WILSON
HOLDINGS, INC.
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
As
of September 30, 2007 and December 31, 2006
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,073,214
|
|
|
|
2,673,056
|
|
Restricted
cash
|
|
|
-
|
|
|
|
2,192,226
|
|
Inventory
|
|
|
|
|
|
|
|
|
Land
and land development
|
|
|
32,463,411
|
|
|
|
29,908,325
|
|
Homebuilding
inventories
|
|
|
2,843,704
|
|
|
|
847,653
|
|
Total
inventory
|
|
|
35,307,116
|
|
|
|
30,755,978
|
|
Other
assets
|
|
|
729,471
|
|
|
|
196,195
|
|
Debt
issuance costs, net of amortization
|
|
|
1,265,218
|
|
|
|
1,458,050
|
|
Equipment
and software, net of accumulated depreciation and amortization
of
$32,294 and $46,358, respectively
|
|
|
232,357
|
|
|
|
97,956
|
|
Total
assets
|
|
|
50,607,375
|
|
|
|
37,373,461
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,404,151
|
|
|
|
1,376,117
|
|
Accrued
real estate taxes payable
|
|
|
405,060
|
|
|
|
454,764
|
|
Accrued
liabilities and expenses
|
|
|
215,372
|
|
|
|
529,090
|
|
Accrued
interest
|
|
|
464,809
|
|
|
|
302,555
|
|
Deferred
revenue
|
|
|
159,381
|
|
|
|
11,223
|
|
Lines
of credit
|
|
|
472,365
|
|
|
|
6,436,706
|
|
Notes
payable
|
|
|
20,165,993
|
|
|
|
9,466,621
|
|
Notes
payable, related party
|
|
|
-
|
|
|
|
279,800
|
|
Subordinated
convertible debt, net of $3,384,807 and $5,224,502 discount,
respectively
|
|
|
13,254,780
|
|
|
|
8,395,876
|
|
Derivative
liability, convertible note compount embedded derivative
|
|
|
-
|
|
|
|
7,462,659
|
|
Derivative
liability, contingent warrants issued to subordinated convertible
debt
holders
|
|
|
-
|
|
|
|
1,883,252
|
|
Total
liabilities
|
|
|
36,541,911
|
|
|
|
36,598,663
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 and 80,000,000 shares authorized,
respectively, 23,135,538 and 18,055,538 shares issued and
outstanding
at
September 30, 2007 and December 31, 2006,
repectively
|
|
|
23,136
|
|
|
|
18,056
|
|
Additional
paid in capital
|
|
|
27,040,304
|
|
|
|
16,809,885
|
|
Retained
deficit
|
|
|
(12,997,976
|
)
|
|
|
(16,053,143
|
)
|
Total
stockholders' equity
|
|
|
14,065,464
|
|
|
|
774,798
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities and stockholders' equity
|
|
$
|
50,607,375
|
|
|
|
37,373,461
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
WILSON
HOLDINGS, INC.
|
|
Consolidated
Statements of Operations
|
|
For
the Three Months and Nine Months Ended Sept. 30, 2007 and
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended Sept 30,
|
|
|
Nine
Months Ended Sept 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
$
|
177,901
|
|
|
|
1,482,933
|
|
|
|
1,295,407
|
|
|
|
4,184,905
|
|
Land
sales
|
|
|
1,115,186
|
|
|
|
413,811
|
|
|
|
3,149,093
|
|
|
|
1,079,811
|
|
Total
revenues
|
|
|
1,293,087
|
|
|
|
1,896,744
|
|
|
|
4,444,500
|
|
|
|
5,264,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
159,088
|
|
|
|
1,255,959
|
|
|
|
1,025,514
|
|
|
|
3,480,403
|
|
Land
sales
|
|
|
913,506
|
|
|
|
273,332
|
|
|
|
3,794,712
|
|
|
|
624,487
|
|
Total
cost of revenues
|
|
|
1,072,595
|
|
|
|
1,529,291
|
|
|
|
4,820,227
|
|
|
|
4,104,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
18,812
|
|
|
|
226,974
|
|
|
|
269,892
|
|
|
|
704,502
|
|
Land
sales
|
|
|
201,680
|
|
|
|
140,479
|
|
|
|
(645,619
|
)
|
|
|
455,324
|
|
Total
gross profit
|
|
|
220,492
|
|
|
|
367,453
|
|
|
|
(375,727
|
)
|
|
|
1,159,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
general and administration
|
|
|
1,326,161
|
|
|
|
1,168,128
|
|
|
|
3,871,587
|
|
|
|
3,369,843
|
|
Sales
and marketing
|
|
|
77,238
|
|
|
|
282,328
|
|
|
|
372,820
|
|
|
|
640,421
|
|
Total
costs and expenses
|
|
|
1,403,399
|
|
|
|
1,450,456
|
|
|
|
4,244,407
|
|
|
|
4,010,264
|
|
Operating
loss
|
|
|
(1,182,907
|
)
|
|
|
(1,083,003
|
)
|
|
|
(4,620,134
|
)
|
|
|
(2,850,438
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
(460,000
|
)
|
|
|
-
|
|
|
|
(3,392,500
|
)
|
Interest
and other income
|
|
|
141,235
|
|
|
|
54,413
|
|
|
|
291,478
|
|
|
|
260,199
|
|
Interest
expense
|
|
|
(844,307
|
)
|
|
|
(570,430
|
)
|
|
|
(2,227,233
|
)
|
|
|
(1,643,086
|
)
|
Total
other expense
|
|
|
(703,072
|
)
|
|
|
(976,017
|
)
|
|
|
(1,935,755
|
)
|
|
|
(4,775,387
|
)
|
Net
loss
|
|
$
|
(1,885,979
|
)
|
|
|
(2,059,020
|
)
|
|
|
(6,555,889
|
)
|
|
|
(7,625,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.08
|
)
|
|
|
(0.12
|
)
|
|
|
(0.32
|
)
|
|
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
23,135,538
|
|
|
|
17,706,625
|
|
|
|
20,586,649
|
|
|
|
17,706,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WILSON
HOLDINGS, INC.
|
|
Consolidated
Statements of Cash Flows
|
|
For
the Nine Months Ended September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,555,889
|
)
|
|
|
(7,625,825
|
)
|
Non
cash adjustments:
|
|
|
|
|
|
|
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
3,392,500
|
|
Amortization
of convertible debt discount
|
|
|
536,230
|
|
|
|
535,983
|
|
Amortization
of debt issuance costs
|
|
|
192,832
|
|
|
|
157,927
|
|
Stock-based compensation expense
|
|
|
540,900
|
|
|
|
349,507
|
|
Services
provided without compensation by principal shareholders
|
|
|
20,000
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
55,309
|
|
|
|
44,940
|
|
Loss
on land option purchase
|
|
|
1,254,968
|
|
|
|
|
|
Effect
of deconsolidation of variable interest entity
|
|
|
259,880
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
Increase
in total inventory
|
|
|
(5,806,106
|
)
|
|
|
(7,620,582
|
)
|
Increase
in other assets
|
|
|
(272,341
|
)
|
|
|
(67,763
|
)
|
Increase
in accounts payable
|
|
|
28,034
|
|
|
|
435,198
|
|
(Decrease)
in real estate taxes payable
|
|
|
(49,704
|
)
|
|
|
|
|
(Decrease)
increase in accrued expenses
|
|
|
(313,718
|
)
|
|
|
684,179
|
|
Increase
in deferred revenue
|
|
|
148,158
|
|
|
|
-
|
|
(Decrease)
increase in accrued interest
|
|
|
162,254
|
|
|
|
(37,194
|
)
|
Net
cash used in operating activities
|
|
|
(9,799,192
|
)
|
|
|
(9,751,130
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(201,565
|
)
|
|
|
(68,479
|
)
|
Cash
paid for Green Builders, Inc.
|
|
|
(32,919
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(234,484
|
)
|
|
|
(68,479
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
2,192,226
|
|
|
|
-
|
|
Repayments
to related parties, net
|
|
|
(279,800
|
)
|
|
|
|
|
Issuances
(repayments) of notes payable, net
|
|
|
10,699,372
|
|
|
|
(897,579
|
)
|
(Repayments)
advances on lines of credit, net
|
|
|
(5,964,341
|
)
|
|
|
9,713,395
|
|
Cash
paid for debt issuance costs
|
|
|
-
|
|
|
|
(212,246
|
)
|
Common
stock sales, net of transaction costs
|
|
|
13,786,377
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
20,433,834
|
|
|
|
8,603,570
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
10,400,158
|
|
|
|
(1,216,039
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
2,673,056
|
|
|
|
10,019,816
|
|
Cash
and cash equivalents at end of period
|
|
$
|
13,073,214
|
|
|
|
8,803,777
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
1,872,716
|
|
|
|
1,064,421
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non
cash in financing activities:
|
|
|
|
|
|
|
|
|
Assets
and Liabilities acquired from Green Builders, Inc.
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
$
|
2,900
|
|
|
|
-
|
|
Accounts
Payable
|
|
$
|
6,190
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
WILSON
HOLDINGS, INC.
|
|
Statements
of Stockholders' Equity
|
|
Nine
Months Ended September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balances
at December 31, 2006
|
|
|
18,055,538
|
|
|
$
|
18,056
|
|
|
$
|
16,809,885
|
|
|
$
|
(16,053,143
|
)
|
|
$
|
774,798
|
|
Cumulative
adjustment for restatement per FSP 00-19-2
|
|
|
$
|
|
|
|
$
|
(4,577,938
|
)
|
|
$
|
9,351,175
|
|
|
$
|
4,773,237
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
540,900
|
|
|
|
-
|
|
|
|
540,900
|
|
Sale
of common stock, net of transaction costs
|
|
|
5,000,000
|
|
|
|
5,000
|
|
|
|
14,031,377
|
|
|
|
-
|
|
|
|
14,036,377
|
|
Issuance
of common stock for purchase of Green Builders,
Inc., net of
transaction costs
|
|
|
80,000
|
|
|
|
80
|
|
|
|
216,080
|
|
|
|
-
|
|
|
|
216,160
|
|
Services
provided without compensation by principal shareholder
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
Effect
of deconsolidation of variable interest entity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259,880
|
|
|
|
259,880
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,555,889
|
)
|
|
|
(6,555,889
|
)
|
Balances
at September 30, 2007
|
|
|
23,135,538
|
|
|
$
|
23,136
|
|
|
$
|
27,040,304
|
|
|
$
|
(12,997,977
|
)
|
|
$
|
14,065,463
|
|
See
accompanying notes to the consolidated financial statements.
(1)
Organization and Business Activity
Wilson
Holdings, Inc., (the “Company”) is a Nevada corporation formerly known as Cole
Computer Corporation, a Nevada corporation. Effective October 11, 2005
pursuant to an Agreement and Plan of Reorganization dated as of
September 2, 2005 by and among Wilson Holdings, Inc., a Delaware
corporation, and a majority of its stockholders, Wilson Acquisition Corp.,
a
Delaware corporation and now a subsidiary of the Company, and Wilson Family
Communities, Inc., a Delaware corporation (“WFC”), Wilson Acquisition Corp. and
WFC merged and WFC became a wholly-owned subsidiary of the Company.
The
consolidated financial statements and the notes of the Company as of September
30, 2007 and for the three months and nine months ending September 30, 2007
and
2006 have been prepared by management without audit, pursuant to rules and
regulations of the Securities Exchange Commission and should be read in
conjunction with the December 31, 2006 audited financials statements contained
in the Company’s Form 10-KSB, filed February 16, 2007. In the opinion of
management, all normal, recurring adjustments necessary for the fair
presentation of such financial information have been included. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted.
In
September 2007, the Company changed its fiscal year-end from December 31
to
September 30 and will file an annual report on Form 10-KSB for the transitional
period from January 1, 2007 to September 30, 2007 with the Securities and
Exchange Commission on or before December 31, 2007.
(2)
Summary of Significant Accounting Policies
(a) Revenue
Recognition
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate.” Revenues from land development services to builders
are recognized when the properties associated with the services are sold, when
the risks and rewards of ownership are transferred to the buyer and when the
consideration has been received, or the title company has processed payment.
For
projects that are consolidated, homebuilding revenues and services will be
categorized as homebuilding revenues and revenues from property sales or options
will be categorized as land sales.
(b) Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those
estimates.
The
Company has estimated and accrued liabilities for real estate property taxes
on
its purchased land in anticipation of development, and other liabilities
including the beneficial conversion liability, the fair value of warrants and
options. To the extent that the estimates are different from the actual amounts,
it could have a material effect on the financial statements.
The
Company has two of its properties that are in Municipal Utility Districts
(MUDs). The Company incurs development costs for water, sewage lines and
associated treatment plants and other development costs and fees for these
properties. Under the agreement with the MUDs, the Company expects to be
reimbursed partially for the above developments costs. The MUDs will issue
bonds
to repay the Company, once there is enough assessed value on the property for
the MUD taxes to repay the bonds. As homes are sold within the MUD, the assessed
value increases. It can take several years before there is enough assessed
value
to recapture the costs. The Company has estimated that it will recover
approximately 50% to 70% of eligible costs spent. In some circumstances, the
MUDs will pay for property set aside for the preservation of endangered species,
greenbelts and similar uses. To the extent that the estimates are
different to the actual amounts, it could have a material effect on the
financial statements.
(2)
Summary of Significant Accounting Policies
(Continued)
(c) Adoption
of New Accounting Pronouncements
In
January 2007, the Company adopted FASB Staff Position (FSP) No. EITF 00-19-2
(“FSP EITF 00-19-2”), Accounting for Registration Payment Arrangements. This
addresses an issuer’s accounting for registration payment arrangements and
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
FASB Statement No. 5, Accounting for Contingencies. The guidance in FSP EITF
00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments
and Hedging Activities, and No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, and FASB
Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include
scope exceptions for registration payment arrangements. The FSP EITF 00-19-2
further clarifies that a financial instrument subject to a registration payment
arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles (GAAP) without regard to the contingent
obligation to transfer consideration pursuant to the registration payment
arrangement. This pronouncement shall be effective immediately for registration
payment arrangements and the financial instruments subject to those arrangements
that are entered into or modified subsequent to the date of issuance of this
pronouncement, or for financial statements issued for fiscal years beginning
after December 15, 2006, and interim periods within those fiscal
years.
