling prices to cover increased land development, home construction or overhead costs;

 

   

our selling fewer homes or experiencing a higher number of cancellations by homebuyers;

 

   

impairments in the value of our inventory and other assets;

 

   

difficulty in acquiring desirable land that meets our investment return or marketing standards, and in selling our interests in land that no longer meet such standards on favorable terms;

 

   

difficulty in our acquiring raw materials and skilled management and trade labor at acceptable prices;

 

   

delays in the development of land and/or the construction of our homes; and/or

 

   

difficulty in securing external financing, performance bonds or letter of credit facilities on favorable terms.

These competitive conditions may have a material adverse effect on our business and consolidated financial statements by decreasing our revenues, impairing our ability to successfully implement our current strategies, increasing our costs and/or diminishing growth in our local or regional homebuilding businesses.

We may not be successful in integrating acquisitions or implementing our growth strategies.

In December 2012, we acquired Village Homes, and we may in the future consider growth or expansion of our operations in our current markets or in new markets, whether through strategic acquisitions of homebuilding

 

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companies or otherwise. The magnitude, timing and nature of any future expansion will depend on a number of factors, including our ability to identify suitable additional markets and/or acquisition candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Our expansion into new or existing markets, whether through acquisition or otherwise, could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations, and any future acquisitions could result in the dilution of existing shareholders if we issue our common shares as consideration. Acquisitions also involve numerous risks, including difficulties in the assimilation of the acquired company’s operations, the incurrence of unanticipated liabilities or expenses, the risk of impairing inventory and other assets related to the acquisition, the diversion of management’s attention and resources from other business concerns, risks associated with entering markets in which we have limited or no direct experience and the potential loss of key employees of the acquired company.

The Company’s success depends on key executive officers and personnel.

The Company’s success is dependent upon the efforts and abilities of its executive officers and other key employees, many of whom have significant experience in the homebuilding industry and in the Company’s divisional markets. In particular, the Company is dependent upon the services of General William Lyon, Chairman of the Board and Executive Chairman, William H. Lyon, Chief Executive Officer, and Matthew R. Zaist, President and Chief Operating Officer, as well as the services of the California region and other division presidents and division management teams and personnel in the corporate office. The loss of the services or limitation in the availability of any of these executives or key personnel, for any reason, could hinder the execution of our business strategy and have a material adverse effect upon the Company’s business, prospects, liquidity, financial condition or results of operation. Further, such a loss could be negatively perceived in capital markets.

Power shortages or price increases could have an adverse impact on operations.

In prior years, certain areas in Northern and Southern California have experienced power and resource shortages, including mandatory periods without electrical power, changes to water availability and significant increases in utility and resource costs. Shortages of natural resources, particularly water, may make it more difficult to obtain regulatory approval of new developments. The Company may incur additional costs and may not be able to complete construction on a timely basis if such power shortages and utility rate increases continue. Furthermore, power shortages and rate increases may adversely affect the regional economies in which the Company operates, which may reduce demand for housing. The Company’s operations may be adversely impacted if further rate increases and/or power shortages occur.

Construction defect, home warranty, soil subsidence and building-related and other claims may be asserted against the Company in the ordinary course of business, and the Company may be subject to liability for such claims.

As a homebuilder, we have been, and continue to be, subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly.

California law provides that consumers can seek redress for patent (i.e., observable) defects in new homes within three or four years (depending on the type of claim asserted) from when the defect is discovered or should have been discovered. If the defect is latent (i.e., non-observable), consumers must still seek redress within three or four years (depending on the type of claim asserted) from the date when the defect is discovered or should have been discovered, but in no event later than ten years after the date of substantial completion of the work on the construction. Consumers purchasing homes in Arizona, Nevada and Colorado may also be able to obtain redress under state laws for either patent or latent defects in their new homes. Because California, our largest market, is one of the most highly regulated and litigious jurisdictions in the United States, our potential losses and expenses due to litigation, new laws and regulations may be greater than those of our competitors who have smaller or no California operations.

 

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With respect to certain general liability exposures, including construction defect claims, product liability claims and related claims, assessment of claims and the related liability and reserve estimation process is highly judgmental due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are asserted for construction defects, it can be difficult to determine the extent to which the assertion of these claims will expand. Although we have obtained insurance for construction defect claims subject to applicable self-insurance retentions, such policies may not be available or adequate to cover liability for damages, the cost of repairs, and/or the expense of litigation surrounding current claims, and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors. Furthermore, any product liability or warranty claims made against us, whether or not they are viable, may lead to negative publicity, which could impact our reputation and our home sales.

Increased insurance costs and reduced insurance coverages may affect the Company’s results of operations and increase the potential exposure to liability.

Recently, lawsuits have been filed against builders asserting claims of personal injury and property damage, including arising from the presence of mold in residential dwellings. Some of these lawsuits have resulted in substantial monetary judgments or settlements against these builders. The Company’s insurance may not cover all of the potential claims, including personal injury claims, or such coverage may become prohibitively expensive. If the Company is unable to obtain adequate insurance coverage, a material adverse effect on the Company’s business, prospects, liquidity, results of operations or financial condition could result.

The costs of insuring against construction defect, product liability and director and officer claims are substantial and the cost of insurance for the Company’s operations has risen, deductibles and retentions have increased and the availability of insurance has diminished. Significant increases in the cost of insurance coverage or significant limitations on coverage could have a material adverse effect on the Company’s business, prospects, liquidity, results of operations or financial condition from such increased costs or from liability for significant uninsurable or underinsured claims.

Material and labor shortages could delay or increase the cost of home construction and reduce our sales and earnings.

The residential construction industry experiences serious material shortages from time to time, including shortages of insulation, drywall, cement, steel and lumber. These material shortages can be more severe during periods of strong demand for housing and during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures. From time to time, we have experienced volatile price swings in the cost of materials, including in particular, the cost of lumber, cement, steel and drywall. Shortages and price increases could cause delays in and increase our costs of home construction. The Company generally is unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the homes at the time the contracts are signed, which may be in advance of the construction of the home. Sustained increases in construction costs may, over time, erode the Company’s gross margins from home sales, particularly if pricing competition restricts the ability to pass on any additional costs of materials or labor, thereby decreasing gross margins from home sales, which in turn could harm our operating results.

The residential construction industry also experiences labor shortages and disruptions from time to time, including: work stoppages; labor disputes; shortages in qualified trades people; lack of availability of adequate utility infrastructure and services; our need to rely on local subcontractors who may not be adequately capitalized or insured; and delays in availability, or fluctuations in prices, of building materials. Additionally, the Company could experience labor shortages as a result of subcontractors going out of business or leaving the residential construction market due to low levels of housing production and volumes. Any of these circumstances could give rise to delays in the start or completion of the Company’s communities, increase the cost of developing one or

 

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more of the Company’s communities and increase the construction cost of the Company’s homes. To the extent that market conditions prevent the recovery of increased costs, including, among other things, subcontracted labor, finished lots, building materials, and other resources, through higher sales prices, the Company’s gross margins from home sales and results of operations could be adversely affected. Increased costs of lumber, framing, concrete, steel and other building materials could cause increases in construction costs. The Company generally is unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the homes at the time the contracts are signed, which may be in advance of the construction of the home. Sustained increases in construction costs may, over time, erode the Company’s gross margins from home sales, particularly if pricing competition restricts the ability to pass on any additional costs of materials or labor, thereby decreasing gross margins from home sales.

Elimination or reduction of the tax benefits associated with owning a home could prevent potential customers from buying our homes and could adversely affect our business or financial results.

Changes in federal tax law may affect demand for new homes. Significant expenses of owning a home, including mortgage interest and real estate taxes, generally are deductible expenses for an individual’s federal and, in some cases, state income taxes, subject to certain limitations. If the federal government or a state government changes its income tax laws to eliminate or substantially modify these income tax deductions, the after-tax cost of owning a new home would increase for many potential customers. The resulting loss or reduction of homeowners’ tax deductions, if such tax law changes were enacted without offsetting provisions, could adversely affect demand for new homes. No meaningful prediction can be made as to whether any such proposals will be enacted and, if enacted, the particular form such laws would take, but enactment of such proposals may have an adverse effect on the homebuilding industry in general and on our business in particular.

Inflation could adversely affect the Company’s business, prospects, liquidity, financial condition or results of operations, particularly in a period of oversupply of homes or declining home sale prices.

Inflation can adversely affect the Company by increasing costs of land, materials and labor. However, the Company may be unable to offset these increases with higher sales prices. In addition, inflation is often accompanied by higher interest rates, which have a negative impact on housing demand. In such an environment, the Company may be unable to raise home prices sufficiently to keep up with the rate of cost inflation, and, accordingly, its margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Moreover, with inflation, the costs of capital can increase and purchasing power of the Company’s cash resources can decline. Efforts by the government to stimulate the economy may not be successful, but have increased the risk of significant inflation and its resulting adverse effect on the Company’s business, prospects, liquidity, financial condition or results of operations.

The Company’s business is seasonal in nature and quarterly operating results can fluctuate.

The Company’s quarterly operating results generally fluctuate by season. The Company typically achieves its highest new home sales orders in the spring and summer, although new homes sales order activity is also highly dependent on the number of active selling communities and the timing of new community openings. Because it typically takes the Company three to six months to construct a new home, the Company delivers a greater number of homes in the second half of the calendar year as sales orders convert to home deliveries. As a result, the Company’s revenues from homebuilding operations are higher in the second half of the year, particularly in the fourth quarter, and the Company generally experiences higher capital demands in the first half of the year when it incurs construction costs. If, due to construction delays or other causes, the Company cannot close its expected number of homes in the second half of the year, the Company’s financial condition and full year results of operations may be adversely affected.

The Company may be unable to obtain suitable bonding for the development of its communities.

The Company provides bonds in the ordinary course of business to governmental authorities and others to ensure the completion of its projects and/or in support of obligations to build community improvements such as

 

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roads, sewers, water systems and other utilities, and to support similar development activities by certain of our unconsolidated joint ventures. As a result of the deterioration in market conditions, surety providers have become increasingly reluctant to issue new bonds and some providers are requesting credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. The Company may also be required to provide performance bonds and/or letters of credit to secure our performance under various escrow agreements, financial guarantees and other arrangements. If the Company is unable to obtain performance bonds and/or letters of credit when required or the cost or operational restrictions or conditions imposed by issuers to obtain them increases significantly, the Company may not be able to develop or may be significantly delayed in developing a community or communities and/or may incur significant additional expenses, and, as a result, the Company’s business, prospects, liquidity, financial condition or results of operation could be materially and adversely affected.

We periodically conduct certain of our operations through unconsolidated joint ventures with independent third parties in which we do not have a controlling interest and we can be adversely impacted by joint venture partners’ failure to fulfill their obligations.

We have participated in land development joint ventures, or JVs, in which we have less than a controlling interest. We have entered into JVs in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Our JVs are typically entered into with developers, other homebuilders and financial partners to develop finished lots for sale to the JV’s members and other third parties. However, our JV investments are generally very illiquid, due to a lack of a controlling interest in the JVs. In addition, our lack of a controlling interest results in the risk that the JV will take actions with which we disagree, or fail to take actions that we desire, including actions regarding the sale of the underlying property, which could materially and adversely affect the Company’s business, prospects, liquidity, financial condition or results of operation.

The Company is the managing member in joint venture limited liability companies and may become a managing member or general partner in future joint ventures, and therefore may be liable for joint venture obligations.

Certain of the Company’s active JVs are organized as limited liability companies. The Company is the managing member in some of these and may serve as the managing member or general partner, in the case of a limited partnership JV, in future JVs. As a managing member or general partner, the Company may be liable for a JV’s liabilities and obligations should the JV fail or be unable to pay these liabilities or obligations. These risks include, among others, that a partner in the JV may fail to fund its share of required capital contributions, that a partner may make poor business decisions or delay necessary actions, or that a partner may have economic or other business interests or goals that are inconsistent with our own.

Fluctuations in real estate values may require us to write–down the book value of our real estate assets.