The
cumulative effect of the re-characterization of the derivative liabilities
is
shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
As
filed
December
31, 2006
|
|
|
Cumulative
effect of re-characterization
of derivative
liabilities
|
|
|
Net
effect of re-characterization
|
|
LIABILITY
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
Subordinated
convertible debt, net of discount, respectively
|
|
$
|
8,395,876
|
|
|
|
4,572,674
|
|
|
|
12,968,550
|
|
Derivative
liability, convertible note compound embedded derivative
|
|
|
7,462,659
|
|
|
|
(7,462,659
|
)
|
|
|
-
|
|
Derivative
liability, contingent warrants issued to subordinated convertible
debt
holders
|
|
|
1,883,252
|
|
|
|
(1,883,252
|
)
|
|
|
-
|
|
Total
debt, net of discount and derivative liabilities
|
|
|
17,741,787
|
|
|
|
(4,773,237
|
)
|
|
|
12,968,550
|
|
STOCKHOLDERS'
EQUITY ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
18,056
|
|
|
|
-
|
|
|
|
18,056
|
|
Additional
paid in capital
|
|
|
16,809,885
|
|
|
|
(4,577,938
|
)
|
|
|
12,231,947
|
|
Retained
deficit
|
|
|
(16,053,143
|
)
|
|
|
9,351,175
|
|
|
|
(6,701,968
|
)
|
Total
stockholders' equity
|
|
$
|
774,798
|
|
|
|
4,773,237
|
|
|
|
5,548,035
|
|
(d) Subordinated
Convertible Debt
The
subordinated convertible debt and the related warrants have been accounted
for
in accordance with Emerging Issues Task Force (EITF) No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, EITF No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” EITF 00-27, “Application of issue 98-5 to Certain Convertible
Instruments”, EITF 05-02 “Meaning of ‘Conventional Convertible Debt Instrument’
in Issue No. 00-19”, and EITF 05-04 “The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to Issue No. 00-19” updated with
FSP EITF 00-19-2”, Accounting for Registration Payment
Arrangements.
(2)
Summary of Significant Accounting Policies
(Continued)
(e) Loss
per Common Share
Earnings
per share is accounted for in accordance with SFAS No. 128, “Earnings per
Share,” which require a dual presentation of basic and diluted earnings per
share on the face of the statements of earnings. Basic loss per share
is based on the weighted effect of common shares issued and outstanding, and
is
calculated by dividing net loss by the weighted average shares outstanding
during the period. Diluted loss per share is calculated by dividing net loss
by
the weighted average number of common shares used in the basic loss per share
calculation plus the number of common shares that would be issued assuming
exercise or conversion of all potentially dilutive common shares
outstanding.
The
Company has issued stock options and warrants convertible into shares of common
stock. These shares and warrants have been excluded from loss per share at
September 30, 2007 and 2006 because the effect would be anti-dilutive as
summarized in the table below:
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Stock
options
|
|
|
1,835,000
|
|
|
|
1,145,000
|
|
Common
stock warrants
|
|
|
1,143,125
|
|
|
|
1,312,500
|
|
Total
|
|
|
2,978,125
|
|
|
|
2,457,500
|
|
(f)
Reclassifications
Certain
prior period amounts have been
reclassified to conform to current period presentation.
(3) Liquidity
and Capital Resources
Liquidity
At
September 30, 2007, the Company had approximately $13.1 million in cash and
cash
equivalents. The Company completed a successful public offering of the Company’s
common stock in May 2007, netting the Company approximately $14 million of
cash.
On
June
29, 2007, WFC entered into a three-year $55 million revolving credit facility
with a syndicate of banks led by RBC Centura Bank, as administrative
agent. The Company has guaranteed all of WFC’s obligations under the
Credit Facility. The obligations of WFC under the Credit Facility
will be secured by assets of each subdivision to be developed with the proceeds
of loans available under the Credit Facility. WFC currently has
approximately $2.7 million in borrowings under the Credit Facility.
The
Company’s growth will require substantial amounts of cash for earnest money
deposits, land purchases, development costs, interest payments and homebuilding
costs. Until it begins to sell an adequate number of lots and homes to cover
monthly operating expenses, sales, marketing, general and administrative costs
will deplete cash.
To
maintain its liquidity, the Company has financed the majority of its land and
development activities with debt, and believes it can continue to do so in
the
future through a combination of conventional and subordinated convertible debt,
joint venture financing, sales of selected lot positions, sales of land and
lot
options, and by raising additional equity.
Capital
Resources
The
Company has raised approximately $16.8 million of subordinated convertible
debt,
and approximately $14 million in a public offering of the Company’s common stock
completed in May 2007. The Company also entered into a three-year $55 million
revolving credit facility with a syndicate of banks mentioned previously. The
Credit Facility may be increased to $100 million with the consent of the
lenders.
In
May
2007 the Company did not exercise a land purchase option to purchase the Bohls
tract of approximately 428 acres for approximately $7.2 million. The Company’s
decision not to exercise the option was based on the following
factors:
|
·
|
Due
to the current market conditions in the homebuilding industry, revenue
projections for sale of residential lots to other homebuilders has
substantially declined. The Company concluded that it currently has
adequate single-family lots, excluding the Bohls tract. Therefore,
the
Company entered into negotiations with sellers of the Bohls tract
to
renegotiate the purchase price and other significant terms of the
contract
to purchase the property. The discussions are ongoing; however, the
option
expired in June
2007.
The Company recorded a loss provision of approximately $1.3 million
relating to development costs incurred on the tract and expenses
expected
to be incurred due to the expiration of the option
period.
|
|
·
|
The
Company commenced homebuilding through its wholly owned subsidiary
Green
Builders, Inc. effective June 20, 2007 and plans to build and sell
homes
in the Central Texas area, initially in Austin, Texas, for prices
ranging
from $200 thousand to $700
thousand.
|
Due
to
market conditions discussed above, weather related delays and longer than
expected ramp up of homebuilding operations, the Company’s financial projections
have changed. The Company expects to incur significant losses for its first
and
second quarters of fiscal 2008.
The
Company believes that capital raised, the closing of the revolving credit
facility and future land and home sales and financing will provide adequate
capital resources for the next twelve months, but the Company may be required
to
raise additional capital in 2008.
Land
and
homes under construction comprises the majority of the Company’s assets, which
could suffer devaluation if the housing and real estate market suffers a
significant downturn due to interest rate increases or other reasons. The
Company’s debt might then be called, requiring liquidation of assets to satisfy
its debt obligations or the use of its cash. A significant downturn could also
make it more difficult for the Company to liquidate assets, to raise cash and
to
pay off debts, which could have a material adverse effect.
In
October 2007 the Company amended its four notes payable, seller financed, that
serve as part of the purchase of 534 acres in Travis County described
above. The notes payable maturity date has been extended to
October 12, 2011. The terms of the notes payable now call for
quarterly interest payments commencing October 12, 2007 and principal payments
of $1.4 million in October 2010 and $1.0 million in October 2011.
In
October 2007 the Company refinanced its land obligation on a land loan for
approximately 120 acres in Georgetown Village Section 9 of approximately $1.1
million and obtained a new loan of approximately $4.3 million to finance
development for Georgetown Village Section 9. The interest rate
is 12.5% annually and requires monthly interest payments, with a maturity of
two
years.
(4)
Inventory
The
Company’s land inventory includes real estate held for sale or under development
and earnest money on land purchase options. Construction in progress includes
development costs, prepaid development costs, and development costs on land
under option but not owned. Homebuilding inventory represents speculative homes
under construction. The Company expects the homebuilding inventory to
increase as it begins to build in additional communities.
Earnest
money deposits for land costs and development costs on land under option, not
owned, totaled $355 thousand and $451 thousand at September 30, 2007 and
December 31, 2006, respectively, of which $350 thousand and $451 thousand is
non-refundable if the Company does not exercise the option and purchase the
land.
As
of
September 30, 2007 it had approximately 1,944 acres of land with approximately
738 acres under development and construction in Hays County, Travis County
and
Williamson County, Texas. During June 2007, the Company chose not to exercise
the option on the Bohls Ranch tract of approximately 428 acres and took a charge
of approximately $1.3 million against income for prepaid development
costs.
In
April
2007 10 acres of Highway 183 was condemned by the State. In July 2007
the Company received final judgement from the State and received proceeds of
approximately $410 thousand for the condemned land. The Company
currently has an option agreement from an outside buyer for the remaining 5
acres.
Effective
July 2007, the Company put a hold on development of phases 2 through 5 of
Rutherford West. From that date, all interest costs related to holding this
property has been recorded as an expense.
Below
is
a summary of the property that is owned or under contract by the Company at
September 30, 2007:
|
Property
|
|
Approximate
Acreage
|
|
|
Approximate
Owned
Acreage
|
|
|
Approximate
Acreage Under Option
|
|
|
Land
and Project
Costs at Sept. 30, 2007
In
thousands
|
|
|
Approximate
Acreage under Development
|
|
Texas
County
|
Rutherford
West
|
|
|
666
|
|
|
|
666
|
|
|
|
n/a
|
|
|
|
$ 12,369
|
|
|
|
666
|
|
Hays
|
Highway
183
|
|
|
5
|
|
|
|
5
|
|
|
|
n/a
|
|
|
|
113
|
|
|
|
-
|
|
Travis
|
Georgetown
Village
|
|
|
648
|
|
|
|
176
|
|
|
|
472
|
|
|
|
6,199
|
|
|
|
42
|
|
Williamson
|
Villages
of New Sweden
|
|
|
534
|
|
|
|
534
|
|
|
|
-
|
|
|
|
10,716
|
|
|
|
-
|
|
Travis
|
Elm
Grove
|
|
|
91
|
|
|
|
30
|
|
|
|
61
|
|
|
|
3,011
|
|
|
|
30
|
|
Hays
|
Other
land projects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
Sub-total
land
|
|
|
1,944
|
|
|
|
1,411
|
|
|
|
533
|
|
|
|
$32,463
|
|
|
|
738
|
|
|
Homebuilding
inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,844
|
|
|
|
-
|
|
|
Total
inventory
|
|
|
1,944
|
|
|
|
1,411
|
|
|
|
533
|
|
|
|
$ 35,307
|
|
|
|
738
|
|
|
At
December 31, 2006, it had approximately 2,430 acres of land under contract,
including 749 acres under development and construction in Hays County, Travis
County and Williamson County, Texas.
Below
is
a summary of the property that is owned or under contract by the Company at
December 31, 2006:
|
Property
|
|
Approximate
Acreage
|
|
|
Approximate
Owned
Acreage
|
|
|
Approximate
Acreage Under Option
|
|
|
Land
and Project Costs at December 31, 2006
In
thousands
|
|
|
Approximate
Acreage under Development
|
|
Texas
County
|
Rutherford
West
|
|
|
697
|
|
|
|
697
|
|
|
|
n/a
|
|
|
|
$11,251
|
|
|
|
697
|
|
Hays
|
Highway
183
|
|
|
15
|
|
|
|
15
|
|
|
|
n/a
|
|
|
|
377
|
|
|
|
-
|
|
Travis
|
Georgetown
Village
|
|
|
665
|
|
|
|
52
|
|
|
|
613
|
|
|
|
5,342
|
|
|
|
52
|
|
Williamson
|
Villages
of New Sweden
|
|
|
534
|
|
|
|
534
|
|
|
|
-
|
|
|
|
10,120
|
|
|
|
-
|
|
Travis
|
Elm
Grove
|
|
|
91
|
|
|
|
30
|
|
|
|
61
|
|
|
|
1,755
|
|
|
|
-
|
|
Hays
|
Bohls
Ranch
|
|
|
428
|
|
|
|
-
|
|
|
|
428
|
|
|
|
1,011
|
|
|
|
-
|
|
Travis
|
Other
land projects
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
|
|
|
Sub-total
land
|
|
|
2,430
|
|
|
|
1,328
|
|
|
|
1,102
|
|
|
|
29,908
|
|
|
|
749
|
|
|
Homebuilding
inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
848
|
|
|
|
-
|
|
|
Total
inventory
|
|
|
2,430
|
|
|
|
1,328
|
|
|
|
1,102
|
|
|
|
$30,756
|
|
|
|
749
|
|
|
The
land
costs in the above projects are Rutherford West, approximately $9.3 million,
Highway 183 is all land, Georgetown Village, approximately $1.5 million, and
Elm
Grove, approximately $1.3 million. All other land and project costs for listed
properties are associated with earnest money deposits, feasibility and
development.
(5)
Consolidation of Variable Interest Entities
The
Company exercises significant influence over, but holds no controlling interest
in, our homebuilder client. It bears the majority of the rewards and risk of
loss. At December 31, 2006, the Company determined it was the primary
beneficiary in certain homebuilder agreements as defined under FASB
Interpretation No. 46(R) (“FIN 46(R)”), “Consolidation of Variable Interest
Entities” (VIEs), that it has a significant, but less than controlling, interest
in the entity. The results of this client have been consolidated into its
financial statements.
Below
is
a summary of the effect of the consolidation of these entities for the three
months ended September 30, 2007 and 2006:
|
|
Three
Months Ended September 30, 2007
|
|
|
|
WFC
|
|
|
VIEs
|
|
|
|
Consolidating
entries
|
|
|
Consolidated
|
|
Revenues
|
|
|
1,119,405
|
|
|
|
177,900
|
|
(a)
|
|
|
(4,218
|
)
|
|
|
1,293,087
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
913,506
|
|
|
|
163,306
|
|
(a)
|
|
|
(4,218
|
)
|
|
|
1,072,595
|
|
General,
administrative, sales and marketing
|
|
|
1,366,546
|
|
|
|
25,723
|
|
|
|
|
11,130
|
|
|
|
1,403,399
|
|
Costs
and expenses before interest
|
|
|
2,280,052
|
|
|
|
189,029
|
|
|
|
|
6,912
|
|
|
|
2,475,994
|
|
Operating
income/(loss)
|
|
|
(1,160,648
|
)
|
|
|
(11,129
|
)
|
|
|
|
(11,130
|
)
|
|
|
(1,182,907
|
)
|
|
|
Three
Months Ended September 30, 2006
|
|
|
|
WFC
|
|
|
VIEs
|
|
|
|
Consolidating
entries
|
|
|
Consolidated
|
|
Revenues
|
|
|
695,592
|
|
|
|
1,482,933
|
|
(a)
|
|
|
(281,781
|
)
|
|
|
1,896,744
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
429,157
|
|
|
|
1,374,427
|
|
(a)
|
|
|
(274,293
|
)
|
|
|
1,529,291
|
|
General,
administrative, sales and marketing
|
|
|
1,293,284
|
|
|
|
82,698
|
|
(b)
|
|
|
74,474
|
|
|
|
1,450,456
|
|
Costs
and expenses before interest
|
|
|
1,722,441
|
|
|
|
1,457,125
|
|
|
|
|
(199,819
|
)
|
|
|
2,979,747
|
|
Operating
income/(loss)
|
|
|
(1,026,849
|
)
|
|
|
25,808
|
|
|
|
|
(81,962
|
)
|
|
|
(1,083,003
|
)
|
|
(a)
|
Eliminates
WFC revenues in VIE expenses, eliminates VIE expenses in
WFC.
|
Below
is
a summary of the effect of the consolidation of these entities for the nine
months ended September 30, 2007 and 2006:
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
WFC
|
|
|
VIEs
|
|
|
|
Consolidating
entries
|
|
|
Consolidated
|
|
Revenues
|
|
|
3,233,233
|
|
|
|
1,295,406
|
|
(a)
|
|
|
(84,139
|
)
|
|
|
4,444,500
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
3,794,712
|
|
|
|
1,109,653
|
|
(a)
|
|
|
(84,139
|
)
|
|
|
4,820,227
|
|
General,
administrative, sales and marketing
|
|
|
4,078,820
|
|
|
|
165,587
|
|
|
|
|
|
|
|
|
4,244,407
|
|
Costs
and expenses before interest
|
|
|
7,873,532
|
|
|
|
1,275,240
|
|
|
|
|
(84,139
|
)
|
|
|
9,064,634
|
|
Operating
income/(loss)
|
|
|
(4,640,300
|
)
|
|
|
20,166
|
|
|
|
|
-
|
|
|
|
(4,620,134
|
)
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
WFC
|
|
|
VIEs
|
|
|
|
Consolidating
entries
|
|
|
Consolidated
|
|
Revenues
|
|
|
1,887,579
|
|
|
|
4,196,905
|
|
(a)
|
|
|
(819,768
|
)
|
|
|
5,264,716
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
1,114,829
|
|
|
|
3,802,341
|
|
(a)
|
|
|
(812,280
|
)
|
|
|
4,104,890
|
|
General,
administrative, sales and marketing
|
|
|
3,534,899
|
|
|
|
287,654
|
|
(b)
|
|
|
187,711
|
|
|
|
4,010,264
|
|
Costs
and expenses before interest
|
|
|
4,649,728
|
|
|
|
4,089,995
|
|
|
|
|
(624,569
|
)
|
|
|
8,115,154
|
|
Operating
income/(loss)
|
|
|
(2,762,149
|
)
|
|
|
106,910
|
|
|
|
|
(195,199
|
)
|
|
|
(2,850,438
|
)
|
(a)
Eliminates WFC revenues in VIE expenses, eliminates VIE expenses in
WFC.
(b)
Loss
of VIE.
On
June
19, 2007, the Company purchased one of its variable interest entities, Green
Builders, Inc, now a wholly owned subsidiary of Wilson Holdings.
The
Company terminated its relationship with its final homebuilder client on August
2, 2007 subsequent to the sale of all the homes for which the Company had
guaranteed the loans. As a result of the termination of the
relationship, the Company recorded approximately a $260 thousand increase in
stockholders equity.
(6) Operating
and Reporting Segments
The
Company has two reporting segments: homebuilding and related services, and
land
sales. The Company’s reporting segments are strategic business units that offer
different products and services. The homebuilding and
related
services segment includes home sales and services provided to homebuilders.
The
Company is required to consolidate its homebuilder services clients per FIN
46(R). The Company identifies the clients it consolidates as “VIEs”. Land sales
consist of land in various stages of development sold, including finished lots.
The Company eliminates land sales to its homebuilder clients. The Company
charges identifiable direct expenses and interest to each segment and allocates
corporate expenses and interest based on an estimate of each segment’s relative
use of those expenses. Depreciation expense is included in selling, general
and
administrative and is immaterial.
The
following table presents segment operating results before taxes for the three
months ended September 30, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
|
|
Homebuilding
and Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
|
Homebuilding
and
Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
Revenues
from external customers
|
|
$
|
177,901
|
|
|
|
1,115,186
|
|
|
|
1,293,087
|
|
|
|
1,482,933
|
|
|
|
413,811
|
|
|
|
1,896,744
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
159,088
|
|
|
|
913,506
|
|
|
|
1,072,595
|
|
|
|
1,255,959
|
|
|
|
273,332
|
|
|
|
1,529,291
|
|
Selling,
general and administrative
|
|
|
835,007
|
|
|
|
568,392
|
|
|
|
1,403,399
|
|
|
|
993,067
|
|
|
|
457,389
|
|
|
|
1,450,456
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
460,000
|
|
|
|
460,000
|
|
Interest
& other income
|
|
|
(77,680
|
)
|
|
|
(63,556
|
)
|
|
|
(141,235
|
)
|
|
|
(143,741
|
)
|
|
|
89,328
|
|
|
|
(54,413
|
)
|
Interest
expense
|
|
|
1,136,652
|
|
|
|
(292,345
|
)
|
|
|
844,307
|
|
|
|
286,237
|
|
|
|
284,193
|
|
|
|
570,430
|
|
Total
costs and expenses
|
|
|
2,053,068
|
|
|
|
1,125,997
|
|
|
|
3,179,066
|
|
|
|
2,391,522
|
|
|
|
1,564,242
|
|
|
|
3,955,764
|
|
Loss
before taxes
|
|
$
|
(1,875,167
|
)
|
|
|
(10,811
|
)
|
|
|
(1,885,979
|
)
|
|
|
(908,589
|
)
|
|
|
(1,150,431
|
)
|
|
|
(2,059,020
|
)
|
Segment
Assets
|
|
$
|
11,236,511
|
|
|
|
39,370,864
|
|
|
|
50,607,374
|
|
|
|
3,048,126
|
|
|
|
28,016,470
|
|
|
|
31,064,596
|
|
Capital
expenditures
|
|
$
|
181,409
|
|
|
|
20,157
|
|
|
|
201,565
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
following table presents segment operating results before taxes for the nine
months ended September 30, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
|
|
Homebuilding
and Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
|
Homebuilding
and Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
Revenues
from external customers
|
|
$
|
1,295,407
|
|
|
|
3,149,093
|
|
|
|
4,444,500
|
|
|
|
4,184,905
|
|
|
|
1,079,811
|
|
|
|
5,264,716
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
1,025,514
|
|
|
|
3,794,712
|
|
|
|
4,820,227
|
|
|
|
3,480,403
|
|
|
|
624,487
|
|
|
|
4,104,890
|
|
Selling,
general and administrative
|
|
|
2,646,613
|
|
|
|
1,597,794
|
|
|
|
4,244,407
|
|
|
|
2,651,143
|
|
|
|
1,359,121
|
|
|
|
4,010,264
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,392,500
|
|
|
|
3,392,500
|
|
Interest
& other income
|
|
|
(151,239
|
)
|
|
|
(140,240
|
)
|
|
|
(291,478
|
)
|
|
|
(143,751
|
)
|
|
|
(116,448
|
)
|
|
|
(260,199
|
)
|
Interest
expense
|
|
|
1,585,634
|
|
|
|
641,599
|
|
|
|
2,227,233
|
|
|
|
650,716
|
|
|
|
992,370
|
|
|
|
1,643,086
|
|
Total
costs and expenses
|
|
|
5,106,523
|
|
|
|
5,893,865
|
|
|
|
11,000,389
|
|
|
|
6,638,511
|
|
|
|
6,252,030
|
|
|
|
12,890,541
|
|
Loss
before taxes
|
|
$
|
(3,811,116
|
)
|
|
|
(2,744,772
|
)
|
|
|
(6,555,889
|
)
|
|
|
(2,453,606
|
)
|
|
|
(5,172,219
|
)
|
|
|
(7,625,825
|
)
|
Segment
Assets
|
|
$
|
11,236,511
|
|
|
|
39,370,864
|
|
|
|
50,607,374
|
|
|
|
3,048,126
|
|
|
|
28,016,470
|
|
|
|
31,064,596
|
|
Capital
expenditures
|
|
$
|
181,409
|
|
|
|
20,157
|
|
|
|
201,565
|
|
|
|
-
|
|
|
|
68,479
|
|
|
|
68,479
|
|
(7)
Related Party Transactions
In
March
of 2005, some of the trusts belonging to the Wilson family purchased a note
for
approximately $280 thousand from a third party that is secured by approximately
15 acres of land. At the time of purchase, the terms of the note payable to
the
trusts belonging to family members of Clark Wilson remained the same at 8%
per
annum but the maturity date was changed from October 7, 2005 to
April 4, 2006 when the entire principal and interest would be due and
payable. On March 29, 2006 the note was extended till April 4,
2008. In August 2007 all outstanding principal and interest was paid
in the normal course of a land closing.
Issuance
of Convertible Debt
As
part
of the December 2005 subordinated convertible debt issuance discussed in
Note 10, an existing common stock investor purchased $800 thousand of the $10
million of subordinated convertible debt that was issued. As part of the
subordinated convertible debt in 2006 discussed in Note 10, existing common
stock investors purchased $1.0 million of the $6.75 million subordinated
convertible debt that was issued.
In
connection with the placement of an additional $6.75 million of the Company’s
convertible promissory notes in September 2006, it entered into an additional
agreement with Tejas Securities Group, Inc. pursuant to which Tejas Securities
Group, Inc. served as the Company’s Placement Agent in connection with the
offering. Pursuant to this agreement, the Company paid Tejas Securities Group,
Inc. commissions of $70 thousand and reimbursed the Placement Agent for its
expenses. John J. Gorman is the Chairman of the Board of the Placement Agent
and
of Tejas Incorporated, the parent company of the Placement Agent.
Mr. Gorman is the beneficial owner of 4,088,963 shares of our common stock.
Clark N. Wilson, who serves as our President and Chief Executive Officer
and is a director of the Company, has served on the board of directors of Tejas
Incorporated since October 1999, and is compensated for such
service. Mr. Wilson owns 1,000 shares of Tejas Incorporated
common stock and options to purchase an additional 60,000 shares of common
stock. Our largest stockholder, who is also our President and Chief
Executive Officer, will continue to control our company.
Barry A.
Williamson is a member of our board of directors and, until January 31,
2006, was a member of the board of directors of Tejas Incorporated, the parent
company of our Placement Agent for the sale of our convertible notes.
Mr. Williamson was re-elected to the board of directors of Tejas
Incorporated in November 2006.
In
September 2006, the Company entered into an agreement to lease approximately
5,000 square feet for its corporate offices, which it began occupying on
October 1, 2006. The lease requires monthly payments of approximately $10
thousand per month for 36 months. The lease is with a subsidiary of Tejas
Incorporated. The Company believes that the lease is at fair market value for
similar space in the Austin, Texas commercial real estate market.
In
September 2006, the Company’s Chairman and Chief Executive Officer purchased
$250 thousand of subordinated convertible debt under the same terms and
conditions as the others participating in the issuance.
In
December 2006, Tejas Securities Group, Inc. exercised 535,000 warrants,
exercisable at $2.00 per share, in a cashless exercise netting the warrant
holder 348,913 shares of common stock.
(8)
Commitments and Contingencies
Options
Purchase Agreements
In
order
to ensure the future availability of land for development and homebuilding,
the
Company plans to enter into lot-option purchase agreements with unaffiliated
third parties. Under the proposed option agreements, the Company pays a stated
deposit in consideration for the right to purchase land at a future time,
usually at predetermined prices or a percentage of proceeds as homes are sold.
These options generally do not contain performance requirements from the Company
nor obligate the Company to purchase the land. In order for the Company to
start
or continue the development process on optioned land, it may incur development
costs on land it does not own before it exercises its option agreement.
Lease
Obligations
In
September 2006, the Company entered into an agreement to lease approximately
5,000 square feet for its corporate offices, which it began occupying on
October 1, 2006. The lease requires monthly payments of approximately $10
thousand per month for 36 months. The Company also has office equipment leases.
The Company’s future minimum lease payments for future fiscal years are as
follows:
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Lease
obligations
|
|
$
|
139,484
|
|
|
|
113,208
|
|
|
|
3,966
|
|
|
|
240
|
|
|
|
240
|
|
Severance
Agreement
During
2006, the Company entered into an employment agreement with Daniel Allen, then
Chief Financial Officer. The employment agreement provided for payment of
severance benefits where the termination is without cause. The severance
benefits included payment of one year of base salary; continue to provide health
benefits for a period of twelve months, and acceleration of vesting of stock
options issued to him. Mr. Allen involuntarily resigned from the
Company
effective November 9, 2006. Effective November 9, 2006 the Company has
continued to pay for Mr. Allen’s salary and benefits. At September 30, 2007
and December 31, 2006, the Company had approximately $40 thousand and
approximately $180 thousand, respectively, accrued for this
contingency.