The homebuilding industry is subject to significant variability and fluctuations in real estate values. As a result, the Company may be required to write-down the book value of certain real estate assets in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and some of those write downs could be material. Any material write–downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations.

On February 24, 2012, the Company adopted fresh start accounting under ASC 852, and recorded all real estate inventories at fair value. Subsequent to February 24, 2012 and throughout each quarter of 2012 and the first quarter of 2013, there were no indicators of impairment, as sales prices and sales absorption rates have improved. For the year ended December 31, 2012 and the three months ended March 31, 2013, there were no impairment charges recorded.

During 2011, the Company incurred non-cash impairment losses on real estate assets amounting to $128.3 million. As required by U.S. GAAP, in connection with our emergence from the Chapter 11 Cases, we adopted the fresh start accounting provisions of ASC 852, effective February 24, 2012. Under ASC 852, the

 

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reorganization value represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the Company immediately after restructuring. The reorganization value is allocated to the respective fair value of assets. The Company engaged a third-party valuation firm to assist with the analysis of the fair value of the entity, and respective assets and liabilities. In conjunction with the valuation of all of the assets of the Company, the Company re-set the value on certain land holdings in the early stages of development, based on: (i) “as-is” development stages of the property instead of a discounted cash flow approach, (ii) relative comparables on similar stage properties that had recently sold, on a per acre basis, and (iii) location of the property, among other factors. As a result, the Company re-valued these particular assets as of February 24, 2012, and since the date of emergence from the Chapter 11 Cases is within six weeks of year end, management made the assumption that the values are approximately the same, and recorded the book value as fair value as of December 31, 2011. Therefore, the adjustment to fair value was made on December 31, 2011, with no subsequent adjustment necessary at February 24, 2012, on these particular assets. The difference between the new value applied to the property on December 31, 2011 and the carrying value as of December 31, 2011, was recorded as impairment loss on real estate assets.

In addition, the Company incurred non-cash impairment losses on real estate assets of $111.9 million for the year ended December 31, 2010. The Company assesses its projects on a quarterly basis, when indicators of impairment exist. Indicators of impairment include a decrease in demand for housing due to soft market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales incentives for home buyers, sales absorption rates below management expectations, a decrease in the value of the underlying land and a decrease in projected cash flows for a particular project. The Company was required to write down the book value of its impaired real estate assets in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 360, Property, Plant and Equipment, or ASC 360.

Governmental laws and regulations may increase the Company’s expenses, limit the number of homes that the Company can build or delay completion of projects.

The Company is subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area, as well as governmental taxes, fees and levies on the acquisition and development of land parcels. These regulations often provide broad discretion to the administering governmental authorities as to the conditions we must meet prior to being approved, if approved at all. We are subject to determinations by these authorities as to the adequacy of water and sewage facilities, roads and other local services. New housing developments may also be subject to various assessments for schools, parks, streets and other public improvements. Although we do not typically purchase land that is not entitled, to the extent that projects that are not entitled, purchased lands may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. The Company may also be subject to periodic delays, may be precluded entirely from developing in certain communities or may otherwise be restricted in our business activities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future in the states in which the Company operates. Such moratoriums can occur prior or subsequent to commencement of our operations, without notice or recourse. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which the Company has received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and welfare issues, which can further delay these projects or prevent their development. As a result, home sales could decline and costs increase, which could negatively affect the Company’s business, prospects, liquidity, financial condition and results of operations.

 

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The Company is subject to environmental laws and regulations, which may increase costs, limit the areas in which the Company can build homes and delay completion of projects.

The Company is also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the environment. The particular environmental laws which apply to any given homebuilding site vary according to the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, including significant fines and penalties for any violation, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas, which could negatively affect the Company’s results of operations.

Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination. In addition, in those cases where an endangered species is involved, environmental rules and regulations can result in the elimination of development in identified environmentally sensitive areas.

Risks Related to Our Capital Structure

We have substantial outstanding indebtedness and may incur additional debt in the future.

The Company is highly leveraged. At March 31, 2013, the total outstanding principal amount of our debt was $347.3 million. We also expect to enter into a new $100 million credit facility following completion of this offering. The Company’s high level of indebtedness could have detrimental consequences, including the following:

 

   

the ability to obtain additional financing as needed for working capital, land acquisition costs, building costs, other capital expenditures, or general corporate purposes, or to refinance existing indebtedness before its scheduled maturity, may be limited;

 

   

the Company will need to use a substantial portion of cash flow from operations to pay interest and principal on our indebtedness, which will reduce the funds available for other purposes;

 

   

if we are unable to comply with the terms of the agreements governing the indebtedness of the Company, the holders of that indebtedness could accelerate that indebtedness and exercise other rights and remedies against the Company;

 

   

if the Company has a higher level of indebtedness than some of its competitors, it may put the Company at a competitive disadvantage and reduce the Company’s flexibility in planning for, or responding to, changing conditions in the industry, including increased competition; and

 

   

the terms of any refinancing may not be as favorable as the debt being refinanced.

The Company cannot be certain that cash flow from operations will be sufficient to allow the Company to pay principal and interest on debt, support operations and meet other obligations. If the Company does not have the resources to meet these and other obligations, the Company may be required to refinance all or part of its outstanding debt, sell assets or borrow more money. The Company may not be able to do so on acceptable terms, in a timely manner, or at all. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. Defaults under our debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations.

 

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The agreements governing our debt impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some corporate actions.

The agreements governing our debt impose significant operating and financial restrictions. These restrictions limit our ability, among other things, to:

 

   

incur or guarantee additional indebtedness or issue certain equity interests;

 

   

pay dividends or distributions, repurchase equity or prepay subordinated debt;

 

   

make certain investments;

 

   

sell assets;

 

   

incur liens;

 

   

create certain restrictions on the ability of restricted subsidiaries to transfer assets;

 

   

enter into transactions with affiliates;

 

   

create unrestricted subsidiaries; and

 

   

consolidate, merge or sell all or substantially all of the Company’s assets.

In addition, we may in the future enter into other agreements refinancing or otherwise governing indebtedness which impose yet additional restrictions and covenants, including covenants limiting our ability to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies. These restrictions may adversely affect our ability to finance future operations or capital needs or to pursue available business opportunities. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness.

Risks Related to Ownership of Our Class A Common Stock and this Offering

Concentration of ownership of the voting power of our capital stock may prevent other stockholders from influencing corporate decisions and create perceived conflicts of interest.

Upon consummation of this offering, our common stock will consist of two classes: Class A and Class B. Holders of Class A Common Stock are entitled to one vote per share, and holders of Class B Common Stock are entitled to five votes per share, on all matters entitled to be voted on by our common stockholders. Immediately following completion of this offering, entities controlled by William H. Lyon will hold approximately 51.6% of the voting power of the Company, assuming exercise in full of the warrant to purchase additional shares of Class B Common Stock, through their ownership of 100% of the outstanding Class B Common Stock, a warrant to purchase 1,907,550 additional shares of Class B Common Stock and approximately 67,104 shares of Class A Common Stock. Additionally, immediately after this offering, Luxor, assuming that the underwriters do not exercise their option to purchase additional shares, and an affiliate of Paulson & Co. Inc., or Paulson, will hold approximately 9.2 million and 3.3 million shares of Class A Common Stock, representing 20.1% and 7.2% of the total voting power of the Company’s outstanding capital stock, respectively. Further, Luxor, Paulson and the entity affiliated with William H. Lyon, which collectively control approximately 78.9% of the total voting power of the Company’s outstanding capital stock, have entered into stockholder agreements effective upon the consummation of this offering with respect to the election of up to six seats on our board of directors, whereby each such stockholder has agreed to vote in favor of the director nominees supported by each of the other stockholders. The Company is not party to such agreements.

William H. Lyon, Luxor and Paulson may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This ownership concentration may adversely impact the trading of our capital stock because of a perceived conflict of interest that may exist, thereby depressing the value of our capital stock.

 

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There has only been a limited public market for our Class A Common Stock, an active trading market for our Class A Common Stock may never develop following the offering and our common stock prices may be volatile and could decline substantially following this offering.

Prior to this offering, there has been a limited market for our Class A Common Stock. Although we have applied to have our Class A Common Stock listed for trading on the New York Stock Exchange in connection with this offering, we cannot guarantee that an active trading market will develop or be sustained after the offering. Accordingly, no assurance can be given as to the following:

 

   

the likelihood that an active trading market for shares of our Class A Common Stock will develop or be sustained;

 

   

the liquidity of any such market;

 

   

the ability of our stockholders to sell their shares of Class A Common Stock; or

 

   

the price that our stockholders may obtain for their Class A Common Stock.

If an active market does not develop or is not maintained, the market price of our Class A Common Stock may decline and you may not be able to sell your shares. Even if an active trading market develops for our Class A Common Stock subsequent to this offering, the market price of our Class A Common Stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our Class A Common Stock.

Some of the factors that could negatively affect or result in fluctuations in the market price of our Class A Common Stock include:

 

   

actual or anticipated variations in our quarterly operating results;

 

   

changes in market valuations of similar companies;

 

   

adverse market reaction to the level of our indebtedness;

 

   

additions or departures of key personnel;

 

   

actions by stockholders;

 

   

speculation in the press or investment community;

 

   

general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets;

 

   

our operating performance and the performance of other similar companies;

 

   

changes in accounting principles; and

 

   

passage of legislation or other regulatory developments that adversely affect us or the homebuilding industry.

The offering price per share of our Class A Common Stock offered under this prospectus may not accurately reflect the value of your investment.

Prior to this offering there has only been a limited market for our common stock. The offering price per share of our Class A Common Stock offered by this prospectus was negotiated among us, the selling stockholder and the underwriters. Factors considered in determining the price of our Class A Common Stock include:

 

   

the history and prospects of companies whose principal business is the design, construction and sale of single-family homes;

 

   

prior offerings of those companies;

 

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our prospects for acquiring land parcels for development at attractive values;

 

   

our capital structure;

 

   

an assessment of our management and its experience in acquiring land parcels and designing, constructing and selling homes;

 

   

general conditions of the securities markets at the time of this offering; and

 

   

other factors we deemed relevant.

The offering price may not accurately reflect the value of our Class A Common Stock and may not be realized upon any subsequent disposition of the shares.

Future sales of our common stock by existing stockholders could cause the price of our Class A Common Stock to decline.

Any sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that such sales might occur, may cause the market price for our Class A Common Stock to decline. Upon completion of this offering, we will have 26,971,129 shares of Class A Common Stock and 3,813,885 shares of Class B Common Stock outstanding, excluding 576,633 shares of Class A Common Stock issuable upon the exercise of outstanding stock options and 1,907,550 shares of Class B Common Stock issuable upon the exercise of a warrant held by the holders of our Class B Common Stock. All of these shares, other than the shares of Class B Common Stock held by William H. Lyon through his management of Lyon Shareholder 2012, LLC, and certain shares of Class A Common Stock held by our directors and officers and other “affiliates”, as defined in Rule 144 of the Securities Act, or Rule 144, will be freely tradable without restriction under the Securities Act. These shares of Class B Common Stock and shares of Class A Common Stock held by our directors, officers and other affiliates are restricted securities under the Securities Act, and may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon exercise of outstanding options or for other reasons. Any such future issuances of our common stock or convertible or other equity-linked securities will dilute the ownership interest of the holders of our Class A Common Stock. We cannot predict the size of future issuances of our common stock or other equity-related securities or the effect, if any, that they may have on the market price of our Class A Common Stock.

Each of our executive officers, directors and certain of our stockholders has agreed, subject to certain exceptions, to be bound by a lock-up agreement that prevents us and them from selling or transferring shares of our common stock during the 180-day period following this offering. Upon expiration of the lock-up period, these shares will be freely tradable in public markets, subject to the limitations of Rule 144 unless sold under the Company’s current shelf registration statement, which could depress the value of our Class A Common Stock. Moreover, Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. may, in their sole discretion, release any of the shares held by our executive officers, directors and other current stockholders from the restrictions of the lock-up agreement at any time without notice, which would allow the immediate sale of these shares in the market, subject to the limitations of Rule 144. See “Underwriting”.