Employment
Agreements with Executive Officers
On
February 14, 2007, the Company entered into an employment agreement with Clark
N. Wilson, its President and Chief Executive Officer. In the event of the
involuntary termination of Mr. Wilson’s service with the Company, the
agreement provides for monthly payments equal to Mr. Wilson’s monthly
salary payments to continue for 12 months. The agreement contains a provision
whereby Mr. Wilson is not permitted to be employed in any position in which
his duties and responsibilities comprise residential land development and
homebuilding in Texas or in areas within 200 miles of any city in which the
Company is conducting land development or homebuilding operations at the time
of
such termination of employment for a period of one year from the termination
of
his employment, if such termination is voluntary or for cause, or involuntary
and in connection with a corporate transaction.
Consulting
Arrangement with Arun Khurana
On
September 18, 2007, Wilson Holdings, Inc. entered into a consulting agreement
with Arun Khurana, its Vice President and Chief Financial Officer, pursuant
to
which Mr. Khurana will transition from his position as an executive officer
of
the Company into a consulting role, beginning on the later to occur of October
31, 2007 or the date the Company files its Annual Report on Form 10-KSB for
the
transition period ending September 30, 2007 and ending on October 31, 2008
(the
Consulting Term). Mr. Khurana will remain as the Company’s Vice
President and Chief Financial Officer, and principal financial officer, until
the beginning of the Consulting Term. Mr. Khurana intends to transition into
a
consulting role as a part of the Company’s efforts to reduce its expenditures
through fiscal 2008 as the Company has decided to focus its efforts on
commencing its homebuilding operations, as described in detail in its Quarterly
Report on Form 10-QSB for the fiscal quarter ended June 30, 2007. The
Company anticipates that Lisa Tucker, the Company’s Chief Accounting Officer,
will assume the role of the Company’s principal financial officer beginning in
fiscal 2008.
Pursuant
to the consulting agreement, during the consulting term Mr. Khurana will (i)
review and provide comments on the Company’s periodic filings with the
Securities and Exchange Commission, (ii) advise the Company on its
Sarbanes-Oxley Act compliance and implementation efforts, (iii)
advise the Company regarding financing and joint venture matters, and (iv)
transition his responsibilities to the Chief Accounting Officer of the
Company. During the consulting term, Mr. Khurana will receive a
consulting fee of $11,500 per month and all unvested options to purchase the
Company’s common stock will vest in full.
Consulting
Arrangement with Audrey Wilson
In
February 2007 the Company entered into a consulting agreement with Audrey
Wilson, the wife of Clark N. Wilson, our President and Chief Executive Officer.
Pursuant to the consulting agreement, the Company has agreed to pay Ms. Wilson
$10,000 per month for a maximum of 6 months. Ms. Wilson agreed to
devote at least twenty-five hours per week assisting the Company with the
following activities: (i) the establishment of “back-office” processes for
homebuilding activities, including procurement, sales and marketing and other
related activities, and (ii) developing our marketing strategy for marketing
and
sale of land to homebuilders. Subsequent to the completion of the six
month period in July 2007, Ms. Wilson continues to provide consulting services
to the Company at no cost to the Company. In accordance with Staff
Accounting Bulletin 5A, the Company has recorded $20 thousand as compensation
expense and credited equity for two months of services recorded at fair market
value.
Revolving
Credit Facility
On
June
29, 2007, the Company entered into a three-year $55 million revolving credit
facility with a syndicate of banks led by RBC Centura Bank, as administrative
agent. The obligations of WFC under the credit facility will be secured by
the
assets of each subdivision to be developed with the proceeds of loans available
under the credit facility. WFC currently has approximately $2.7 million in
borrowings outstanding under the credit facility. The credit facility may be
increased to $100 million with the consent of the lenders
thereunder.
The
credit facility allows the Company to obtain revolving credit loans and provides
for the issuance of letters of credit. The amount available at any time under
the credit facility for revolving credit loans or the issuance of letters
of
credit
is determined by a borrowing base. The borrowing base is calculated as the
sum
of the values for homes and lots in the subdivision to be developed as agreed
to
by WFC and the agent.
Outstanding
borrowings under the credit facility will bear interest at the prime rate plus
0.25%. WFC is charged a letter of credit fee equal to 1.10% of each letter
of
credit issued under the credit facility. WFC may elect to prepay the credit
facility at any time without premium or penalty.
The
credit facility contains customary terms and covenants limiting the Company’s
ability to take certain actions, including terms that limit the Company’s
ability to place liens on property, pay dividends and other restrictions and
payments. The covenants are as follows:
|
·
|
require
the Company to maintain a minimum net worth of $20,000,000, net worth
includes subordinated debt (although the minimum net worth may be
$17,000,000 for one quarter);
|
|
·
|
prohibit
the Company’s ratio of debt to equity from exceeding (A) 1.75 to 1.0 prior
to September 30, 2007, (B) 1.85 to 1.0 from September 30, 2007 until
March
30, 2008 and (C) 2.0 to 1.0 thereafter;
and
|
|
·
|
require
the Company to maintain working capital of at least
$15,000,000.
|
An
event
of default will occur under the credit facility if certain events occur,
including the following:
|
·
|
a
failure to pay principal or interest on any loan under the credit
facility;
|
|
·
|
the
inaccuracy of a representation or warranty when
made;
|
|
·
|
the
failure to observe or perform covenants or
agreements;
|
|
·
|
an
event of default beyond any applicable grace period with respect
to any
other indebtedness;
|
|
·
|
the
commencement of proceedings under federal, state or foreign bankruptcy,
insolvency, receivership or similar
laws;
|
|
·
|
a
condition where any loan document, or any lien created thereunder,
ceases
to be in full force and effect;
|
|
·
|
the
entry of a judgment greater than $1,000,000 that remains undischarged;
or
|
If
an
event of default occurs under the credit facility, then the lenders may: (1)
terminate their commitments under the credit facility; (2) declare any
outstanding indebtedness under the credit facility to be immediately due and
payable; and (3) foreclose on the collateral securing the
obligations. The Company is in compliance with its covenants as
of September 30, 2007.
The
above
description of the material terms of the credit facility is not a complete
statement of the parties’ rights and obligations with respect to such
transactions. The above statements are qualified in their entirety by reference
to the Borrowing Base Loan Agreement executed in connection with the credit
facility, a copy of which is filed with the Company's quarterly report for
the
second quarter of 2007.
The
following schedule lists the Company’s notes payable and lines of credit
balances at September 30, 2007 and December 31, 2006:
|
|
In
Thousands
|
|
|
|
|
Rate
|
|
Maturity
Date
|
|
2007
|
|
|
2006
|
|
Line
of Credit, $3 million, development
|
|
|
a
|
|
|
Prime
+.50
|
%
|
Mar-1-08
|
|
$
|
472
|
|
|
|
2,250
|
|
Line
of Credit, $15.5 million, purchase and development
|
|
|
b
|
|
|
Prime
+2.00
|
%
|
Oct-1-08
|
|
|
-
|
|
|
|
3,587
|
|
Notes
payable, land
|
|
|
c
|
|
|
12.50
|
%
|
Mar-1-09
|
|
|
4,700
|
|
|
|
n/a
|
|
Notes
payable, seller financed
|
|
|
d
|
|
|
7.0
|
%
|
Oct.
2009/10
|
|
|
2,475
|
|
|
|
2,474
|
|
Line
of Credit, $5 million / $10 million, land and construction
|
|
|
e
|
|
|
Prime
+.50
|
%
|
Feb-6-08
|
|
|
-
|
|
|
|
600
|
|
Notes
payable, land
|
|
|
f
|
|
|
Prime
+.75
|
%
|
Jun-1-08
|
|
|
-
|
|
|
|
6,200
|
|
Notes
payable, land
|
|
|
g
|
|
|
12.50
|
%
|
Mar-1-09
|
|
|
7,300
|
|
|
|
n/a
|
|
Notes
payable, development
|
|
|
h
|
|
|
Prime
+.50%
|
|
Feb-1-10
|
|
|
1,502
|
|
|
|
n/a
|
|
Notes
payable, family trust
|
|
|
i
|
|
|
8.0
|
%
|
Apr-1-08
|
|
|
-
|
|
|
|
280
|
|
Notes
payable, land, due
|
|
|
j
|
|
|
Prime
+.75
|
%
|
Dec-1-09
|
|
|
-
|
|
|
|
792
|
|
Notes
payable, land and development
|
|
|
k
|
|
|
Prime
+3.00
|
%
|
Feb-1-09
|
|
|
1,440
|
|
|
|
n/a
|
|
Line
of Credit,$55 million, land and development and
construction
|
|
|
l
|
|
|
Prime
+ .25
|
%
|
June-29-08
|
|
|
2,749
|
|
|
|
n/a
|
|
2005
$10 million, Subordinated convertible notes, net of discount of $481
thousand and $4,288 thousand, respectively
|
|
|
|
|
|
5.0
|
%
|
Dec-1-12
|
|
|
9,541
|
|
|
|
5,712
|
|
2006
$6.50 / $6.75 million, Subordinated convertible notes, net of discount
of
$2,903 and $4,066 thousand respectively
|
|
|
|
|
|
5.0
|
%
|
Sep-1-13
|
|
|
3,714
|
|
|
|
2,684
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
33,893
|
|
|
|
24,579
|
|
(a) In
March 2006, the Company secured a $3.0 million line of credit development loan,
maturing on March 30, 2008, at prime plus 0.50% with a minimum floor of
7.00%, and interest payable monthly. The loan is secured by property being
developed into single-family home lots, totaling approximately 32.6 acres
located in Williamson County, Texas. Each of the lots will be released upon
payment to the bank of either 125% of the loan basis or 90% of the net sales
proceeds for each lot to be released. The Company must make cumulative principal
reductions in the aggregate amount of approximately $494 thousand every three
months in the calendar year beginning at the end of the first calendar month
in
which the completion date occurs, which was during July 2006.
(b) During
October 2006, the Company secured a $15.5 million line of credit for the
purchase and development of approximately 534 acres located in eastern Travis
County and subsequently closed on the purchase of the property. The first phase
of the loan is $10.2 million and covers the purchase, a portion of the first
two
phases of construction, offsite utilities and provides letters of credit
totaling $4.3 million, required for the development of municipal utility
facilities, at the bank’s prime rate plus 0.50%, and is secured by the
underlying property. Loan origination fees were 1% of the $10.2 million. The
debt has financial covenants which (1) require the Company to keep a debt to
equity ratio of 2:1, and (2) keep liquid assets in excess of $7 million, except
for 2006 and first and second quarters of 2007 in which it is required to
maintain $4 million in liquid assets, which includes $2.2 million of restricted
cash, in the financial institution. During February 2007, the Company obtained
a
release from the bank whereby its restricted cash was released, except for
$315
thousand, and financial covenants for the third quarter of 2007 were modified
requiring the Company to keep liquid assets of only $4 million. Interest is
payable quarterly, commencing January 2007. Principal is payable in quarterly
installments commencing 90 days after completion of construction which is
projected to be during 2007. The required pay down amount under the loan is
equal to 75% of gross sales price as set forth in the Company’s contracts for
sales of lots. Its current projects require pay down amounts of approximately
$600 thousand per quarter. The purchase price of the property was approximately
$8.5 million, with $2.5 million of owner financing, $3.6 million from the bank
loan and cash from us of approximately $2.4 million. The Company has invested
an
additional amount for development of the property of approximately $1.9 million.
This note was refinanced and paid off in March 2007 (c).
(c) In
March 2007, the Company replaced the $15.5 million line of credit (b) with
a
$4.7 million term loan maturing March 2009. The interest rate on the loan is
12.5%, with interest payable monthly. The loan has no financial
covenants and is secured by the underlying property described
above.
(d) As
part of the purchase of 534 acres in Travis County described above, the Company
entered into four notes payable, seller financed, due 2009 and 2010, with a
cumulative balance of approximately $2.5 million. The notes payable have a
maturity date of October 12, 2010. Three of the notes payable with a
cumulative balance of $1.9 million are at an interest rate of 7.0% and the
fourth note payable issued for approximately $600 thousand is at an interest
rate of the Wall Street Journal’s prime rate plus 2.0%. The terms of the notes
payable call for annual principal repayments of $1.1 million in 2007, $0.3
million in 2008, $500 thousand in 2009 and $500 thousand in 2010, payable on
October 12. The notes can be prepaid at anytime without penalty and are
secured by the real estate purchased.
(e) The
Company had a $5 million master construction line of credit that matured on
January 11, 2007, used by one of its homebuilding clients. Under the
agreement, the Company, as Guarantor, is subject to certain covenants. Among
others, the Company must maintain a minimum tangible net worth of $2.5 million,
its debt to equity ratio shall not exceed 7.5 to 1 as of the end of any calendar
quarter, and Mr. Clark Wilson must remain active in the day to day business
management affairs of the Company. The Company complied with the above loan
covenants. During February 2007, the line of credit was replaced by a $10
million line of credit for land and home construction under the same terms
with
a maturity date of February 6, 2008.
(f) In
June 2005, the Company issued notes payable of approximately $6.9 million with
a
maturity date of June 30, 2006 at an escalating interest rate for
approximately 74% of 736 acres of land. These notes had a total balance of
approximately $6.7 million at December 31, 2005. The Company reduced the
principal balance through sales of acreage tracts to approximately $6.2 million
and during June 2006, it refinanced the notes payable, land, with a new lender.
The terms of the new loan include a $6.2 million principal balance, an interest
rate indexed to the New York prime rate plus 0.75% per annum with a floor of
7.0%, a term not to exceed 24 months or June 2008, and required principal
reductions of $800 thousand per quarter beginning June 12, 2007. Principal
reductions from sales of the real estate are credited towards the $800 thousand
per quarter requirement. This loan was refinanced in February 2007
(g).
(g) On
February 13, 2007 the Company refinanced its land obligation on a land loan
of approximately $6.2 million and obtained a new loan of approximately $7.2
million to finance approximately 538 acres. The interest rate is 12.5% annually
and requires monthly interest payments, with a maturity of two years and is
renewable for an additional year for a 1% loan fee. The loan is secured by
the
underlying land.
(h) On
February 9, 2007, the Company obtained a development loan of approximately
$4.6
million. The loan matures on February 1, 2010 and requires quarterly interest
payments and principal pay downs as lots are sold. The loan is secured by the
property being developed at an interest rate of prime plus 0.50%.
(i) In
October 2003, a predecessor entity of the Company exchanged notes payable of
approximately $280 thousand and approximately $95 thousand in cash for
approximately 15 acres of land in Travis County, Texas. Interest on the note
was
8% per annum, payable quarterly with a maturity date of October 7, 2008. In
March of 2005, the note was purchased by trusts belonging to some members of
Clark Wilson’s family. The interest rate remained the same at 8% per annum but
the maturity date changed to April 4, 2006. In March 2006, the Company
renegotiated an extension on the notes payable, family trust, 8%, due April
2008. This note was paid completely in August 2007.
(j) In
December of 2006, the Company paid cash and issued notes payable, land, due
2009, a long-term note payable of $792 thousand with a maturity date of
December 21, 2007 at an interest rate of the bank’s prime rate plus 0.5%
for the purchase of approximately 30 acres of land. The terms of the note
payable called for interest only payable quarterly, and the balance of the
principal and accrued interest due and payable upon maturity. It is secured
by
the real estate purchased. This note was replaced in February 2007.
(k) This
property was refinanced in February 2007 with a land purchase and development
loan of approximately $3.1 million. The loan matures in February 2009, with
two
nine-month extensions, at an interest rate of prime plus 3.00%, with interest
payable monthly.
(l) In
June 2007, the Company established a $55 million credit facility with a
syndicate of banks. The Company currently has approximately $2.7
million in borrowing for land and home construction.
Subordinated
Convertible Debt
The
Company accounts for all derivative financial instruments in accordance with
SFAS No. 133. Prior to 2007, derivative financial instruments were recorded
as
liabilities in the consolidated balance sheet and measured at fair value. The
Company accounted for the various embedded derivative features as being bundled
together as a single, compound embedded derivative instrument that was
bifurcated from the debt host contract, referred to as the “single compound
embedded derivatives.” The single compound embedded derivative
features include the conversion feature within the convertible note, the early
redemption option and the fixed price conversion adjustment. The initial value
of the single compound embedded derivative liability was bifurcated from the
debt host contract and recorded as a derivative liability, which resulted in
a
reduction of the initial carrying amount (as unamortized discount) of the
convertible notes. The unamortized discount was amortized using the
straight-line method over the life of the convertible note, or 7 years. The
penalty warrants were valued based on the fair value of the Company’s common
stock on the issuance date using a Black-Scholes valuation model and the
unamortized discount was to be amortized as interest expense over the 7-year
life of the notes using the straight-line method.
In
January 2007, the Company adopted “FSP EITF 00-19-2” as discussed in Note
2.
Prior
to
adoption of FSP EITF 00-19-2, the uncertainty of a successful registration
of
the shares underlying the subordinated convertible debt required that the
freestanding and embedded derivatives be characterized as derivative
liabilities. FSP EITF 00-19-2 specifically addressed the accounting for a
registration rights agreement and the requirement to classify derivative
instruments subject to registration rights agreements as liabilities was
withdrawn. The Company re-evaluated its accounting for the
subordinated debt transaction and determined that the liability for the penalty
warrants be included in the allocation of the proceeds to the various components
of the transaction according to paragraph 16 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt issued with Stock Purchase
Warrants.
The Company also determined the notes contained a beneficial
conversion feature under Issues 98-5 and 00-27, and used the effective
conversion price based on the proceeds allocated to the convertible instrument
to compute the intrinsic value of the embedded conversion option. The Company
recalculated the discount on the convertible debt at its intrinsic value and
re-characterized the freestanding and embedded derivatives as equity. The
previous valuation adjustments of the derivative liabilities were reversed
and
the amortization of the discounts was adjusted based upon the recalculation.
Per
FSP EITF 00-19-2, the Company was permitted to adjust the previous amounts
as a
cumulative accounting adjustment.
The
net
effect of the change increased the net carrying amount of the subordinated
convertible debt and eliminated the derivative liabilities. There was also
an
increase of $4.8 million in total stockholders’ equity. During
the year ended December 31, 2006, the Company recognized approximately $8.5
million of loss on fair value of derivatives related to the subordinated
convertible debt. Under the new FSP EITF 00-19-2 the derivatives were eliminated
and hence there will no longer be gains and losses related to the current
subordinated convertible debt.
2005,
$10MM, 5%, Subordinated Convertible Debt.
On
December 19, 2005, the Company issued $10 million in aggregate principal
amount of 5% subordinated convertible debt due December 1, 2012 to certain
purchasers. The following are the key features of the subordinated convertible
debt: interest accrues on the principal amount of the subordinated convertible
debt at a rate of 5% per annum and the debt is payable semi-annually on
May 1 and December 1 of each year, with interest payments beginning on
June 1, 2006. The subordinated convertible debt is due on December 1,
2012 and is convertible, at the option of the holder, into shares of our common
stock at a conversion price of $2.00 per share. The conversion price is subject
to adjustment for stock splits, reverse stock splits, recapitalizations and
similar corporate actions. An adjustment in the conversion price is also
triggered upon the issuance of certain equity or equity-linked securities with
a
conversion price, exercise price, or share price less than $2.00 per share.
The
anti-dilution provisions state the conversion price cannot be lower than $1.00
per share.
The
Company may redeem all or a portion of the subordinated convertible debt after
December 1, 2008 at a redemption price that incorporates a premium that
ranges from 3% to 10% during the period beginning December 1, 2008 and
ending on the due date. In addition, the redemption price will include any
accrued but unpaid interest on the subordinated convertible debt. Upon a change
in control event, each holder of the subordinated convertible debt may require
us to repurchase some or all of its subordinated convertible debt at a purchase
price equal to 100% of the principal amount of the subordinated convertible
debt
plus accrued and unpaid interest. The due date may accelerate in the event
the
Company commences any case relating to bankruptcy or insolvency, or related
events of default. The Company’s assets will be available to pay obligations on
the subordinated convertible debt only after all senior indebtedness has been
paid.
The
subordinated convertible debt has a registration rights agreement whereby the
Company must use its best efforts to have its associated registration statement
effective not later than 120 days after the closing (December 19, 2005).
Further, the Company must maintain the registration statement in an effective
status until the earlier to occur of (i) the date after which all the
registrable shares registered thereunder shall have been sold and (ii) the
second anniversary of the later to occur of (a) the closing date, and (b) the
date on which each warrant has been exercised in full and after which by the
terms of such Warrant there are no additional warrant shares as to which the
warrant may become exercisable; provided that in either case, such date shall
be
extended by the amount of time of any suspension period. Thereafter the Company
shall be entitled to withdraw the registration statement, and upon such
withdrawal and notice to the investors, the investors shall have no further
right to offer or sell any of the registrable shares pursuant to the
registration statement. The registration statement filed pursuant to the
registration rights agreement was declared effective by the SEC on
August 1, 2006.
The
Company also issued warrants to purchase an aggregate of 750,000 shares of
common stock to the purchasers of the subordinated convertible debt, 562,500
shares which vested and the remaining shares will never vest. The
warrants were exercisable only upon the occurrence of certain events and then
only in the amount specified as follows: (i) with respect to 25% of the warrant
shares, on February 3, 2006 if the registration statement shall not have
been filed with the SEC by such date (the Company filed a Form SB-2 registration
statement on February 2, 2006); (ii) with respect to an additional 25% of
the warrant shares, on April 19, 2006 if the registration statement shall
not have been declared effective by the SEC by such date; (iii) with respect
to
an additional 25% of the warrant shares, on May 19, 2006 if the
registration statement shall not have been declared effective by the SEC by
such
date; and (iv) with respect to the final 25% of the warrant shares, on
June 18, 2006 if the registration statement shall not have been declared
effective by the SEC by such date. Management has recorded the fair value of
these warrants due to the uncertainty surrounding the timeline of getting the
registration statement effected and the high probability that these warrants
would be issued. The shelf registration statement relating to these
warrants was declared effective on August 1, 2006 and 562,500 of these
warrants have vested and the remaining 187,500 warrants will never
vest.
The
penalty warrants were valued based on the fair value of the Company’s common
stock on the issuance date of $1.60, using a Black-Scholes approach, risk free
interest rate of 4.25%; dividend yield of 0%; weighted-average expected life
of
the warrants of 10 years; and a 60% volatility factor, resulting in an allocated
value of approximately $613 thousand. The penalty warrants are recorded as
part
of the debt discount and an increase in additional paid in capital, and
amortized over the 7-year life of the notes using the straight-line rate
method.
The
Company also incurred closing costs of $588 thousand which included placement
agent fees of $450 thousand plus reimbursement of expenses to the placement
agent of $125 thousand, plus 750,000 fully vested warrants to purchase the
Company’s common stock at $2.00 per share with a 10 year exercise period, valued
at $829 thousand, for a total of $1.4 million, recorded as debt issuance costs,
to be amortized over the 7-year life of the notes using the straight line
method. These warrants were valued based on the fair value of the Company’s
common stock of $1.60, using a Black-Scholes valuation model, at a $2.00
exercise price, risk free interest rate of 4.25%; dividend yield of 0%;
weighted-average expected life of warrants of 10 years; and a 60% volatility
factor.
Subordinated
Convertible Note at September 30, 2007 and at December 31,
2006
|
|
2007
|
|
|
2006
|
|
Notional
balance
|
|
$
|
10,000,000
|
|
|
|
10,000,000
|
|
Unamortized
discount
|
|
|
(459,400
|
)
|
|
|
(4,287,857
|
)
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
9,540,600
|
|
|
|
5,712,143
|
|
2006,
$6.75MM, 5%, Subordinated Convertible Debt
On
September 29, 2006, the Company raised capital of $6.75 million in
aggregate principal amount of 5% subordinated convertible debt due
September 1, 2013, to certain purchasers. As of December 31, 2006,
$6.75 million had been received in cash, the remaining $250 thousand was a
receivable from an owner of land that the Company had under option to
purchase. During the quarter ended June 2007, the Company did not
exercise its option to purchase the land and therefore does not expect to
receive the additional $250 thousand. In addition, during the
quarter ended June 30, 2007, one of our convertible debt holders who is also
the
seller of Bohl’s tract purchased common stock with a promissory
note. Under the terms of the promissory note, should the Company not
exercise the option to purchase the Bohl’s tract the convertible debt would be
used for repayment of the promissory note. As the Company did not
exercise the option to purchase Bohl’s tract the promissory note was repaid from
the proceeds of the convertible debt. The following are the key
features of the subordinated convertible debt: interest accrues on the principal
amount of the subordinated convertible debt at a rate of 5% per annum, payable
semi-annually on February 1 and September 1 of each year, with
interest payments beginning on February 1, 2006. The subordinated
convertible debt is due on September 1, 2013 and is convertible, at the
option of the holder, into shares of common stock at a conversion price of
$2.00
per share. The conversion price is subject to adjustment for stock splits,
reverse stock splits, recapitalizations and similar corporate actions. An
adjustment in the conversion price is also triggered upon the issuance of
certain equity or equity-linked securities with a conversion price, exercise
price, or share price less than $2.00 per share. The anti-dilution provisions
state the conversion price cannot be lower than $1.00 per
share.
The
Company may redeem all or a portion of the subordinated convertible debt after
September 1, 2009 at a redemption price that incorporates a premium that
ranges from 3% to 10% during the period beginning September 1, 2009 and
ending on the due date. In addition, the redemption price will include any
accrued but unpaid interest on the subordinated convertible debt. Upon a change
in control event, each holder of the subordinated convertible debt may require
us to repurchase some or all of its subordinated convertible debt at a purchase
price equal to 100% of the principal amount of the subordinated convertible
debt
plus accrued and unpaid interest. The due date may accelerate in the event
the
Company commences any case relating to bankruptcy or insolvency, or related
events of default. The Company’s assets will be available to pay obligations on
the subordinated convertible debt only after all senior indebtedness has been
paid.
The
subordinated convertible debt has a registration rights agreement, whereby
the
Company must use its best efforts to have its associated registration statement
effective not later than 120 days after the closing (January 27, 2007).
Further, the Company must maintain the registration statement in an effective
status until the earlier to occur of (i) the date after which all the
registrable shares registered thereunder shall have been sold and (ii) the
second anniversary of the later to occur of (a) the closing date, and (b) the
date on which each warrant has been exercised in full and after which by the
terms of such warrant there are no additional warrant shares as to which the
warrant may become exercisable; provided that in either case, such date shall
be
extended by the amount of time of any suspension period. Thereafter the Company
shall be entitled to withdraw the registration statement, and upon such
withdrawal and notice to the investors, the investors shall have no further
right to offer or sell any of the registrable shares pursuant to the
registration statement.