We do not currently intend to pay dividends on our common stock.

We have not declared or paid any cash dividends on our common stock and we do not plan to do so in the foreseeable future. Any determination to pay dividends to the holders of our common stock will be at the discretion of our board of directors. Further, the payment of cash dividends is restricted under the terms of the Amended Term Loan and may be restricted under the terms of our proposed new credit facility and other future debt agreements. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future.

 

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Investors in this offering will suffer immediate and substantial dilution of their investment.

The offering price of our common stock is higher than the net tangible book value per share of our common stock outstanding upon the completion of this offering. Accordingly, if you purchase Class A Common Stock in this offering, you will experience immediate dilution of approximately $14.59 in the net tangible book value per share of our common stock, based upon the midpoint of the price range set forth on the cover page of this prospectus. This means that investors that purchase shares of our Class A Common Stock in this offering will pay a price per share that exceeds the per share net tangible book value of our assets.

Additionally, as of May 1, 2013, we have a warrant outstanding exercisable for an additional 1,907,550 shares of Class B Common Stock, at an exercise price of approximately $17.08 per share, and outstanding stock options to purchase 576,633 shares of the Company’s Class A Common Stock at an exercise price of $8.66 per share. To the extent the warrant or options are exercised, there will be further dilution.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment.

The price of our Class A Common Stock could be subject to volatility related or unrelated to our operations.

The market price of the Class A Common Stock may fluctuate substantially due to a variety of factors, including:

 

   

market perception of our ability to meet our growth projections and expectations;

 

   

actual or anticipated operating results of the Company and other companies in the same industry;

 

   

changes in expectations as to our future financial performance;

 

   

government regulatory action, changes in analyst or other ratings;

 

   

changes in the homebuilding industry and general valuations for homebuilding companies;

 

   

changes in interest rates or other government policies;

 

   

additions or departures of key personnel, trading volume in our common stock;

 

   

future incurrences of debt or sales of shares, changes in general conditions in the economy and the financial markets; and

 

   

other developments affecting our business and the business of others in our industry.

In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons related and unrelated to their operating performance and could have the same effect on our common stock.

Any of these factors could have a material adverse effect on your investment in our Class A Common Stock and our Class A Common Stock may trade at prices significantly below the offering price. As a result, you could lose some or all of your investment.

We will incur substantial costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

We recently became subject to the reporting requirements of the Securities and Exchange Commission, or the SEC. As a public company, we will incur significant legal, accounting and other expenses, including costs

 

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associated with public company reporting requirements. We also have incurred substantial expenses in connection with the preparation and filing of this registration statement. We will also incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC or any stock exchange or inter-dealer quotations system on which our securities may be listed in the future. The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically in recent years. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are unable to currently estimate these costs with any degree of certainty. We also expect that these new rules and regulations may make it difficult and expensive for us to obtain director and officer liability insurance, and if we are able to obtain such insurance, we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage available to privately-held companies. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to enable the Company to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We have begun the process of documenting, reviewing and improving our internal controls and procedures in order to meet the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal controls over financial reporting beginning with our annual report for the year ending December 31, 2013. We and our independent auditors will be testing our internal controls pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act and could, as part of that documentation and testing, identify areas for further attention or improvement. Implementing any appropriate changes to our internal controls may require additional personnel, specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems and require a significant period of time to complete.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us.

Anti-takeover provisions in our corporate organizational documents, under Delaware law and in our debt covenants could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our capital stock.

Provisions in our corporate organizational documents may have the effect of delaying or preventing a change of control or changes in our management. Such provisions include, but are not limited to:

 

   

authorizing the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

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any action to be taken by holders of our common stock must be effected at a duly called annual or special meeting and not by written consent;

 

   

special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, our Chief Executive Officer or our lead independent director;

 

   

vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director or by the stockholders entitled to vote at any annual or special meeting held in accordance with our bylaws;

 

   

our bylaws require advance notice of stockholder proposals and director nominations;

 

   

an amendment to our bylaws requires a supermajority vote of stockholders; and

 

   

after the conversion of all Class B Common Stock, our board of directors will be staggered into three separate classes, with classes fixed by the board, and, once staggered, the removal of directors requires a supermajority vote of stockholders.

These provisions may frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. See “Where You Can Find More Information” and “Description of Capital Stock” within this prospectus.

In addition, some of our debt covenants contained in the agreements governing our debt may delay or prevent a change in control.

Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which may be senior to our common stock for purposes of liquidating and dividend distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our company.

If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

If a trading market for our Class A Common Stock develops, the trading market will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts who do cover us may make adverse recommendations regarding our stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors.

 

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If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or disposition of shares of our Class A Common Stock.

The Company believes that it is a “United States real property holding corporation,” or USRPHC, for United States federal income tax purposes. If the Company is a USRPHC, non-U.S. holders (as defined in “Material United States Federal Income Tax Considerations” in this prospectus) may be subject to United States federal income tax (including withholding tax) upon a sale or disposition of our Class A Common Stock, if (i) our Class A Common Stock is not regularly traded on an established securities market, or (ii) our Class A Common Stock is regularly traded on an established securities market, and the non-U.S. holder owned, actually or constructively, Class A Common Stock with a fair market value of more than 5% of the total fair market value of such common stock throughout the shorter of the five-year period ending on the date of the sale or other disposition or the non-U.S. holder’s holding period for such common stock.

Other Risks

Because of the adoption of Debtor in Possession Accounting and Fresh Start Accounting, financial information for certain periods and periods subsequent thereto will not be comparable to financial information for other periods.

Upon the filing by the Company and certain of our direct and indirect wholly-owned subsidiaries of voluntary petitions under chapter 11 of Title 11 of the United States Code, as amended, or the Chapter 11 Petitions, we adopted Debtor in Possession Accounting, in accordance with ASC 852. Upon our emergence from the Chapter 11 Cases, we adopted Fresh Start Accounting, in accordance with ASC 852, pursuant to which the midpoint of the range of our reorganization value was allocated to our assets in conformity with the procedures specified by Accounting Standards Codification No. 805, Business Combinations. Accordingly, our financial statements for the period from December 19, 2011 through February 24, 2012 will not be comparable in many respects to our financial statements prior to December 19, 2011 or subsequent to February 24, 2012. The lack of comparable historical financial information may discourage investors from purchasing our securities. The lack of comparable historical financial information may discourage investors from purchasing our securities.

The Company may not be able to benefit from its tax attributes.

In connection with our emergence from Chapter 11 bankruptcy proceedings, we were able to retain the tax basis in our assets as well as a portion of our U.S. net operating loss and tax credit carryforwards, or the Tax Attributes. Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, provide an annual limitation with respect to the ability of a corporation to utilize its Tax Attributes against future U.S. taxable income in the event of a change in ownership. Implementation of the Plan upon our emergence from Chapter 11 bankruptcy proceedings triggered a change in ownership for purposes of Section 382 and our annual Section 382 limitation is $3.6 million. As a result, our future U.S. taxable income may not be fully offset by the Tax Attributes if such income exceeds our annual limitation, and we may incur a tax liability with respect to such income. In addition, subsequent changes in ownership for purposes of the Code could further diminish our ability to utilize Tax Attributes. Our tax attributes are reflected as a deferred tax asset for financial statement purposes, against which we have currently recorded a full valuation allowance.

Future terrorist attacks against the United States or increased domestic or international instability could have an adverse effect on our operations.

Adverse developments in the war on terrorism, future terrorist attacks against the United States, or any outbreak or escalation of hostilities between the United States and any foreign power, including the armed conflicts in Iraq and Afghanistan, may cause disruption to the economy, our Company, our employees and our customers, which could adversely affect our revenues, operating expenses and financial condition.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Investors are cautioned that this prospectus and any accompanying prospectus supplement contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21 of the Securities Exchange Act of 1934, as amended, or the Exchange 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 Securities 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.

Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that actual 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, worsening in general economic conditions either nationally or in regions in which the Company operates, worsening in markets for residential housing, the Company’s ability to acquire land at reasonable prices, changes in home mortgage interest rates or limitations on the availability of mortgage financing, difficulty in obtaining sufficient capital for completion of projects, increases in the Company’s cancellation rate, a decrease in the value of the Company’s land inventory, competition in the homebuilding industry, any construction defect, soil subsidence and building-related and other claims asserted against the Company, inability to obtain suitable bonding for the development of the Company’s communities, 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, inability to comply with financial and other covenants under the Company’s debt instruments, whether the Company is able to refinance the outstanding balances of its debt obligations at their maturity, the Company’s ability to use its deferred tax assets and the timing of receipt of regulatory approvals and the opening of projects. These and other risks and uncertainties are more fully described in the section in the prospectus entitled “Risk Factors.” While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company’s past performance or past or present economic conditions in the Company’s housing markets are not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities laws.

 

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USE OF PROCEEDS

We expect to receive net proceeds from this offering of approximately $137.7 million (assuming an initial public offering price of $23.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for growth capital, including the acquisition of land currently under contract or non-binding letters of intent, and for general corporate purposes.

Prior to application of the proceeds described above, we may hold any net proceeds in cash or invest them in short-term securities or investments.

Each $1.00 increase (decrease) in the assumed initial public offering price of $23.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $6.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $23.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase the net proceeds to us from this offering by approximately $28.4 million, after deducting the underwriting discount and estimated offering expenses payable by us. Conversely, a decrease of 1.0 million shares in the number of shares offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $23.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the net proceeds to us from this offering by approximately $26.6 million, after deducting the underwriting discount and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

We will not receive any of the net proceeds from the sale of shares of our common stock in this offering by the selling stockholder, including any net proceeds from the sale of shares sold by the selling stockholder in connection with the exercise of the underwriters’ option to purchase additional shares.

DIVIDEND POLICY

We do not intend to pay dividends on our common stock in the near future. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors. Additionally, the payment of cash dividends is restricted under the terms of the agreements governing our debt.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the Common Stock Recapitalization; and

 

   

on a pro forma as adjusted basis to give further effect to the issuance and sale by us of 6,525,000 shares of our Class A Common Stock in this offering at an assumed initial public offering price of $23.00 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with “Use of Proceeds”, “Selected Historical Consolidated Financial Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related included elsewhere in this prospectus.

 

     As of March 31, 2013  
(In thousands, except per share amounts)    Actual
(unaudited)
    Pro Forma
(unaudited)(1)
    Pro Forma
as adjusted
(unaudited)(1)(2)
 

Cash and cash equivalents

   $ 66,404      $ 65,056      $ 202,800   
  

 

 

   

 

 

   

 

 

 

Debt:

      

8.5% Senior Notes due November 15, 2020

     325,000        325,000        325,000   

Construction notes payable

     22,269        22,269        22,269   
  

 

 

   

 

 

   

 

 

 

Total debt

     347,269        347,269        347,269   
  

 

 

   

 

 

   

 

 

 

Redeemable Convertible Preferred Stock, par value $0.01 per share, 80,000,000 shares authorized, 77,005,744 issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     71,571        —          —     
  

 

 

   

 

 

   

 

 

 

Equity:

      

William Lyon Homes stockholders’ equity

      

Preferred Stock, par value $0.01 per share, no shares authorized, no shares issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     —          —          —     

Class A Common Stock, par value $0.01 per share, 340,000,000 shares authorized, 70,121,378 issued and outstanding, actual; 150,000,000 shares authorized, 20,446,129 shares issued and outstanding, pro forma; 150,000,000 shares authorized, 26,971,129 shares issued and outstanding, pro forma as adjusted

     701        204        270   

Class B Common Stock, par value $0.01 per share, 50,000,000 shares authorized, 31,464,548 issued and outstanding, actual; 30,000,000 shares authorized, 3,813,885 shares issued and outstanding, pro forma and pro forma as adjusted

     315        38        38   

Class C Common Stock, par value $0.01 per share, 120,000,000 shares authorized, 16,020,338 issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     160        —          —     

Class D Common Stock, par value $0.01 per share, 30,000,000 shares authorized, 3,084,585 issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     31        —          —     

Additional paid-in capital

     73,418        144,606        282,284   

Accumulated deficit

     (15,124     (15,124     (15,124
  

 

 

   

 

 

   

 

 

 

Total William Lyon Homes stockholders’ equity

     59,501        129,724        267,467   
  

 

 

   

 

 

   

 

 

 

Noncontrolling interest

     9,594        9,594        9,594   
  

 

 

   

 

 

   

 

 

 

Total equity

     69,095        139,318        277,061   
  

 

 

   

 

 

   

 

 

 

Total capitalization

     487,935        486,587        624,330   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

 

(1) Reflects a cash payment of $1,347,688 by the Company to the holders of Convertible Preferred Stock upon conversion of our outstanding shares of Convertible Preferred Stock into Class A Common Stock, which represents the amount of accrued but unpaid preferred stock dividends as of March 31, 2013.
(2) A $1.00 increase (decrease) in the assumed initial public offering price of $23.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $6.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us, a portion of which will be reimbursed to us by the underwriters. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us, would increase (decrease) additional paid-in capital, total stockholders’ equity and total capitalization by approximately $21.4 million. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and terms of this offering determined at pricing.