The
Company also issued warrants to purchase an aggregate of 506,250 shares of
common stock to the purchasers of the subordinated convertible debt. The
warrants are exercisable only upon the occurrence of certain events and then
only in the amount specified as follows: (i) with respect to 25% of the warrant
shares, on November 13, 2006 if the registration statement shall not have
been filed with the SEC by such date (the Company filed a Form SB-2 registration
statement on October 16, 2006); (ii) with respect to an additional 25% of
the warrant shares, on January 27, 2007 if the registration statement shall
not have been declared effective by the SEC by such date; (iii) with respect
to
an additional 25% of the warrant shares, on February 26, 2007 if the
registration statement shall not have been declared effective by the SEC by
such
date; and (iv) with respect to the final 25% of the warrant shares, on
March 28, 2007 if the registration statement shall not have been declared
effective by the SEC by such date. Management has recorded 75% of the fair
value
of these warrants since its timely filed registration statement but such
registration statement was not declared effective prior to March 28,
2007.
The
Company also incurred closing costs of $140 thousand, including placement agent
fees of approximately $70 thousand plus reimbursement of expenses to the
placement agent of $25 thousand, for a total of $95 thousand to the placement
agent, recorded as debt issuance costs, to be amortized over the 7-year life
of
the notes using the straight-line rate method.
The
issuance of the debt resulted in an embedded beneficial conversion feature
valued at approximately $2.5 million, which will be recorded as part of the
debt
discount and an increase in additional paid in capital, and amortized over
the
7-year life of the notes using the straight-line rate method.
The
penalty warrants were valued were based on the fair value of the Company’s
common stock on the issuance date of $1.91, using a Black-Scholes approach,
risk
free interest rate of 4.64%; dividend yield of 0%; weighted-average expected
life of the warrants of 10 years; and a 60% volatility factor. The allocated
value of the penalty warrants totaled approximately $846 thousand and are
recorded as part of the debt discount and an increase in additional paid in
capital, and amortized over the 7-year life of the notes using the straight-line
rate method.
Convertible
Note at September 30, 2007 and December 31, 2006:
|
|
2007
|
|
|
2006
|
|
Notional
balance
|
|
$
|
6,500,000
|
|
|
|
6,750,000
|
|
Unamortized
discount
|
|
|
(2,785,820
|
)
|
|
|
(4,066,267
|
)
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
3,714,180
|
|
|
|
2,683,733
|
|
(10) Common
Stock
The
Company is authorized to issue 100,000,000 shares of common stock. Each common
stockholder is entitled to one vote per share of common stock
owned.
The
Company sold 5,000,000 shares of common stock in a public offering at $3.25
per
share that closed on May 19, 2007 and concurrently began trading on the American
Stock Exchange under the symbol “WIH”. Related to the financing, the Company
incurred the following transaction costs:
(In
thousands)
|
|
|
|
Cash
paid to investment banker for underwriting and other fees
|
|
$
|
1,219
|
|
Legal,
printing, accounting and stock exchange registration fees
|
|
|
497
|
|
Travel
and selling related costs
|
|
|
503
|
|
Warrants
to purchase 500,000 shares at $4.06 with a fair value based on the
Black-
Scholes option pricing model with a risk free interest rate
of
4.64%; dividend yield of 0%;
weighted-average expected life of the
warrants of 1 years; and a 60% volatility factor at
$0.56 per
warrant.
|
|
|
280
|
|
Total
expenses
|
|
$
|
2,499
|
|
During
June 2007, the Company issued 80,000 shares of common stock for the purchase
of
Green Builders, Inc.
(11) Common
Stock Option / Stock Incentive Plan
In
August
2005, the Company adopted the Wilson Family Communities, Inc. 2005 Stock
Option/Stock Issuance Plan or the Stock Option Plan. The plan contains two
separate equity programs: 1) the Option Grant Program for eligible persons
at
the discretion of the plan administrator, be granted options to purchase shares
of common stock and 2) the Stock Issuance Program under which eligible persons
may, at the discretion of the plan administrator, be issued shares of common
stock directly, either through the immediate purchase of such shares or as
a
bonus for services rendered to the Company or any parent or subsidiary. The
market value of the shares underlying option issuance prior to the merger of
the
Company and WFC was determined by the Board of Directors as of the grant date.
This plan was assumed by Wilson Holdings, Inc. The fair value of the options
granted under the plan was determined by the Board of Directors or the Board
prior to the merger of the Company and WFC.
The
Board
is the plan administrator and has full authority (subject to provisions of
the
plan) and it may delegate a committee to carry out the functions of the
administrator. Persons eligible to participate in the plan are employees,
non-employee members of the Board or members of the board of directors of any
parent or subsidiary.
The
stock
issued under the Stock Option Plan shall not exceed 2,500,000 shares. Unless
terminated at an earlier date by action of the Board of Directors, the Stock
Option Plan terminates upon the earlier of (1) the expiration of the ten year
period measured from the date the Stock Option Plan is adopted by the Board
or
(2) the date on which all shares available for issuance under the Stock Option
Plan shall have been issued as fully-vested shares.
The
Company had 765,000 shares of common stock available for future grants under
the
Stock Option Plan at September 30, 2007. Compensation expense related to
the Company’s share-based awards for the nine months ended September 30,
2007 and 2006 was approximately $484 thousand and $349 thousand,
respectively.
Before
January 1, 2006, options granted to non-employees were recorded at fair
value in accordance with SFAS No. 123 and EITF 96-18. These options are issued
pursuant to the Stock Option Plan and are reflected in the disclosures
below.
During
the nine months ended September 30, 2007, the Company issued options to purchase
1,370,000 shares of common stock at exercise prices ranging from $3.25 to 1.65
per share. Using the Black-Scholes pricing model with the following
weighted-average assumptions: risk free interest rate of 4.64%; dividend yields
of 0%; weighted average expected live of options ranging from 1 to 5 years;
and
a 60% volatility factor, management estimated the fair market value of the
grants to range from $0.56 to $1.43 per share. Management estimated the
volatility factor based on an average of comparable companies due to its limited
trading history.
A
summary
of activity in common stock options for the years ended December 31, 2006
and the nine months ended September, 2007 are as follows:
|
|
Shares
|
|
|
Range
of Exercise Prices
|
|
|
Weighted-Average
Exercise Price
|
|
Options
outstanding, December 31, 2006
|
|
|
925,000
|
|
|
$
|
2.00
- $2.26
|
|
|
$
|
2.17
|
|
Options
granted
|
|
|
1,370,000
|
|
|
|
$1.65
- $3.25
|
|
|
$
|
2.82
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
forfeited
|
|
|
(460,000
|
)
|
|
$
|
2.00
- $3.25
|
|
|
$
|
2.45
|
|
Options
outstanding, September 30, 2007
|
|
|
1,835,000
|
|
|
$
|
2.00
- $3.25
|
|
|
$
|
2.24
|
|
Add:
Available for issuance
|
|
|
665,000
|
|
|
|
|
Total
available under plan
|
|
|
2,500,000
|
|
|
|
|
The
following is a summary of options outstanding and exercisable at September
30,
2007:
|
|
|
|
|
Outstanding
|
|
|
Vested
|
|
Number
of Shares
Subject to Options Outstanding
|
|
|
Weighted
Average Remaining Contractual
Life (in years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of
Vested
Shares
|
|
|
Weighted
Average Remaining Contractual
Life (in years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
1,835,000
|
|
|
|
6.76
|
|
|
$
|
2.24
|
|
|
|
805,965
|
|
|
|
5.62
|
|
|
$
|
2.54
|
|
At
September 30, 2007, there was approximately $1.6 million of unrecognized
compensation expense related to unvested share-based awards granted under the
Company’s Stock Option Plan. That expense is expected to be recognized over a
weighted-average period of 6.76 years. In February 2007, the
Company’s Board approved an 819,522 share increase in the number of shares
issuable pursuant to its option plan for a total of 2,500,000 shares issuable
under the plan. This increase will be effective when approved by the
Company’s shareholders.
(12)
Purchase
of Green Builders, Inc.
On
June
19, 2007, the Company purchased Green Builders, Inc. for $65 thousand in cash
and issued 80,000 shares of the Company’s common stock valued at $2.70 per share
on the date of the transaction to the former shareholder of Green Builders,
Inc.
The total purchase price for the acquisition was approximately $281
thousand. In addition the Company spent approximately $24 thousand in
legal fees for the purchase. The Company allocated the purchase price
and legal fees to trademark with indefinite life in accordance with SFAS
142.
|
|
|
|
Cash
|
|
$
|
17,081
|
|
Accounts
Receivable
|
|
|
2,900
|
|
Accounts
Payable
|
|
|
(6,190
|
)
|
Trademarks
|
|
|
292,192
|
|
Others
|
|
|
(8,776
|
)
|
|
|
$
|
297,207
|
|
In
conjunction with the acquisition, the Company increased the size of its Board
of
Directors from four to five persons, and appointed Victor Ayad as a director
of
the Company. Mr. Ayad was the President and sole shareholder of Green Builders,
Inc. prior to the acquisition. The pro forma effect of the acquisition on the
Company’s income was not material and is already consolidated into the Company’s
results as a VIE under FIN 46(R).
(13)
Subsequent
Events
In
October 2007 the Company amended its four notes payable, seller financed, that
serve a part of the purchase of 534 acres in Travis County described
above. The notes payable maturity date has been extended to
October 12, 2011. The terms of the notes payable now call for
quarterly interest payments commencing October 12, 2007 and principal payments
of $1.4 million in October 2010 and $1.0 million due in October
2011.
In
October 2007 the Company refinanced its land obligation on a land loan for
approximately 120 acres in Georgetown Village Section 9 of approximately $1.1
million and obtained a new loan of approximately $4.3 million to finance
development for Georgetown Village Section 9. The interest rate
is 12.5% annually and requires monthly interest payments, with a maturity of
two
years.
Item
2.
Management’s Discussion and
Analysis or Plan of Operation
The
information presented in this section should be read in conjunction with our
audited financial statements and related notes for the periods ended December
31, 2006 and 2005 included in our Form 10-KSB, as well as the information
contained in the financial statements, including the notes thereto, appearing
in
Part 1 of this report. This report contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the
Securities Exchange Act of 1934, that involve risks and uncertainties. Our
expectations with respect to future results of operations that may be embodied
in oral and written forward-looking statements, including any forward looking
statements that may be included in this report, are subject to risks and
uncertainties that must be considered when evaluating the likelihood of our
realization of such expectations. Our actual results could differ materially.
The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar
phrases as they relate to us are intended to identify such forward-looking
statements. Actual results and the timing of events may differ
materially from those contained in these forward-looking statements due to
a
number of factors, including those discussed in the section entitled “Risk
Factors” below.
Overview
Our
business plan focuses on the acquisition of undeveloped land that we believe,
based on our understanding of population growth patterns and infrastructure
development, is strategically located. This portion of our business
focus has required, and is expected to continue to require, the majority of
our
financial resources. We have funded these acquisitions primarily with
bank debt. In tandem with our land acquisition efforts, and based
upon our strategic market analysis, we also prepare land for homebuilding.
We
believe that as the central Texas economy expands, the strategic land purchases,
land development activities and homebuilding activities that we have recently
commenced will enable us to capitalize on the new growth centers we expect
will
be created.
We
commenced our homebuilding operations in June 2007 with the purchase of Green
Builders, Inc. We are in the process of developing the Green Builders
brand and developing our homebuilding strategy. Our strategy is to
build homes that are environmentally responsible, resource efficient and
consistent with local style. We will build homes on the majority of the lots
that we currently have under development. We may build on lots that
we purchase from other land builders or developers. We plan on continuing to
acquire and develop land and sell some of those lots to
homebuilders. Our home designs will be selected and prepared for each
of our markets based on local community tastes and the preferences of
homebuyers. Substantially all of our construction work will be performed by
subcontractors. Subcontractors will be retained for specific subdivisions
pursuant to contracts entered in 2007.
We
have
derived revenue from the sale of real estate and residential lots, and from
services provided to homebuilder clients. We exercise significant influence
over, but hold no controlling interest in, homebuilder clients, but we may
retain the majority of the risk of loss. At September 30, 2007 and December
31,
2006, we determined that we were the primary beneficiary in certain homebuilder
agreements, as defined under FASB Interpretation No. 46(R), or FIN 46(R),
entitled “Consolidation of Variable Interest Entities”, where we have a
significant, but less than controlling, interest in our clients. In accordance
with FIN 46(R), the results of these clients have been consolidated into our
financial statements. A primary focus of our business has been the
sale of developed lots to homebuilders, including national
homebuilders. During the second quarter of 2007, demand for finished
lots from national homebuilders was reduced and orders placed for some of our
finished lots were cancelled. We believe that retaining these lots
for use by our new homebuilding business is the most efficient use of our
finished lots and will allow us to generate homebuilding revenue to replace
revenue from the loss of sales of these finished lots. We believe
that national homebuilders are trying to reduce their real estate holdings
and
their demand for real estate has been reduced in all parts of the country,
including areas which have been less affected from the recent slowdown in
housing starts, such as Central Texas.
We
terminated our relationship our last remaining homebuilder client on August
2,
2007 subsequent to the sale of all the homes for which we had guaranteed the
loans. As a result of the termination of the relationship, we
recorded approximately a $260 thousand increase to stockholders
equity.
In
September 2007, we changed our fiscal year-end from
December 31 to September 30 and we will file our annual report on Form 10-KSB
for the transition period from January 1, 2007 to September 30, 2007 with the
Securities and Exchange Commission on or before December 31, 2007.
Results
of Operations
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Delta
|
|
|
%
Delta
|
|
|
2007
|
|
|
2006
|
|
|
Delta
|
|
|
%
Delta
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,293
|
|
|
|
1,897
|
|
|
|
(604
|
)
|
|
|
-32
|
%
|
|
|
4,444
|
|
|
|
5,265
|
|
|
|
(820
|
)
|
|
|
-16
|
%
|
Gross
profit
|
|
|
$220
|
|
|
|
367
|
|
|
|
(147
|
)
|
|
|
-40
|
%
|
|
|
(376
|
)
|
|
|
1,160
|
|
|
|
(1,536
|
)
|
|
|
-132
|
%
|
Operating
costs
|
|
$
|
1,396
|
|
|
|
1,450
|
|
|
|
47
|
|
|
|
3
|
%
|
|
|
4,237
|
|
|
|
4,010
|
|
|
|
(234
|
)
|
|
|
-6
|
%
|
Operating
loss
|
|
$
|
(1,175
|
)
|
|
|
(1,083
|
)
|
|
|
(100
|
)
|
|
|
9
|
%
|
|
|
(4,613
|
)
|
|
|
(2,850
|
)
|
|
|
(1,770
|
)
|
|
|
62
|
%
|
Net
loss
|
|
$
|
(1,874
|
)
|
|
|
(2,059
|
)
|
|
|
173
|
|
|
|
-8
|
%
|
|
|
(6,544
|
)
|
|
|
(7,626
|
)
|
|
|
1,070
|
|
|
|
-14
|
%
|
Homebuilding
and Related Services Revenues
Background
- Homebuilding and related services consists of home sales and homebuilder
services. Historically, all of the home sales have been generated by our clients
utilizing our homebuilder services. We consolidate these clients into our
operating results based on accounting requirements according to FIN 46(R) and
refer to these clients as Variable Interest Entities, or VIEs.
Revenues
- During the three months and nine months ended September 30, 2007, home sales
declined approximately 88% and 69%, respectively, from the same periods in
2006,
primarily due to the reduced home sales from our VIEs. Homebuilding
services declined during the three months ended September 30, 2007 by
approximately 88% as our one remaining homebuilder client depleted their
inventory. All homebuilding and related services for the three months
and nine months ended September 30, 2007 were generated with one homebuilder
client. We terminated our relationship with our homebuilder client on
August 2, 2007 subsequent to the sale of all the homes for which we had
guaranteed the loans. As a result of the termination of the
relationship, we recorded approximately a $260 thousand increase to stockholders
equity.
In
June
2007 we acquired Green Builders, Inc. and have commenced our homebuilding
activities under the name “Green Builders, Inc.” Our strategy
is to build homes that are environmental responsible, resource efficient and
built consistently with local styles and standards. We plan to
sell homes in central Texas, initially in the Austin, Texas area for prices
ranging from $200 thousand to $700 thousand.
Land
Sales
Background
–
Land sales revenue consists of revenues from the sale of developed
lots. Developing finished lots from land takes approximately one to
three years. We may sell our lots to national, regional and local homebuilders
that may purchase anywhere from five to one hundred or more lots at a time,
although delivery of lots would be scheduled over several months to possible
years, or we may use our developed lots for our own homebuilding
operations.
Revenues
–
Revenues from land sales increased approximately 169% and 192% for the three
months and nine months ended September 30, 2007, respectively, from the same
periods in 2006, primarily to the completion and sale of residential lots.
Gross
profit as a percentage of total land revenues declined over the same period
in
the prior year due to the low volume and mix of land sold. Land sales during
the
same periods of 2006 consisted of a land purchase option and undeveloped
acreage
tracts with lower cost of sales, whereas the current year land sales were
primarily single family lots.
Cost
of Sales
- In May 2007 we did not exercise a land purchase option to
purchase the Bohls tract of approximately 428 acres for approximately $7.2
million. Due to the current market conditions in the homebuilding
industry, revenue projections for sale of residential lots to other homebuilders
have substantially declined. We concluded that we currently have adequate
single-family lots, excluding the Bohls tract. We recorded a loss provision
of
approximately $1.3 million relating to development expenses incurred on the
tract and expenses expected to be incurred due to the expiration of the option
period. We commenced homebuilding under Green Builders, Inc.
effective June 20,
2007
and
plan to develop lots and build environmentally responsive, resource efficient
and culturally sensitive homes. We are in the process of developing standards
for “green homebuilding” and plan to sell homes in central Texas, initially in
the Austin, Texas area for prices ranging from $200 thousand to $700
thousand.
Costs
and Expenses
General
and Administrative Expenses
General
and administrative expenses are composed primarily of salaries of general
and
administrative personnel and related employee benefits and taxes, accounting
and
legal and general office expenses and insurance.
During
the three months ended September 30, 2007 and 2006, salaries, benefits, taxes
and related employee expenses totaled approximately $356 thousand and $563
thousand, respectively, and represented approximately 27% and 48%, respectively,
of total general and administrative expenses for the periods. The decrease
was
primarily the result of a decrease in the provision for bonuses of approximately
$189 thousand. During the nine months ended September 30, 2007 and 2006,
salaries, benefits, taxes and related employee expenses totaled approximately
$1.2 million and $1.3 million, respectively, and represented approximately
31%
and 39%, respectively, of total general and administrative expenses for the
periods.
Legal,
accounting, audit and transaction expense, which includes the expense of
filing
our registration statements and other SEC filings, totaled approximately
$284
thousand and $176 thousand, respectively, in the three months ended September
30, 2007 and 2006. For the nine months ended September 30, 2007 and 2006,
the
expenses were approximately $666 thousand and $664 thousand, respectively,
due
primarily to expenses relating to the 2007 offering that were a reduction
in net
proceeds versus expenses in the same periods the prior year, offset by
an
increase in overall filings for the Company in 2007.
Stock
compensation expense for the three months ended September 30, 2007 and
2006 was
approximately $336 thousand and $147 thousand, respectively, and approximately
$541 thousand and $350 thousand, respectively for the nine months ended
September 30, 2007 and 2006. The increase in stock compensation
expense was due primarily to an increase in acceleration of stock options
vesting for our CFO in connection with the terms of his new consulting
agreement.
Depreciation
expense included in general and administrative expenses was approximately
$24
thousand and $44 thousand, respectively, for the nine months ended September
30,
2007 and 2006 and approximately $319 thousand and $157 thousand, respectively
for the same periods for amortization of subordinated debt issuance
costs
We
expect
total general and administrative expenses to increase over the next year
as we
continue to ramp up the homebuilding business.
Sales
and Marketing Expenses
Sales
and
marketing expenses include salaries and related taxes and benefits, marketing
activities including website, brochures, catalogs, signage, and billboards,
and
market research that benefit our corporate presence and are not included as
homebuilding cost of sales.
We
expect
sales and marketing expenses to increase substantially as we continue to ramp
up
our homebuilding business and develop our green building strategy and corporate
branding.
Interest
Expense and Income
Interest
expense for the three months and nine months ended September 30, 2007 and 2006
increased by approximately $273 thousand and $584 thousand, respectively, and
was related to the increased subordinated convertible debt issued in September
2006 and the increase in property not under development. Included in the
interest expense was amortization of subordinated convertible debt. For the
nine
months ended September 30, 2007 and 2006, the amortization expense of the
subordinated debt discount was approximately $536 thousand
consecutively. We expect our interest expense to decrease on land and
development due to our new line of credit. To the extent we purchase additional
land that we hold for future development, our interest expenses will
increase.
Interest
and other income increased for the nine months ended September 30, 2007 over
the
same period in 2006 due to the increase in cash from our public offering in
May
2007 and consisted of interest earned on our cash and cash equivalents and
immaterial amounts of miscellaneous other income.
Financial
Condition and Capital Resources
Liquidity
At
September 30, 2007 we had approximately $13.1 million in cash and cash
equivalents. We completed a successful public offering of the Company’s common
stock in May 2007, netting us approximately $14 million of cash.
On
June
29, 2007, WFC entered into a three-year $55 million revolving credit facility
with a syndicate of banks led by RBC Centura Bank, as administrative
agent. We have guaranteed all of the obligations of WFC under the
Credit Facility. The obligations of WFC under the Credit Facility will be
secured by the assets of each subdivision to be developed with the proceeds
of
loans available under the Credit Facility. We currently have approximately
$2.7
million borrowings outstanding under the Credit Facility.
The
Credit Facility allows WFC to obtain revolving credit loans and provides for
the
issuance of letters of credit. The amount available at any time under the Credit
Facility for revolving credit loans or the issuance of letters of credit is
determined by a borrowing base. The borrowing base is calculated as the sum
of
the values for homes and lots in the subdivision to be developed as agreed
to by
WFC and the agent.
Outstanding
borrowings under the Credit Facility will bear interest at the prime rate plus
0.25%. WFC is charged a letter of credit fee equal to 1.10% of each letter
of
credit issued under the Credit Facility. WFC may elect to prepay the Credit
Facility at any time without premium or penalty.
The
Credit Facility contains customary covenants limiting our ability to take
certain actions, including covenants that
|
·
|
affect
how we can develop WFC’s
properties;
|
|
·
|
limit
WFC’s ability to pay
dividends and other restricted payments;
|
|
·
|
limit
WFC’s ability to place
liens on its property;
|
|
·
|
limit
WFC’s ability to engage in
mergers and acquisitions and dispositions of
assets;
|
|
·
|
require
WFC to maintain a minimum
net worth of $20,000,000, including subordinated debt (although the
minimum net worth may be $17,000,000 for one
quarter);
|
|
·
|
prohibit
WFC’s ratio of debt to
equity from exceeding (A) 1.75 to 1.0 prior to September 30, 2007,
(B)
1.85 to 1.0 from September 30, 2007 until March 30, 2008 and (C)
2.0 to
1.0 thereafter; and
|
|
·
|
require
WFC to maintain working
capital of at least
$15,000,000.
|
An
event
of default will occur under the Credit Facility if certain events occur,
including the following:
|
·
|
a
failure to pay principal or
interest on any loan under the Credit
Facility;
|
|
·
|
the
inaccuracy of a
representation or warranty when
made;
|
|
·
|
the
failure to observe or perform
covenants or agreements;
|
|
·
|
the
commencement of proceedings
under federal, state or foreign bankruptcy, insolvency, receivership
or
similar laws;
|
|
·
|
any
loan document, or any lien
created thereunder, ceases to be in full force and
effect;
|
|
·
|
the
entry of a judgment greater
than $1,000,000 that remains undischarged;
or
|
If
an
event of default occurs under the Credit Facility, then the lenders may: (1)
terminate their commitments under the Credit Facility; (2) declare any
outstanding indebtedness under the Credit Facility to be immediately due and
payable; and (3) foreclose on the collateral securing the
obligations. We are currently in compliance with our covenants as of
September 30, 2007.
Our
growth will require substantial amounts of cash for earnest money deposits,
land
purchases, development costs, interest payments and homebuilding costs. Until
we
begin to sell an adequate number of lots and homes to cover monthly operating
expenses, sales, marketing, general and administrative costs will deplete
cash.
To
maintain our liquidity, we have financed the majority of our land and
development activities with debt and believe we can continue to do so in the
future through a combination of conventional and subordinated convertible debt,
joint venture financing, sales of selected lot positions, sales of land and
lot
options, and by raising additional equity.
Capital
Resources
We
have
raised approximately $16.8 million of subordinated convertible debt, and
approximately $14 million in a public offering of the Company’s common stock
completed in May 2007. WFC also entered into a three-year $55
million revolving credit facility with a syndicate of banks mentioned
previously. The Credit Facility may be increased to $100 million with the
consent of the lenders.
In
May
2007 we did not exercise a land purchase option to purchase the Bohls tract
of
approximately 428 acres for approximately $7.2 million. Our decision not to
exercise the option was based on the following factors:
|
·
|
Due
to the current market conditions in the homebuilding industry, revenue
projections for sales of residential lots to other homebuilders has
substantially declined. We concluded that we currently have adequate
single-family lots for our needs, excluding the Bohls tract. Therefore,
we
are attempting to renegotiate the purchase price and other significant
terms of the contract with the seller of the Bohls tract. While these
discussions are ongoing the option expired in June 2007. We recorded
a
loss provision of approximately $1.3 million relating to development
costs
incurred on the tract and expenses expected to be incurred due to
the
expiration of the option period.
|
|
·
|
We
commenced homebuilding under Green Builders, Inc. in June 2007 and
plan to
build and sell homes in the central Texas area, initially in the
Austin,
Texas area, for prices ranging from $200 thousand to $700
thousand.
|
Due
to
market conditions stated above, weather related delays and longer than expected
ramp-up of homebuilding operations our financial projections have
changed. We expect to incur significant losses for the first and
second quarters of fiscal 2008.
We
believe that the capital we raised in May 2007, the closing of the revolving
credit facility and future land and home sales and financing will provide
adequate capital resources for the next twelve months, but we may be required
to
raise additional capital in 2008.
Land
and
homes under construction comprise the majority of the Company’s assets. These
assets could suffer devaluation if the housing and real estate market suffers
a
significant downturn, due to interest rate increases or other
reasons.
Our debt might then be called, requiring liquidation of assets to satisfy
our
debt obligations or the use of our cash. A significant downturn could also
make
it more difficult for us to liquidate assets, to raise cash and to pay off
debts, which could have a material adverse effect.
In
October 2007 we amended our four notes payable, seller financed, that serve
a
part of the purchase of 534 acres in Travis County described
above. The notes payable maturity date has been extended to
October 12, 2011. The terms of the notes payable now call for
quarterly interest payments commencing October 12, 2007 and principal payments
of $1.4 million in October 2010 and $1.0 million due in October
2011.
In
October 2007 we refinanced our land obligation on a land loan for approximately
120 acres in Georgetown Village Section 9 of approximately $1.1 million and
obtained a new loan of approximately $4.3 million to finance development for
Georgetown Village Section 9. The interest rate is 12.5%
annually and requires monthly interest payments, with a maturity of two
years.
Off-Balance
Sheet Arrangements
As
of
September 30, 2007, we had no off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
Our
accounting policies are more fully described in the notes to our consolidated
financial statements.
As
discussed in the notes to the consolidated financial statements, the preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions about future events that affect the amounts reported in our
consolidated financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
could differ from those estimates, and such differences may be material to
our
consolidated financial statements. Listed below are those policies and estimates
that we believe are critical and require the use of significant judgment in
their application.