The outstanding share information in the table above excludes the following:

 

   

576,633 shares of Class A Common Stock issuable upon exercise of outstanding stock options, of which 384,422 were vested as of May 1, 2013;

 

   

2,389,058 additional shares of Class A Common Stock that are reserved for future issuance under our incentive award plan; and

 

   

1,907,550 shares of Class B Common Stock issuable to the holder of our Class B Common Stock upon exercise of a warrant entitling such holder to purchase additional shares of Class B Common Stock.

 

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Table of Contents

DILUTION

If you invest in our Class A Common Stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A Common Stock in this offering and the net tangible book value per share of our Class A Common Stock after this offering. Our net tangible book value represents total tangible assets less total liabilities and Convertible Preferred Stock, all divided by the number of shares of common stock outstanding on May 1, 2013. As of March 31, 2013, we had a historical net tangible book value of $50.9 million, or $0.41 per share of common stock. Our pro forma net tangible book value at March 31, 2013, before giving effect to this offering, was $121.1 million, or $4.99 per share of our common stock. Pro forma net tangible book value, before the issuance and sale of shares in this offering, gives effect to the Common Stock Recapitalization.

After giving effect to the sale of shares of Class A Common Stock in this offering at an assumed initial public offering price of $23.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at March 31, 2013 would have been approximately $258.9 million, or $8.41 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $3.42 per share to existing stockholders and an immediate dilution of $14.59 per share to new investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $ 23.00   

Historical net tangible book value per share as of March 31, 2013

     0.41   

Pro forma increase in net tangible book value per share

     4.58   

Pro forma net tangible book value per share as of March 31, 2013

     4.99   

Increase in pro forma net tangible book value per share attributable to new investors

     3.42   

Pro forma as adjusted net tangible book value per share after this offering

     8.41   

Dilution in pro forma net tangible book value per share to new investors participating in this offering

     14.59   

Each $1.00 increase (decrease) in the assumed offering price would increase (decrease) our pro forma net tangible book value by approximately $6.1 million, our pro forma net tangible book value per share after this offering by $0.20 per share and the dilution in pro forma net tangible book value to new investors in this offering by $0.80 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Each increase of 1.0 million shares in the number of shares offered by us at the assumed public offering price would increase our pro forma net tangible book value by approximately $21.4 million, our pro forma net tangible book value per share after this offering by $0.41 per share and the dilution in pro forma net tangible book value to new investors in this offering by $(0.41) per share. Similarly, each decrease of 1.0 million shares in the number of shares offered by us at the assumed public offering price would decrease our pro forma net tangible book value by approximately $21.4 million, our pro forma net tangible book value per share after this offering by $0.44 per share and the dilution in pro forma net tangible book value to new investors in this offering by $(0.44) per share.

If the underwriters exercise their option to purchase up to 1,305,000 additional shares of Class A Common Stock in this offering from us and the selling stockholder, our pro forma as adjusted net tangible book value per share after giving effect to our initial public offering would be approximately $8.68 per share, and the dilution in pro forma net tangible book value per share to investors in our initial public offering would be approximately $14.32 per share.

The discussion and table above exclude, as of May 1, 2013:

 

   

576,633 shares of Class A Common Stock issuable upon exercise of outstanding stock options, of which 384,422 were vested as of May 1, 2013;

 

   

2,389,058 additional shares of Class A Common Stock that are reserved for future issuance under our incentive award plan; and

 

   

1,907,550 shares of Class B Common Stock issuable to the holder of our Class B Common Stock upon exercise of a warrant entitling such holder to purchase additional shares of Class B Common Stock.

 

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Table of Contents

UNAUDITED PRO FORMA OPERATING STATEMENTS

(in thousands except number of shares and per share amounts)

The following unaudited pro forma condensed consolidated statements of operations for the years ended December 31, 2012 and 2011 and the accompanying notes thereto have been prepared to illustrate the effects of certain adjustments related to the consummation of the Plan, giving effect to the adjustments as if the Company had emerged from bankruptcy on January 1, 2011. The pro forma adjustments and certain assumptions underlying these adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed consolidated statements of operations.

The unaudited pro forma condensed consolidated statements of operations does not purport to project our future operating results as of any future date or for any future period. The unaudited pro forma condensed consolidated statements of operations are also not necessarily indicative of what our results of operations would have been if the effectiveness of the Plan had actually occurred as of January 1, 2011.

 

     Period Ended
December  31,
2012
    Plan  of
Reorganization
Adjustments
    Pro forma
Year Ended
December 31,
2012
         Year Ended
December  31,
2011
    Plan of
Reorganization
Adjustments
    Pro forma
Year Ended
December 31,
2011
 

Operating revenue

                

Home sales

   $ 261,297        —        $ 261,297          $ 207,055        —        $ 207,055   

Lots, land and other sales

     104,325        —          104,325            —          —          —     

Construction services

     32,708        —          32,708            19,768        —          19,768   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
     398,330        —          398,330            226,823        —          226,823   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Operating costs

                

Cost of sales—homes

     (217,801     524 (a)      (217,277         (184,489     982 (f)      (183,507

Cost of sales—lots, land and other

     (94,786     —          (94,786         (4,234     —          (4,234

Impairment loss on real estate assets

     —          —          —              (128,314     —          (128,314

Construction services

     (29,639     —          (29,639         (18,164     —          (18,164

Sales and marketing

     (15,872     —          (15,872         (16,848     —          (16,848

General and administrative

     (29,397     —          (29,397         (22,411     —          (22,411

Amortization of intangible assets

     (5,757     4,084 (b)      (1,673         —          (3,151 )(g)      (3,151

Other

     (3,096     —          (3,096         (3,983     —          (3,983
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
     (396,348     4,608        (391,740         (378,443     (2,169     (380,612
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Equity in income of unconsolidated joint ventures

     —          —          —              3,605        —          3,605   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1,982        4,608        6,590            (148,015     (2,169     (150,184

Loss on extinguishment of debt

     (1,392     —          (1,392         —          —          —     

Interest expense, net of amounts capitalized

     (11,634     363 (c)      (11,271         (24,529     9,778 (h)      (14,751

Other income, net

     1,758        —          1,758            838        —          838   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Loss before reorganization items and provision for income taxes

     (9,286     4,971        (4,315         (171,706     7,609        (164,097

Reorganization items, net

     230,933        (230,933 )(d)      —              (21,182     21,182 (i)      —     
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     221,647        (225,962     (4,315         (192,888     28,791        (164,097

Provision for incomes taxes

     (11     —          (11         (10     —          (10
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income (loss)

     221,636        (225,962     (4,326         (192,898     28,791        (164,107

Less: Net income attributable to noncontrolling interest

     (2,112     —          (2,112         (432     —          (432
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to William Lyon Homes

     219,524        (225,962     (6,438         (193,330     28,791        (164,539

Preferred stock dividends

     (2,743     (459 )(e)      (3,202         —          (3,023 )(j)      (3,023
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ 216,781      $ (226,421   $ (9,640       $ (193,330   $ 25,768      $ (167,562
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Income (loss) per common share, basic and diluted

   $ 2.10        —        $ (0.10       $ (193,330     —        $ (1.81

Weighted average common shares outstanding, basic and diluted

     103,037,842        —          101,434,476            1,000        92,367,169 (k)      92,368,169   

Weighted average additional common shares outstanding if preferred shares converted to common shares

     68,002,529        —          67,526,058            —          64,831,831 (k)      64,831,831   

 

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Table of Contents

 

(a) Reflects adjustments made to cost of sales based on the fair value of inventory per the plan or reorganization. Adjustments were made to real estate inventories on a per project basis, were allocated pro rata to the number of homes in the project, and relieved to cost of sales based on the number of homes closed during the period.
(b) Reflects the adjustment to amortization of intangible assets based on the Company emerging from Chapter 11 on January 1, 2011. The adjustment is comprised primarily of $4.0 million relating to amortization of homes in backlog that would have been fully amortized in the prior year, as well as adjustments to amortization of construction management contracts and joint venture management contracts for the period from January 1, 2012 through February 24, 2012.
(c) Reflects the adjustment to interest expense based on the Prepetition Term Loan of $206.0 million at 14% interest and the Old Notes of $283.5 million at interest rates between 7.5% and 10.75%, post-bankruptcy emergence Amended Term Loan of $235.0 million at 10.25% interest, zero Old Notes and New Notes of $75.0 million at 12% interest for the period from January 1, 2012 through February 24, 2012.
(d) Reflects the reversal of reorganization items comprised of cancellation of debt of $298.9 million, plan implementation adjustments of $49.3 million, professional fees of $9.7 million and write-off of deferred loan costs of $8.3 million.
(e) Reflects the amount of preferred stock dividends that would have been accrued for the period from January 1, 2012 through February 24, 2012.
(f) Reflects adjustments made to cost of sales based on the fair value of inventory per the plan of reorganization. Adjustments were made to real estate inventories on a per project basis, were allocated pro rata to the number of homes in the project, and relieved to cost of sales based on the number of homes closed during the year.
(g) Reflects the adjustment to amortization of intangible assets based on the Company emerging from Chapter 11 on January 1, 2011. The Company would have recorded intangible assets relating to homes in backlog with a fair value of $2.4 million, which would have been fully amortized during the 2011 period, as all the homes in backlog at January 1, 2011 closed during the 2011 period. Additionally, the Company would have recorded intangible assets relating to construction management contracts of $4.6 million and joint venture management contracts of $0.8 million and would have recorded amortization expense based on the number of homes closed of $0.6 million and $0.2 million respectively.
(h) Reflects the adjustment to interest expense based on California Lyon’s pre-bankruptcy petition loan agreement with ColFin WLH Funding, LLC and certain other lenders, or the Prepetition Term Loan, of $206.0 million at 14% interest and Old Notes of $283.5 million at interest rates between 7.5% and 10.75% versus the Amended Term Loan of $235.0 million at 10.25% interest, no outstanding balance on Old Notes and New Notes of $75.0 million at 12% interest for the 2011 period.
(i) Reflects the reversal of reorganization items, which is comprised of legal and professional fees incurred in connection with the Chapter 11 cases.
(j) Reflects the amount of preferred stock dividends that would have been accrued had the Company emerged from Chapter 11 on January 1, 2011.
(k) Reflects the weighted average common shares outstanding in accordance with the plan of reorganization.

 

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Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth certain of the Company’s historical financial data. The selected historical consolidated statement of operations data, other financial data and operating data as of December 31, 2012 and 2011 and for the period from February 25, 2012 through December 31, 2012, the period from January 1, 2012 through February 24, 2012 and the years ended December 31, 2011 and 2010 has been derived from the Company’s audited consolidated financial statements and the related notes included elsewhere herein. The selected historical consolidated financial data as of December 31, 2010, 2009 and 2008 and for the years ended December 31, 2009 and 2008 has been derived from the Company’s audited financial statements for such years, which are not included herein. The selected historical consolidated statement of operations data, other financial data and operating data for the quarterly period ended March 31, 2013 and the period from February 25, 2012 through March 31, 2012 and balance sheet data as of March 31, 2013 have been derived from our unaudited financial statements and the related notes included elsewhere herein.

Unless otherwise stated or the context otherwise requires, any reference hereinafter to the “Successor” reflects the operations of the Company post-emergence from February 25, 2012, or the Emergence Date, through March 31, 2012 and December 31, 2012 as applicable, and any reference to the “Predecessor” refers to the operations of the Company prior to the Emergence Date. As a result of the consummation of the Plan on the Emergence Date, the Company adopted Fresh Start Accounting in accordance with ASC 852.

The selected historical consolidated financial data set forth below are not necessarily indicative of the results of future operations. Fresh start accounting required us to value our assets and liabilities to their related fair values. In addition, we adjusted our accumulated deficit to zero at the Emergence Date. Items such as accumulated depreciation, amortization and accumulated deficit were reset to zero. We allocated the reorganization value to the individual assets and liabilities based on their estimated fair values. Items such as accounts receivable, prepaid and other assets, accounts payable, certain accrued liabilities and cash, whose fair values approximated their book values, reflected values similar to those reported prior to emergence from bankruptcy. Items such as real estate inventories, property, plant and equipment, certain notes receivable, certain accrued liabilities and notes payable were adjusted from amounts previously reported. Because we adopted fresh start accounting at emergence and because of the significance of liabilities subject to compromise that were relieved upon emergence from bankruptcy, the historical financial statements of the Predecessor and the financial statements of the Successor are not comparable. Refer to the notes to our consolidated financial statements included in this prospectus for further details relating to fresh start accounting.

You should read this summary in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical consolidated financial statements and accompanying notes included elsewhere herein.

 

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Table of Contents
    Successor(1)         Predecessor(1)  
($ in thousands except
per share data)
  Three Months
Ended
March 31,

2013
(unaudited)
    Period from
February 25,
through
December 31,
2012
    Period From
February 25,
through
March 31,
2012
(unaudited)
        Period from
January 1,
through
February 24,
2012
    Year Ended
December 31,
 
            2011     2010     2009     2008  

Statement of Operations Data:

                 

Revenues

                 

Home Sales

  $ 76,434      $ 244,610      $ 15,109        $ 16,687      $ 207,055      $ 266,865      $ 253,874      $ 468,452   

Lots, land and other sales

    —          104,325        —            —          —          17,204        21,220        39,512   

Construction services

    4,419        23,825        3,195          8,883        19,768        10,629        34,149        18,114   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    80,853        372,760        18,304          25,570        226,823        294,698        309,243        526,078   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (812     4,666        (2,962       (2,684     (148,015     (117,843     (161,301     (193,859

Loss before reorganization items and (provision) benefit from income taxes

    (2,009     (4,325     (4,629       (4,961     (171,706     (135,867     (122,861     (163,676

Reorganization items, net(2)

    (464     (2,525     (353       223,458        (21,182     —          —          —     

Net (loss) income

    (2,473     (6,861     (4,982       228,497        (192,898     (135,455     (20,593     (122,084

Net (loss) income available to common stockholders

  $ (3,522   $ (11,602   $ (5,351     $ 228,383        (193,330   $ (136,786   $ (20,525   $ (111,638
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income per common share:

                 

Basic and diluted

  $ (0.03   $ (0.11   $ (0.06     $ 228,383      $ (193,330   $ (136,786   $ (20,525   $ (111,638

Weighted average common shares outstanding

                 

Basic and diluted:

    120,300,654        103,037,842        92,368,169          1,000        1,000        1,000        1,000        1,000   

Other Financial Data:

                 

Adjusted homebuilding gross margin(3)

  $ 17,738      $ 64,135      $ 3,173        $ 3,449      $ 40,468      $ 57,876      $ 52,366      $ 67,083   

Adjusted homebuilding gross margin percentage(3)

    23.2     26.2     21.0       20.7     19.6     21.7     20.6     14.3

Adjusted EBITDA(4)

  $ 4,593      $ 39,792      $ (728     $ (8,435   $ (21,357   $ 16,612      $ (95,666   $ 3,191   

Adjusted EBITDA margin percentage(5)

    5.7     10.7     (4.0 %)        (33.0 %)      (9.4 %)      4.5     (30.9 %)      0.6

Operating Data (including consolidated joint ventures) (unaudited):

                 

Number of net new home orders

    361        956        146          175        669        650        869        1,221   

Number of homes closed

    268        883        61          67        614        760        915        1,260   

Average sales price of homes closed

  $ 285      $ 277      $ 248        $ 249      $ 337      $ 351      $ 278      $ 372   

Cancellation rates

    12     15     8       8     18     19     21     28

Average number of sales locations

    23        18        20          20        19        18        25        44   

Backlog at end of period, number of homes(6)

    498        406        332          246        139        84        194        240   

Backlog at end of period, aggregate sales value(6)

  $ 170,798      $ 115,449      $ 79,408        $ 63,434      $ 29,329      $ 30,077      $ 56,472      $ 80,750   

 

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    Successor(1)         Predecessor(1)  
    March 31,
2013
    December 31,
2012
        December 31  
            2011     2010     2009     2008  
(in thousands)                                        

Balance Sheet Data:

             

Cash and cash equivalents

  $ 66,404      $ 71,075        $ 20,061      $ 71,286      $ 117,587      $ 67,017   

Real estate inventories—Owned

    439,491        421,630          398,534        488,906        523,336        754,489   

Real estate inventories—Not owned

    39,029        39,029          47,408        55,270        55,270        107,763   

Total assets

    598,906        581,147          496,951        649,004        860,099        1,044,843   

Total debt

    347,269        338,248          563,492        519,731        590,290        670,905   

Redeemable convertible preferred stock

    71,571        71,246          —          —          —          —     

Total William Lyon Homes stockholders’ equity (deficit)

    59,501        62,712          (179,516     13,814        150,600        171,125   

 

(1)   Successor refers to William Lyon Homes and its consolidated subsidiaries on and after the Emergence Date, after giving effect to: (i) the cancellation of shares of our common stock issued prior to February 25, 2012; (ii) the issuance of shares of new common stock, and settlement of existing debt and other adjustments in accordance with the Plan; and (iii) the application of fresh start accounting. Predecessor refers to William Lyon Homes and its consolidated subsidiaries up to the Emergence Date. In relation to the adoption of fresh start accounting in conjunction with the confirmation of the Plan, the results of operations for 2012 separately present the period from January 1, 2012 through February 24, 2012 as the pre-bankruptcy emergence, predecessor entity and the periods from February 25, 2012 through March 31, 2012 and from February 25, 2012 through December 31, 2012 as the successor entity. As such, the application of fresh start accounting as described in Note 2 of the “Notes to Consolidated Financial Statements” is reflected in the period from February 25, 2012 through December 31, 2012 and not the period from January 1, 2012 through February 24, 2012. Certain statistics including (i) net new home orders, (ii) average number of sales locations, (iii) backlog, (iv) number of homes closed, (v) homes sales revenue and (vi) average sales price of homes closed are not affected by the fresh start accounting.
(2)   The Company recorded reorganization items of $(0.5) million, $(2.5) million, $(0.4) million, $233.5 million and $(21.2) million during the three months ended March 31, 2013, the period from February 25, 2012 through December 31, 2012, the period from February 25, 2012 through March 31, 2012, the period from January 1, 2012 through February 24, 2012, and the year ended December 31, 2011, respectively. See Note 4 of “Notes to Consolidated Financial Statements.”
(3)   Adjusted homebuilding gross margin is a non-U.S. GAAP financial measure used by management and our local divisions in evaluating operating performance and in making strategic decisions regarding sales pricing, construction and development pace, product mix and other operating decisions. We believe this information is meaningful as it isolates the impact that interest has on homebuilding gross margin and permits investors to make better comparisons with our competitors, who also break out and adjust gross margins in a similar fashion. A reconciliation of adjusted homebuilding gross margin to homebuilding gross margin is provided as follows:

 

    Successor(1)    

 

  Predecessor(1)  
    Three Months
Ended
March 31,
2013
(unaudited)
    Three  Months
Ended
December  31,
2012
    Period from
February 25,
through
March 31,
2012
(unaudited)
    Period from
February 25
through
December 31,
2012
   

 

  Period from
January 1
through
February 24,
2012
    Three  Months
Ended
December 31,
2011
    Year Ended December 31,  
           

 

      2011     2010     2009     2008  
(dollars in thousands)                                                       

Home sales revenue

  $ 76,434      $ 98,633      $ 15,109      $ 244,610          $ 16,687      $ 58,983      $ 207,055      $ 266,865      $ 253,874      $ 468,452   

Cost of home sales

    (63,328     (81,048     (13,063     (203,203         (14,598     (54,849     (184,489     (225,751     (219,486     (439,276
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross margin

    13,106        17,585        2,046        41,407            2,089        4,134        22,566        41,114        34,388        29,176   

Add: Interest in cost of sales

    4,632        11,528        1,127        22,728            1,360        6,565        18,082        16,762        17,978        37,907   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin

  $ 17,738      $ 29,113      $ 3,173      $ 64,135          $ 3,449      $ 10,699      $ 40,648      $ 57,876      $ 52,366      $ 67,083   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin percentage

    23.2     29.5     21.0     26.2         20.7     18.1     19.6     21.7     20.6     14.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(4)   Adjusted EBITDA is a financial measure that is not prepared in accordance with U.S. GAAP. Adjusted EBITDA means net (loss) income plus (i) provision for (benefit from) income taxes, (ii) interest expense, (iii) amortization of capitalized interest included in cost of sales, (iv) non-cash impairment charges, (v) gain (loss) on retirement of debt, (vi) loss on sale of fixed assets, (vii) depreciation and amortization, (viii) distributions of income from unconsolidated joint ventures less equity in income of unconsolidated joint ventures, (ix) equity in (income) loss of unconsolidated joint ventures less equity in income of unconsolidated joint ventures, (x) stock based compensation expense and (xi) non-cash reorganization items. Other companies may calculate adjusted EBITDA differently. Adjusted EBITDA is presented herein because management believes the presentation of adjusted EBITDA provides useful information to the Company’s investors regarding the Company’s financial condition and results of operations because adjusted EBITDA is a widely utilized indicator of a company’s operating performance. Adjusted EBITDA should not be considered as an alternative for net (loss) income, cash flows from operating activities and other consolidated income or cash flow statement data prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. A reconciliation of net (loss) income attributable to the Company to adjusted EBITDA is provided as follows:

 

    Successor(1)          Predecessor(1)  
    Three
Months
Ended
March 31,
2013

(unaudited)
    Period from
February 25,
through
December 31,
2012
    Period From
February 25,
through
March 31,
2012
(unaudited)
         Period from
January 1,
through
February 24,
2012
    Year Ended
December 31,
 
              2011     2010     2009     2008  

Net (loss) income attributable to William Lyon Homes

  $ (2,548   $ (8,859   $ (5,059       $ 228,383      $ (193,330   $ (136,786   $ (20,525   $ 111,638   

Provision for (benefit from) income taxes

    —          11        —              —          10        (412     (101,908     (41,592

Interest expense

                   

Interest incurred

    7,151        30,526        4,234            7,145        61,464        62,791        48,782        66,748   

Interest capitalized

    (5,867     (21,399     (2,520         (4,638     (36,935     (39,138     12,880        (42,308

Amortization of capitalized interest included in cost of sales

    4,632        27,791        1,127            1,360        18,082        16,762        17,978        37,907   

Non-cash impairment charge

    —          —          —              —          128,314        111,860        45,269        141,207   

Gain (loss) on extinguishment of debt

    —          1,392        —              —          —          (5,572     (78,144     (54,044

Loss on sale of fixed assets

    —          —          —              —          83        122        3,009        —     

Depreciation and amortization

    914        6,631        1,490            586        3,875        3,718        1,493        2,218   

Distributions of income from unconsolidated joint ventures

    —          —          —              —          685        4,183        840        816   

Equity in (income) loss of unconsolidated joint ventures

    —          —          —              —          (3,605     (916     420        3,877   

Stock-based compensation

    311        3,699        —              —          —          —          —          —     

Non-cash reorganization items

    —          —          —              (241,271     —          —          —          —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 4,593      $ 39,792      $ (728       $ (8,435   $ (21,357   $ 16,612      $ (95,666   $ 3,191   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(5)   Adjusted EBITDA margin percentage is calculated as Adjusted EBITDA, as defined in (4) above, divided by total revenues during the period.
(6)   Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of March 31, 2013 and December 31, 2012, 416 and 352, respectively, represent homes completed or under construction and 82 and 54, respectively, represent homes not yet under construction.

 

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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 Historical Consolidated Financial Data,” the “Consolidated Financial Statements,” the “Notes to Consolidated Financial Statements,” and other financial information appearing elsewhere in this prospectus. As used herein, “on a consolidated basis” means the total of operations in wholly-owned projects and in consolidated joint venture projects.

Except where otherwise noted, the information in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” does not give effect to Common Stock Recapitalization.

Overview

The Company is one of the largest Western U.S. regional homebuilders. Headquartered in Newport Beach, California, the Company is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado. The Company’s core markets include Orange County, Los Angeles, San Diego, the San Francisco Bay Area, Phoenix, Las Vegas and Denver. The Company has a distinguished legacy of more than 55 years of homebuilding operations, over which time it has sold in excess of 75,000 homes. For the three months ended March 31, 2013, or the first quarter of 2013, the Company had revenues from homes sales of $76.4 million, a 140% increase from $31.8 million for the three months ended March 31, 2012, which includes the “Predecessor” entity from January 1, 2012 through February 24, 2012, and the “Successor” entity from February 25, 2012 through March 31, 2012, or the first quarter of 2012, on a consolidated basis, which includes results from all five reportable operating segments. The Company had net new home orders of 361 homes in the first quarter of 2013, a 12% increase from 321 in the first quarter of 2012, and the average sales price for homes closed increased 15% to $285,200 in the first quarter of 2013 from $248,400 in the first quarter of 2012. For the year ended December 31, 2012, which includes the “Predecessor” entity from January 1, 2012 through February 24, 2012, and the “Successor” entity from February 25, 2012 through December 31, 2012, or the 2012 period, on a combined basis, which includes results from all five reportable operating segments, the Company had revenues from homes sales of $261.3 million, a 26% increase from $207.1 million for the year ended December 31, 2011, or the 2011 period. The Company had net new home orders of 1,131 homes in the 2012 period, a 69% increase from 669 in the 2011 period, and the average sales price for homes closed decreased 18% to $275,100 in the 2012 period from $337,200 in the 2011 period.

The Company acquired Village Homes of Denver, Colorado on December 7, 2012, which marked the beginning of the Colorado segment. Financial data included herein as of December 31, 2012, and for the period from February 25, 2012 through December 31, 2012, includes operations of the Colorado segment from December 7, 2012 (date of acquisition) through December 31, 2012.

Chapter 11 Reorganization

On December 19, 2011, William Lyon Homes, or Parent, and certain of its direct and indirect wholly-owned subsidiaries filed voluntary petitions, or the Chapter 11 Petitions, in the U.S. Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, to seek approval of the Plan, of Parent and certain of its subsidiaries. Prior to filing the Chapter 11 Petitions, Parent’s wholly-owned subsidiary, William Lyon Homes, Inc., or California Lyon, was in default under the Prepetition Term Loan, due to its failure to comply with certain financial covenants in the Prepetition Term Loan. In addition, the Company became increasingly uncertain of its ability to repay or refinance its then-outstanding 7 5/8% Senior Notes when they matured on December 15, 2012. Beginning in April 2010, California Lyon entered into a series of amendments and temporary waivers with the lenders under the Prepetition Term Loan related to these defaults, which prevented acceleration of the indebtedness outstanding

 

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under the Prepetition Term Loan and enabled the Company to negotiate a financial reorganization to be implemented through the bankruptcy process with its key constituents prior to the Chapter 11 Petitions. The Chapter 11 Petitions were jointly administered under the caption In re William Lyon Homes, et al., Case No. 11-14019, or the Chapter 11 Cases. The sole purpose of the Chapter 11 Cases was to restructure the debt obligations and strengthen the balance sheet of the Parent and certain of its subsidiaries.

On February 10, 2012, the Bankruptcy Court confirmed the Plan. On February 25, 2012, Parent and its subsidiaries consummated the principal transactions contemplated by the Plan, including:

 

   

the issuance of 44,793,255 shares of Parent’s new Class A Common Stock, $0.01 par value per share, or the Class A Common Stock, and $75 million aggregate principal amount of Old Notes, issued by California Lyon, in exchange for the claims held by the holders of the formerly outstanding notes of California Lyon;

 

   

the amendment of the Prepetition Term Loan, or the Amended Term Loan, which resulted, among other things, in the increase in the principal amount outstanding under the Prepetition Term Loan, the reduction in the interest rate payable under the Prepetition Term Loan, and the elimination of any prepayment penalty under the Prepetition Term Loan;

 

   

the issuance, in exchange for cash and land deposits of $25 million, of 31,464,548 shares of Parent’s new Class B Common Stock, $0.01 par value per share, or Class B Common Stock, and a warrant to purchase 15,737,294 shares of Class B Common Stock;

 

   

the issuance of 64,831,831 shares of Parent’s new Convertible Preferred Stock, $0.01 par value per share, or Convertible Preferred Stock, and 12,966,366 shares of Parent’s new Class C Common Stock, $0.01 par value per share, or Class C Common Stock, in exchange for aggregate cash consideration of $60 million; and

 

   

the issuance of an additional 3,144,000 shares of Class C Common Stock pursuant to an agreement with Luxor to backstop the offering of shares of Class C Common Stock and shares of Convertible Preferred Stock in connection with the Plan.

Basis of Presentation

The accompanying consolidated financial statements included herein have been prepared under U.S. Generally Accepted Accounting Principles, or U.S. GAAP, and the rules and regulations of the Securities and Exchange Commission, or the SEC, and are presented on a going concern basis, which assumes the Company will be able to operate in the ordinary course of its business and realize its assets and discharge its liabilities for the foreseeable future.

Consequences of Chapter 11 Cases—Debtor in Possession Accounting

Accounting Standards Codification Topic 852-10-45, Reorganizations-Other Presentation Matters, which is applicable to companies in Chapter 11 proceedings, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for the periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Amounts that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statement of operations for the year ended December 31, 2011 and all subsequent periods through the date of emergence. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, cash provided or used by reorganization items must be disclosed separately in the statement of cash flows. The Company applied ASC 852-10-45 effective on December 19, 2011 and is segregating those items as outlined above for all reporting periods subsequent to such date through the date of emergence, as applicable.

 

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The Predecessor consolidated financial statements included in the consolidated financial statements provide for the outcome of the Plan, in particular:

 

   

pre-petition liabilities, the amounts that will ultimately be allowed for claims or contingencies, or the status and priority thereof;

 

   

the reorganization items upon confirmation of the reorganization;

 

   

the fair value of all asset, liability and equity accounts and the effect of any changes that may be made in the capitalization.

In preparing the consolidated financial statements for the Predecessor, we applied ASC 852, which requires that the financial statements for periods subsequent to the reorganization filing distinguish transactions and events that were directly associated with the reorganization from the ongoing operations of the business. Accordingly, professional fees associated with the Plan, interest income earned during the reorganization process and certain gains and losses resulting from reorganization of our business have been reported separately as reorganization items. In addition, interest expense has been reported only to the extent that it was paid or expected to be paid during the reorganization process or that it is probable that it will be an allowed priority, secured, or unsecured claim under the Plan.

Upon emergence from the reorganization process, we adopted fresh start accounting in accordance with ASC 852. The adoption of fresh start accounting results in our becoming a new entity for financial reporting purposes. Accordingly, the Consolidated Financial Statements on or after February 25, 2012 are not comparable to the Consolidated Financial Statements prior to that date. See Note 2 of “Notes to Consolidated Financial Statements”.

Fresh start accounting requires resetting the historical net book value of assets and liabilities to fair value by allocating the entity’s reorganization value to its assets pursuant to Accounting Standards Codification Topic 805, Business Combinations, and Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures. The excess reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill on the Consolidated Balance Sheet. Deferred taxes are determined in conformity with Accounting Standards Codification Topic 740, Income Taxes, or ASC 740. For additional information regarding the impact of fresh start accounting on our Consolidated Balance Sheet as of December 31, 2012, see Note 3 of “Notes to Consolidated Financial Statements.”

Results of Operations

The U.S. housing market continues to improve from the cyclical low points reached during the 2008—2009 national recession. In 2011, early signs of a recovery began to materialize in many markets around the country as a result of an improving macroeconomic backdrop and excellent housing affordability. Historically, strong housing markets have been associated with great affordability, a healthy domestic economy, positive demographic trends such as population growth and household formation, falling mortgage rates, increases in renters that qualify as homebuyers and locally based dynamics such as housing demand relative to housing supply. Many markets across the U.S. are exhibiting most of these positive characteristics.

In the three months ended March 31, 2013 and the year ended December 31, 2012, the Company delivered 268 and 950 homes, respectively, with an average selling price of approximately $285,200 and $275,100, respectively, and recognized home sales revenues and total revenues of $76.4 million and $80.9 million, respectively, during the three months ended March 31, 2012, and $261.3 million and $398.3 million, respectively, during the year ended December 31, 2012. The Company has experienced significant operating momentum since the beginning of 2012, during which time a variety of key housing, employment and other related economic statistics in our markets have increasingly demonstrated signs of recovery. This rebound in market conditions, when combined with the Company’s disciplined operating strategy, has resulted in five consecutive quarters of

 

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period over period growth in net new home orders, home closings and unit backlog. The improving market conditions and increase in pricing is reflected in our average sales price of homes in backlog of $343,000 at March 31, 2013 which is 20% higher than the average sales price of $285,200 for homes sold in the three months ended March 31, 2013.

As of March 31, 2013 the Company was selling homes in 22 communities and had a consolidated backlog of 498 sold but unclosed homes, with an associated sales value of $170.8 million, representing a 50% and 115% increase in units and dollars, respectively, as compared to the backlog at March 31, 2012. As of December 31, 2012, the company had a consolidated backlog of 406 sold but unclosed homes, with an associated sales value of $115.4 million. The Company believes that the attractive fundamentals in its markets, its leading market share positions, its long-standing relationships with land developers, its significant land supply and its focus on providing the best possible customer experience, positions the Company to capitalize on meaningful growth as the U.S. housing market continues to rebound.

Homebuilding gross margin percentage and adjusted homebuilding gross margin percentage increased to 17.1% and 23.2%, respectively, for the three months ended March 31, 2013, as compared to 13.0% and 20.8%, respectively, for the three months ended March 31, 2012. Homebuilding gross margin percentage and adjusted homebuilding gross margin percentage was 16.6% and 25.9%, respectively, for the year ended December 31, 2012. The increase in gross margins is primarily related to an increase in net sales prices during the period and an increase in absorption, which decreases certain project related costs. The increase in gross margins is also attributed to the impact of fresh start accounting which resulted in a net decrease to the cost basis of our properties, which subsequently increased gross margins.

The Company benefits from a sizeable and well-located lot supply. As of March 31, 2013, the Company and its consolidated joint ventures owned 10,682 lots, all of which are entitled, and had options to purchase an additional 2,529 lots, an increase over 10,593 lots owned and options to purchase 1,249 lots as of December 31, 2012. The Company’s lot supply reflects its balanced approach to land investment. The Company has a diverse mix of finished lots available for near-term homebuilding operations and longer-term strategic land positions to support future growth. The Company believes that its current inventory of owned and controlled lots is sufficient to supply the vast majority of its projected future home closings for the next three years and a portion of future home closings for a multi-year period thereafter. The Company’s meaningful supply of owned lots allows it to be selective in identifying new land acquisition opportunities, with a primary focus on optioning and acquiring land to drive closings, revenues and earnings growth in 2015 and beyond, and largely insulates it from the heavy competition for near-term finished lots.

The Company also benefits from an attractive book value basis in its inventory, which was adjusted to fair value in February 2012 in conjunction with the restructuring and in accordance with fresh start accounting requirements. To facilitate the adoption of fresh start accounting, the Company engaged a third-party valuation firm to assist in a comprehensive assessment of the Company’s enterprise value and the allocation of value to its assets and liabilities. In the assessment, the Company generally utilized assumptions for future home sales paces and prices based upon then-prevailing market conditions in late 2011, which represented conditions near the trough of the recent U.S. housing downturn.

The Company acquired Village Homes of Denver, Colorado on December 7, 2012 which marked the Company’s entry into the Colorado market and the beginning of the Colorado segment. Financial data included herein as of December 31, 2012, includes operations of the Colorado segment from December 7, 2012 (date of acquisition) through December 31, 2012. There were no operations in our Colorado division for the period from January 1, 2012 through February 24, 2012, and the period from February 25, 2012 through March 31, 2012, therefore year over year comparisons are not meaningful (“N/M”) as indicated in the comparative tables below.

Comparisons of the Three Months Ended March 31, 2013 to March 31, 2012

Revenues from homes sales increased 140% to $76.4 million during the three months ended March 31, 2013 compared to $31.8 million during the three months ended March 31, 2012. The increase is primarily due to an

 

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increase of 109% in homes closed to 268 homes during the first quarter of 2013 compared to 128 homes during the first quarter of 2012, along with an increase in the average sales price of homes closed to $285,200 in the first quarter of 2013 compared to $248,400 in the first quarter of 2012. The number of net new home orders for the three months ended March 31, 2013 increased 12% to 361 homes from 321 homes for the three months ended March 31, 2012.

The average number of sales locations of the Company increased to 23 locations for the three months ended March 31, 2013 compared to 20 for the three months ended March 31, 2012 due to the addition of the Colorado division which added five new communities, and the addition of four communities in Arizona, offset by the close out of communities in California.

In relation to the adoption of fresh start accounting in conjunction with the confirmation of the Plan, the results of operations for 2012 separately present the period from January 1, 2012 through February 24, 2012 as Predecessor and the period from February 25, 2012 through March 31, 2012 as Successor. As such, the application of fresh start accounting is reflected in the period from February 25, 2012 through March 31, 2012 and not the period from January 1, 2012 through February 24, 2012. The accounts reflected in the tables below, including gross margin percentage, sales and marketing expense, and general and administrative expense, are affected by the fresh start accounting. Certain statistics including (i) net new home orders, (ii) average number of sales locations, (iii) backlog, (iv) number of homes closed, (v) homes sales revenue and (vi) average sales price of homes closed are not affected by the fresh start accounting. These items are described period over period “on a combined basis”, which combines the predecessor and successor entities for the three months ended March 31, 2012.

 

    Successor     Combined     Successor     Predecessor     Increase (Decrease)  
    Three Months
Ended
March 31,
2013
    Three Months
Ended
March 31,
2012
    Period from
February 25 through
March 31,

2012
    Period from
January 1 through
February 24,

2012
    Amount     %  

Number of Net New Home

             

Orders

             

Southern California

    68        83        45        38        (15     (18 %) 

Northern California

    53        55        32        23        (2     (4 %) 

Arizona

    93        123        30        93        (30     (24 %) 

Nevada

    98        60        39        21        38        63

Colorado

    49        —          —          —          49        N/M   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

    361        321        146        175        40        12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cancellation Rate

    12     9           3  
 

 

 

   

 

 

         

 

 

   

The weekly average sales rates remained consistent at 1.2 sales per project during the first quarter of 2013 and the first quarter of 2012. The increase in net new homes orders was driven by the addition of our Colorado division and the 63% improvement in Nevada. Total orders in Southern California and Northern California decreased due to a 50% decrease in average sales locations, however sales per location increased in Southern California from 10.4 in the first quarter of 2012 to 17.0 in the first quarter of 2013 and increased in Northern California from 13.8 in the first quarter of 2012 to 26.5 in the first quarter of 2013. In Arizona, sales per location in the first quarter of 2012 were exceptionally high at 61.5, and have returned to a more normalized rate in the first quarter of 2013. In addition, we have opened new communities in well located areas with strong homebuyer demand. The increase in net new home orders positively impacts the number of homes in backlog, which are homes that will close in future periods. As new home orders and backlog increase, it has a positive impact on revenues and cash flow in future periods.

 

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Cancellation rates during the first quarter of 2013 increased to 12% from 9% during the first quarter of 2012, which is common in an increasing market, but have improved from 14% for the year ended December 31, 2012.

 

     Successor               
     Three Months Ended March 31,      Increase (Decrease)  
     2013      2012      Amount     %  

Average Number of Sales

          

Locations

          

Southern California

     4         8         (4     (50 %) 

Northern California

     2         4         (2     (50 %) 

Arizona

     6         2         4        200

Nevada

     6         6         —          0

Colorado

     5         —           5        N/M   
  

 

 

    

 

 

    

 

 

   

Total

     23         20         3        15
  

 

 

    

 

 

    

 

 

   

The average number of sales locations for the Company increased to 23 locations for the three months ended March 31, 2013 compared to 20 for the three months ended March 31, 2012. Southern California and Northern California decreased by four and two sales locations, respectively, in the first quarter of 2013 compared to the first quarter of 2012, while Arizona increased by four sales locations and Nevada remained consistent in the 2013 period compared to the first quarter of 2012. For the three months ended March 31, 2013, the Colorado division had five sales locations, with no comparable amount in the first quarter of 2012.

 

     Successor               
     March 31,      Increase (Decrease)  
     2013      2012      Amount     %  

Backlog (units)

          

Southern California

     78         82         (4     (5 %) 

Northern California

     50         56         (6     (11 %) 

Arizona

     165         146         19        13

Nevada

     123         48         75        156

Colorado

     82         —           82        N/M   
  

 

 

    

 

 

    

 

 

   

Total

     498         332         166        50
  

 

 

    

 

 

    

 

 

   

The Company’s backlog at March 31, 2013 increased 50% from 332 units at March 31, 2012 to 498 units at March 31, 2013. The increase is primarily attributable to an increase in net new home orders during the period driven by the Nevada division, which had a 63% increase in net new home orders, which contributed to a 156% increase in backlog, as well as the addition of our Colorado division. The increase in backlog at March 31, 2013 reflects an increase in the number of homes closed to 268 during the three months ended March 31, 2013 from 128 during the three months ended March 31, 2012, and a 12% increase in total net new order activity to 361 homes during the three months ended March 31, 2013 from 321 homes during the three months ended March 31, 2012. All divisions continue their strong performance due to increased homebuyer confidence and demand.

 

     Successor                
     March 31,      Increase (Decrease)  
     2013      2012      Amount      %  

Backlog (dollars)

           

Southern California

   $ 46,513       $ 34,025       $ 12,488         37

Northern California

     17,561         17,231         330         2

Arizona

     40,889         20,369         20,520         101

Nevada

     33,832         7,783         26,049         335

Colorado

     32,003         —           32,003         N/M   
  

 

 

    

 

 

    

 

 

    

Total

   $ 170,798       $ 79,408       $ 91,390         115
  

 

 

    

 

 

    

 

 

    

 

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The dollar amount of backlog of homes sold but not closed as of March 31, 2013 was $170.8 million, up 115% from $79.4 million as of March 31, 2012. The increase during this period reflects a 50% increase in the number of homes in backlog to 498 homes as of March 31, 2013 compared to 332 homes as of March 31, 2012. The increase in the dollar amount of backlog reflects an increase in average sales prices for new home orders, as well as the addition of our Colorado division. The Company experienced an increase of 43% in the average sales price of homes in backlog to $343,000 as of March 31, 2013 compared to $239,200 as of March 31, 2012. The increase is driven by a higher price point of our actively selling projects in Arizona in three new communities that opened in the second quarter of 2012, and one new community in Southern California that opened in the first quarter of 2013, as well as an average sales price of homes in backlog in Colorado of $390,300 with no comparable amount in the three months ended March 31, 2012. The increase in the dollar amount of backlog of homes sold but not closed as described above generally results in an increase in operating revenues in the subsequent period as compared to the previous period.

In Southern California, the dollar amount of backlog increased 37% to $46.5 million as of March 31, 2013 from $34.0 million as of March 31, 2012, which is attributable to a 44% increase in the average sales price of homes in backlog to $596,300 as of March 31, 2013 compared to $484,400 as of March 31, 2012, offset by a 5% decrease in the number of homes in backlog in Southern California to 78 homes as of March 31, 2013 compared to 82 homes as of March 31, 2012, and a 18% decrease in net new home orders to 68 for the three months ended March 31, 2013 compared to 83 homes for the three months ended March 31, 2012. In Southern California, the cancellation rate decreased to 6% for the three months ended March 31, 2013 from 9% for the three months ended March 31, 2012.

In Northern California, the dollar amount of backlog increased 2% to $17.6 million as of March 31, 2013 from $17.2 million as of March 31, 2012, which is attributable to a 14% increase in the average sales price of homes in backlog to $351,200 as of March 31, 2013 compared to $307,700 as of March 31, 2012, offset by an 11% decrease in the number of units in backlog to 50 as of March 31, 2013 from 56 as of March 31, 2012, along with a 4% decrease in net new home orders in Northern California to 53 homes for the three months ended March 31, 2013 compared to 55 homes for the three months ended March 31, 2012. In Northern California, the cancellation rate decreased to 13% for the three months ended March 31, 2013 from 21% for the three months ended March 31, 2012.

In Arizona, the dollar amount of backlog increased 101% to $40.9 million as of March 31, 2013 from $20.4 million as of March 31, 2012, which is attributable to a 13% increase in the number of units in backlog to 165 as of March 31, 2013 from 146 as of March 31, 2012, and a 78% increase in the average sales price of homes in backlog to $247,800 as of March 31, 2013 compared to $139,500 as of March 31, 2012, offset by a 24% decrease in net new home orders in Arizona to 93 homes during the three months ended March 31, 2013 compared to 123 homes during the three months ended March 31, 2012. In Arizona, the cancellation rate increased to 15% for the three months ended March 31, 2013 from 2% for the three months ended March 31, 2012.

In Nevada, the dollar amount of backlog increased 335% to $33.8 million as of March 31, 2013 from $7.8 million as of March 31, 2012, which is attributable to a 156% increase in the number of units in backlog to 123 as of March 31, 2013 from 48 as of March 31, 2012, along with a 63% increase in net new home orders in Nevada to 98 homes during the three months ended March 31, 2013 compared to 60 homes during the three months ended March 31, 2012, and a 70% increase in the average sales price of homes in backlog to $275,100 as of March 31, 2013 compared to $162,100 as of March 31, 2012. In Nevada, the cancellation rate increased to 13% for the three months ended March 31, 2013 from 8% for the three months ended March 31, 2012.

 

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In Colorado, the dollar amount of backlog was $32.0 million as of March 31, 2013, with no comparable amount as of March 31, 2012.

 

    Successor     Combined     Successor     Predecessor     Increase (Decrease)  
    Three Months
Ended
March 31,
2013
    Three Months
Ended
March 31,
2012
    Period from
February 25 through
March 31,

2012
    Period from
January 1 through
February 24,

2012
    Amount     %  

Number of Homes Closed

             

Southern California

    22        23        10        13        (1     (4 %) 

Northern California

    31        24        9        15        7        29

Arizona

    100        52        25        27        48        92

Nevada

    66        29        17        12        37        128

Colorado

    49        —          —          —          49        N/M   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

    268        128        61        67        140        109
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

During the three months ended March 31, 2013, the number of homes closed increased 109% to 268 in the 2013 period from 128 in the first quarter of 2012. The increase in home closings is primarily attributable to an increase in beginning backlog for the period of 192% to 406 units at December 31, 2012 compared to 139 units at December 31, 2011. There was a 29% increase in Northern California to 31 homes closed in the first quarter of 2013 compared to 24 homes closed in the first quarter of 2012, a 92% increase in homes closed in Arizona to 100 in the first quarter of 2013 from 29 in the first quarter of 2012, and a 128% increase in homes closed in Nevada to 66 in the first quarter of 2013 compared to 52 in the first quarter of 2012, offset by a 4% decrease in Southern California to 22 homes closed in the 2013 period compared to 23 homes closed in the first quarter of 2012. Colorado had 49 home closings during the first quarter of 2013, with no comparable activity in the first quarter of 2012.

 

    Successor     Combined     Successor     Predecessor     Increase (Decrease)  
    Three Months
Ended
March 31,
2013
    Three Months
Ended
March 31,
2012
    Period from
February 25 through
March 31,

2012
    Period from
January 1 through
February 24,

2012
        Amount             %      
          (dollars in thousands)                    

Home Sales Revenue

             

Southern California

  $ 10,146      $ 11,141      $ 5,501      $ 5,640      $ (995     (9 %) 

Northern California

    10,019        6,785        2,535        4,250        3,234        48

Arizona

    21,629        8,104        3,788        4,316        13,525        167

Nevada

    14,761        5,766        3,285        2,481        8,995        156

Colorado

    19,879        —          —          —          19,879        N/M   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 76,434      $ 31,796      $ 15,109      $ 16,687      $ 44,638        140
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

The increase in homebuilding revenue of 140% to $76.4 million for the first quarter of 2013 from $31.8 million for the first quarter of 2012 is primarily attributable to a 109% increase in the number of homes closed to 268 during the first quarter of 2013 from 128 in the first quarter of 2012, along with a 15% increase in the average sales price of homes closed to $285,200 during the first quarter of 2013 from $248,400 during the first quarter of 2012, as well as the addition of our Colorado division. The increase in average home sale price resulted in a $9.9 million increase in revenue, as well as a $34.8 million increase in revenue attributable to a 109% increase in the number of homes closed.

 

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Table of Contents
    Successor     Combined     Successor     Predecessor     Increase (Decrease)  
    Three Months
Ended
March 31,
2013
    Three Months
Ended
March 31,
2012
    Period from
February 25 through
March 31,

2012
    Period from
January 1 through
February 24,

2012
    Amount     %  

Average Sales Price of Homes Closed

             

Southern California

  $ 461,200      $ 484,400      $ 550,100      $ 433,800      $ (23,200     (5 %) 

Northern California

    323,200        282,700        281,700        283,300        40,500        14

Arizona

    216,300        155,800        151,500        159,900        60,500        39

Nevada

    223,700        198,800        193,200        206,800        24,900        13

Colorado

    405,700        —          —          —          405,700        N/M   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 285,200      $ 248,400      $ 247,700      $ 249,100      $ 36,800        15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

The average sales price of homes closed for the first quarter of 2013 increased primarily due to increasing price points of our actively selling projects to projects available to first time buyers or first time “move up” buyers. In the Southern California segment, the overall average sales price decrease is primarily due to a change in product mix, in which the number of homes closed with a sale price in excess of $500,000 was 8 in the first quarter of 2013 and 13 in the first quarter of 2012. The increase in average sales prices for the period was due to new projects that were released during the latter half of 2012 with an average sales price of $324,800 which is above the prior period overall average of $248,400. On a same store basis, which represents projects that were open during the comparable periods, average sales prices increased 8% from $299,200 in the first quarter of 2012 to $323,600 in the first quarter of 2013.

 

     Successor     Predecessor  
     Three Months
Ended
March 31,
2013
    Period from
February 25 through
March 31,

2012
    Period from
January 1 through
February 24,

2012
 

Homebuilding Gross Margin Percentage

        

Southern California

     21.8     12.3     11.8

Northern California

     20.5     23.4     14.6

Arizona

     15.0     10.6     11.6

Nevada

     20.9     11.5     12.0

Colorado

     12.6     —          —     
  

 

 

   

 

 

   

 

 

 

Total

     17.1     13.5     12.5
  

 

 

   

 

 

   

 

 

 

Adjusted Homebuilding Gross Margin Percentage

     23.2     21.0     20.7
  

 

 

   

 

 

   

 

 

 

Gross margins were positively impacted in the Successor period by the Company’s lower book value basis in its inventory, which was adjusted to fair value in February 2012 in conjunction with the restructuring and in accordance with fresh start accounting requirements. In assessing the inventory value, the Company generally utilized assumptions for future home sales paces and prices based upon then-prevailing market conditions in late 2011, which represented conditions near the trough of the recent U.S. housing downturn.

For homebuilding gross margins, the comparison of the Successor entity for the three months ended March 31, 2013 and the Successor entity from February 25, 2012 through March 31, 2012 are as follows:

 

   

In Southern California, homebuilding gross margins increased 9.5% to 21.8% during the first quarter of 2013 compared to 12.3% during the first quarter of 2012. The increase was due to a decrease in the average cost per home closed of 25% from $482,600 in the first quarter of 2012 to $360,500 in the first quarter of 2013, offset by a 16% decrease in the average sales price of homes closed from $550,100 in the

 

55


Table of Contents
 

first quarter of 2012 to $461,200 in the first quarter of 2013. On a same store basis, average sales prices increased 4.0% to $468,300 in the first quarter of 2013 compared to $450,100 in the first quarter of 2012.

 

   

In Northern California, homebuilding gross margins decreased 2.9% to 20.5% in the first quarter of 2013 from 23.4% in the first quarter of 2012. The decrease was due to an increase in the average cost per home closed of 19% from $215,900 in the first quarter of 2012 to $256,800 in the first quarter of 2013, offset by a 15% increase in the average sales price of homes closed from $281,700 in the first quarter of 2012 to $323,200 in the first quarter of 2013. On a same store basis, average sales prices increased 25.8% to $254,800 in the first quarter of 2013 compared to $202,500 in the first quarter of 2012, driven by an increase in one community.

 

   

In Arizona, homebuilding gross margins increased 4.4% to 15.0% in the first quarter of 2013 from 10.6% in the first quarter of 2012. The increase was due to a 43% increase in the average sales price of homes closed of $216,300 in the first quarter of 2013 from $151,500 in the first quarter of 2012, offset by an increase in the average cost per home closed of 36% from $135,600 in the first quarter of 2012 to $183,800 in the first quarter of 2013. Average sales prices increased 42.8% to $216,300 in the first quarter of 2013 compared to $151,500 in the first quarter of 2012.

 

   

In Nevada, homebuilding gross margins increased 9.4% to 20.9% in the first quarter of 2013 from 11.5% in the first quarter of 2012. The increase was due to a 16% increase in the average sales price of homes closed of $223,700 in the first quarter of 2013 from $193,200 in the first quarter of 2012, slightly offset by an increase in the average cost per home closed of 3% from $171,100 in the first quarter of 2012 to $177,000 in the first quarter of 2013. On a same store basis, average sales prices increased 9.1% to $232,800 in the first quarter of 2013 compared to $213,400 in the first quarter of 2012.

 

   

In Colorado, homebuilding gross margins were 12.6% during the first quarter of 2013, with no comparable amount in the first quarter of 2012.

For homebuilding gross margins, the comparison of the Successor entity for the three months ended March 31, 2013 and the Predecessor entity from January 1, 2012 through February 24, 2012 are as follows:

 

   

In Southern California, homebuilding gross margins increased 10% in the first quarter of 2013 to 21.8% from 11.8% in the first quarter of 2012. Margins were slightly impacted by fresh start accounting on the real estate values, which decreased the cost basis on some properties in the division and increased the cost basis on others, and subsequently decreased gross margins by 1.4% in the first quarter of 2013. On a same store basis, average sales prices increased 13.3% to $436,600 in the first quarter of 2013 compared to $381,100 in the first quarter of 2012. In addition, the Company has experienced increases in sales prices and decreases in incentives during 2013.

 

   

In Northern California, homebuilding gross margins increased 5.9% in the first quarter of 2013 to 20.5% from 14.6% in the first quarter of 2012. Margins were slightly impacted by fresh start accounting on the real estate values, which decreased the cost basis on some properties in the division and increased the cost basis on others, and subsequently decreased gross margins by 1.4% in the first quarter of 2013. On a same store basis, average sales prices increased 18.2% to $254,800 in the first quarter of 2013 compared to $215,600 in the first quarter of 2012. In addition, the Company has experienced increases in sales prices and decreases in incentives during 2013.

 

   

In Arizona, homebuilding gross margins increased 3.4% in the first quarter of 2013 to 15.0% from 11.6% in the first quarter of 2012. Margins were slightly impacted by fresh start accounting on the real estate values, which decreased the cost basis on some properties in the division and increased the cost basis on others, and subsequently decreased gross margins by 0.5% in the first quarter of 2013. Average sales prices increased 35.4% to $216,300 in the first quarter of 2013 compared to $159,800 in the first quarter of 2012. In addition, the Company has experienced increases in sales prices and decreases in incentives during 2013.

 

   

In Nevada, homebuilding gross margins increased 8.9% in the first quarter of 2013 to 20.9% from 12.0% in the first quarter of 2012. Margins were slightly impacted by fresh start accounting on the real estate

 

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values, which decreased the cost basis on some properties in the division and increased the cost basis on others, and subsequently increased gross margins by 1.0% in the first quarter of 2013. On a same store basis, average sales prices increased 8.4% to $232,800 in the first quarter of 2013 compared to $214,800 in the first quarter of 2012. In addition, the Company has experienced increases in sales prices and decreases in incentives during 2013.

 

   

In Colorado, homebuilding gross margins were 12.6% during the first quarter of 2013, with no comparable amount in the first quarter of 2012.

For the comparison of the Successor entity for the three months ended March 31, 2013 and the Successor entity from February 25, 2012 through March 31, 2012, adjusted homebuilding gross margin percentage, which excludes previously capitalized interest included in cost of sales, was 23.2% for the first quarter of 2013 compared to 21.0% for the first quarter of 2012. The increase was primarily a result of the changes discussed for homebuilding gross margins described previously.

For the comparison of the Successor entity for the three months ended March 31, 2013 and the Predecessor entity from January 1, 2012 through February 24, 2012, adjusted homebuilding gross margin percentage was 23.2% for the first quarter of 2013 compared to 20.7% for the first quarter of 2012.

Adjusted homebuilding gross margin is a non-GAAP financial measure. The Company believes this information is meaningful as it isolates the impact that interest has on homebuilding gross margin and permits investors to make better comparisons with its competitors, who also break out and adjust gross margins in a similar fashion. See table set forth below reconciling this non-GAAP measure to homebuilding gross margin.

 

    Successor     Predecessor  
    Three Months
Ended
March 31,
2013
    Period from
February 25 through
March 31,

2012
    Period from
January 1 through
February 24,

2012
 
    (dollars in thousands)  

Home sales revenue

  $ 76,434      $ 15,109      $ 16,687   

Cost of home sales

    63,328        13,063        14,598   
 

 

 

   

 

 

   

 

 

 

Homebuilding gross margin

    13,106        2,046        2,089   

Add: Interest in cost of sales

    4,632        1,127        1,360   
 

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin

  $ 17,738      $ 3,173      $ 3,449   
 

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin percentage

    23.2     21.0     20.7
 

 

 

   

 

 

   

 

 

 

Construction Services Revenue

Construction services revenue, which was all recorded in Southern California and Northern California, was $4.4 million for the three months ended March 31, 2013, $3.2 million for the period from February 25, 2012 through March 31, 2012, and $8.9 million for the period from January 1, 2012 through February 24, 2012. The decrease is primarily due to a decrease in the number of construction services projects in the first quarter of 2013, compared to the first quarter of 2012. See Note 1 of “Notes to Condensed Consolidated Financial Statements” for further discussion.

 

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Table of Contents

Sales and Marketing Expense

 

    Successor     Predecessor  
    Three Months
Ended
March 31,
2013
    Period from
February 25 through
March 31,

2012
    Period from
January 1 through
February 24,

2012
 
    (in thousands)  

Sales and Marketing Expense

       

Homebuilding

       

Southern California

  $ 1,096      $ 449      $ 942   

Northern California

    662        215        463   

Arizona

    1,000        210        260   

Nevada

    825        219        279   

Colorado

    1,085        —          —     
 

 

 

   

 

 

   

 

 

 

Total

  $ 4,668