Consolidation
of Variable Interest Entities
We
offer
certain homebuilder clients surety for their interim construction loans and
cash
advances to facilitate sales of our residential lots. We may be considered
the
primary beneficiary as defined under FASB Interpretation No. 46(R) (“FIN
46(R)”), “Consolidation of Variable Interest Entities” (VIE), and the Company
may have a significant, but less than controlling, interest in the entities.
We
account for each of these entities in accordance with FIN 46(R). Management
uses
its judgment when determining if we are the primary beneficiary of, or have
a
controlling interest in, any of these entities. Factors considered in
determining whether we have significant influence or has control include risk
and reward sharing, experience and financial condition of the other partners,
voting rights, involvement in day-to-day capital and operating decisions and
continuing involvement.
Inventory
Inventory
is stated at cost unless it is determined to be impaired, in which case the
impaired inventory would be written down to the fair market
value. Inventory costs include land, land development costs, deposits
on land purchase contracts, model home construction costs, advances to builders
and capitalized interest and real estate taxes incurred during development
and
construction phases.
Revenue
Recognition
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate.” Revenues from land development services to builders
are recognized when the properties associated with the services are sold, when
the risks and rewards of ownership are transferred to the buyer and when the
consideration has been received, or the title company has processed payment.
For
projects that are consolidated, homebuilding revenues and services will be
categorized as homebuilding revenues and revenues from property sales or options
will be categorized as land sales.
Use
of Estimates
We
have
estimated and accrued liabilities for real estate property taxes on our
purchased land in anticipation of development, and other liabilities including
the beneficial conversion liability and the fair value of warrants and
options. To the extent that the estimates are different to the actual
amounts, it could have a material effect on the financial
statements.
We
have
two properties that are in Municipal Utility Districts, or MUDs. We incur
development costs for water, sewage lines and associated treatment plants and
other development costs and fees for these properties. Under the agreement
with
the MUDs, we expect to be reimbursed partially for the above developments costs.
The MUDs will issue bonds to repay us once there is enough assessed value on
the
property for the MUD taxes to repay the bonds. As homes are sold, the assessed
value increases in the MUD. It can take several years before there is enough
assessed value to recapture the costs. We estimate that we will recover
approximately 50% to 70% of eligible costs. In some circumstances, the MUDs
will
pay for property set aside for the preservation of endangered species,
greenbelts and similar uses. To the extent that the estimates are different
to
the actual amounts, it could have a material effect on the financial
statements.
Concentrations
Our
current activities are limited to the geographical area of central Texas, which
we define as encompassing the Austin Metropolitan Statistical Area and the
San
Antonio Metropolitan Statistical Area. This geographic concentration makes
our
operations more vulnerable to local economic downturns than those of larger,
more diversified companies.
We
are
also dependent upon a limited number of homebuilder services customers which
are
subject to numerous uncertainties related to homebuilding including weather
delays and damage, labor and material shortages, insufficient capital, materials
theft or poor workmanship. Revenues from one homebuilder customer accounted
for
100% of our total homebuilding revenue for the three months and nine months
ended September 30, 2007.
Convertible
Debt
The
subordinated convertible debt and the related warrants have been accounted
for
in accordance with Emerging Issues Task Force (EITF) No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, EITF No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” EITF 00-27, “Application of issue 98-5 to Certain Convertible
Instruments”, EITF 05-02 “Meaning of ‘Conventional Convertible Debt Instrument’
in Issue No. 00-19”, and EITF 05-04 “The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to Issue No. 00-19” updated with
FSP EITF 00-19-2”, Accounting for Registration Payment
Arrangements.
Risk
Factors
An
investment in our common stock involves risks. Any of the following
risks, as well as other risks and uncertainties, could harm our business and
financial results and cause the value of our securities to decline, which in
turn could cause investors to lose all or part of their investment in
us. The risks below are not the only ones we
face. Additional risks not currently known to us, or that we
currently deem immaterial, also may impair our business.
Risks
Related to Our Business
Our
current operating business has a limited operating history and
revenues.
In
October 2005, we acquired Wilson
Family Communities, Inc., or WFC, which has a limited operating history.
Accordingly, our business is subject to substantial risks inherent in the
commencement of a new business enterprise in an intensely competitive industry.
The business of WFC was conducted, beginning in 2002, by Athena Equity
Partners-Hays, L.P., or Athena, to engage in land acquisition and development
and, beginning in 2005, to provide homebuilder services. Prior to its merger
with WFC, Athena did not generate significant revenues, and, through September
30, 2007, our company has generated revenues of only approximately $4.4 million
and has incurred cumulative net losses of approximately $13
million.
There
can
be no assurance that we will be able to successfully acquire, develop and/or
market land, develop and market our homebuilder services, commence our
homebuilding activities, generate revenues, or ever operate on a profitable
basis. Any investment in our company should be considered a high-risk
investment because the investor will be placing funds at risk in a company
with
unknown costs, expenses, competition, and other problems to which new ventures
are often subject. Investors should not invest in our company unless they can
afford to lose their entire investment.
We
have incurred a significant amount of debt, but will require additional
substantial capital to continue to pursue our operating
strategy.
We
had
approximately $13.1 million in cash and cash equivalents at September 30, 2007.
We have secured lines of credit totaling approximately $55 million.
Approximately $2.7 million has been drawn against these lines of credit as
of
September 30, 2007.
We
have
issued and sold an aggregate of $16.75 million in principal amount of
convertible promissory notes since December 2005. These notes bear interest
at a
fixed rate of 5.0% per annum, with the principal amount of such notes
convertible into shares of our common stock at the rate of one share per $2.00
of principal, which conversion rate is subject to proportionate adjustment
for
stock splits, stock dividends and recapitalizations as well as an anti-dilution
adjustment which will apply if we sell shares of our common stock in the future
at a price per share of less than $2.00, provided that such conversion rate
may
not be reduced below a rate of one share of common stock for each $1.00 of
note
principal.
Our
growth plans will require substantial amounts of cash for earnest money
deposits, land purchases, development costs and interest payments, and to
provide financing or surety services to our homebuilder clients. Until we begin
to sell an adequate number of lots and services to cover our monthly operating
expenses, costs associated with our sales, marketing and general and
administrative activities will deplete cash. Our articles of incorporation
contain no limits on the amount of indebtedness we may incur.
We
are seeking additional credit lines to finance land purchases and development
costs.
Through
September 30, 2007, we have closed on four major land development projects.
The
majority of our expenditures in the past have been for inventory, consisting
of
land, land development and land options totaling over $3.2 million as of
September 30, 2007. To secure additional inventory, we will be required to
put
up earnest money deposits, make cash down payments, and acquire acreage tracts
and pay for certain land development activities costing several million dollars.
This amount includes the development of land, including costs for the
installation of water, sewage, streets and common areas. In the normal course
of
business, we enter into various land purchase option agreements that require
earnest money deposits. In order for us to start or continue the development
process, we may incur development costs before we exercise an option agreement.
We currently have approximately $351 thousand in capitalized development costs,
earnest money and deposits outstanding of which the entire amount would be
forfeited and expensed if we were to cancel all of these
agreements.
Should
our financing efforts be insufficient to execute our business plan, we may
be
required to seek additional sources of capital, which may include partnering
with one or more established operating companies that are interested in our
emerging business or entering into joint venture arrangements for the
development of certain of our properties. However, if we were required to resort
to partnering or joint venture relationships as a means to raise needed capital
or reduce our cost burden, we likely will be required to cede some control
over
our activities and negotiate our business plan with our business or joint
venture partners.
We
are vulnerable to concentration risks because our initial operations have been
limited to the central Texas area.
Our
real
estate activities have to date been conducted almost entirely in the central
Texas region, which we define as encompassing the Austin Metropolitan
Statistical Area and the San Antonio Metropolitan Statistical Area. This
geographic concentration, combined with a limited number of projects that we
plan to pursue, make our operations more vulnerable to local economic downturns
and adverse project-specific risks than those of larger, more diversified
companies.
The
performance of the central Texas economy will affect our sales and,
consequently, the underlying values of our properties. For example, the economy
in the Austin MSA is heavily influenced by conditions in the technology
industries. During periods of weakness or instability in technology industries,
we may experience reduced sales, particularly with respect to “high-end”
properties, which can significantly affect our financial condition and results
of operations. The San Antonio MSA economy is dependent on the service industry
(including tourism), government/military and businesses specializing in
international trade. To the extent there is a significant reduction in tourism
or in staffing levels of military or other government employers in the San
Antonio MSA, we would expect to see reduced sales of lower priced homes due
to a
likely reduction in lower paying tourism- and government-related jobs.
Fluctuations
in market conditions may affect our ability to sell our land at expected prices,
if at all, which could adversely affect our revenues, earnings and cash
flows.
We
are
subject to the potential for significant fluctuations in the market value of
our
land inventories. There is a lag between the time we acquire control of
undeveloped land and the time that we can improve that land for sale to home
builders. This lag time varies from site to site as it is impossible to
determine in advance the length of time it will take to obtain government
approvals and permits. The risk of owning undeveloped land can be substantial
as
the market value of undeveloped land can fluctuate significantly as a result
of
changing economic and market conditions. Inventory carrying costs can be
significant and can result in losses in a poorly performing development or
market. Material write-downs of the estimated value of our land inventories
could occur if market conditions deteriorate or if we purchase land at higher
prices during stronger economic periods and the value of those land inventories
subsequently declines during weaker economic periods. We could also be forced
to
sell land or lots for prices that generate lower profit than we anticipate,
and
may not be able to dispose of an investment in a timely manner when we find
dispositions advantageous or necessary. Furthermore, a decline in the market
value of our land inventories may give rise to a breach of financial covenants
contained in our credit facilities, which could cause a default under one or
more of those credit facilities.
Our
operations are subject to an intensive regulatory approval process, including
governmental and environmental regulation, which may delay, increase the cost
of, prohibit or severely restrict our development projects and reduce our
revenues and cash flows.
We
are
subject to extensive and complex laws and regulations that affect the land
development process. Before we can develop a property, we must obtain a variety
of approvals from local, state and federal governmental agencies with respect
to
such matters as zoning, density, parking, subdivision, site planning and
environmental issues. Certain of these approvals are discretionary by nature.
Because certain government agencies and special interest groups have in the
past
expressed concerns about development plans in or near the central Texas region,
our ability to develop these properties and realize future income from them
could be delayed, reduced, made more expensive or prevented
altogether.
Real
estate development is subject to state and federal regulations as well as
possible interruption or termination because of environmental considerations,
including, without limitation, air and water quality and the protection of
endangered species and their habitats. We are making and will continue to make
expenditures and other accommodations with respect to our real estate
development for the protection of the environment. Emphasis on environmental
matters may result in additional costs to us in the future or a reduction in
the
amount of acreage that we can use for development or sales
activities.
We
may be subject to risks as a result of our entry into joint
ventures.
To
the
extent that we undertake joint ventures to develop properties or conduct our
business, we may be liable for all obligations incurred by the joint venture,
even though such obligations may not have been incurred by us, and our share
of
the potential profits from such joint venture may not be commensurate with
our
liability. Moreover, we will be exposed to greater risks in joint ventures
should our co-venturers’ financial condition become impaired during the term of
the joint venture, as creditors will increasingly look to our company to support
the operations and fund the obligations of the joint venture.
Our
operations are subject to weather-related risks.
Our
land
development operations and the demand for our homebuilder services may be
adversely affected from time to time by weather conditions that damage property.
The central Texas region is prone to tornados, hurricanes entering from the
Gulf
of Mexico, floods, hail storms, severe heat and droughts. In 2007,
the central Texas region has received significant levels of rain that have
delayed and in some cases stopped construction projects. We maintain
only limited insurance coverage to protect the value of our assets against
natural disasters. Additionally, weather conditions can and have delayed our
development and construction projects by weeks or months, which could delay
and
decrease our anticipated revenues. To the extent we encounter significant
weather-related delays, our business would suffer.
The
availability of water could delay or increase the cost of land development
and
adversely affect our future operating results.
The
availability of water is becoming an increasingly difficult issue in the central
Texas region and other areas of the southwestern United States. Many
jurisdictions are now requiring that builders provide detailed information
regarding the source of water for any new community that they intend to develop.
Similarly, the availability of treatment facilities for sanitary sewage is
a
growing concern. Many urban areas have insufficient resources to meet the demand
for waste-water and sanitary sewage treatment. To the extent we are unable
to
find satisfactory solutions to these issues with respect to future development
projects, our operations could be adversely affected.
We
are subject to risks related to environmental damages.
We
may be
required to undertake expensive and time-consuming clean-up or remediation
efforts in the event that we encounter environmental hazards on the lots we
own,
even if we were not originally responsible for or aware of such hazards. In
the
event we are required to undertake any such remediation activities, our business
could suffer.
We
are a small company and have a correspondingly small financial and accounting
organization. Being a public company may strain our resources, divert
management’s attention and affect our ability to attract and retain qualified
directors.
We
are a
small company with a finance and accounting organization that we believe is
of
appropriate size to support our current operations; however, the rigorous
demands of being a public reporting company may lead to a determination that
our
finance and accounting group is undersized. As a public company, we are subject
to the reporting requirements of the Securities Exchange Act of 1934 and the
Sarbanes-Oxley Act of 2002. The requirements of these laws and the rules and
regulations promulgated thereunder entail significant accounting, legal and
financial compliance costs, and have made, and will continue to make, some
activities more difficult, time consuming or costly and may place significant
strain on our personnel, systems and resources.
The
Securities Exchange Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial
reporting. In order to maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial reporting,
significant resources and management oversight are required. As a result,
management’s attention may be diverted from other business concerns, which could
have a material adverse effect on our business, financial condition and results
of operations.
These
rules and regulations also have made it more difficult and more expensive for
us
to maintain director and officer liability insurance, and in the future we
may
be required to accept reduced coverage or incur substantially higher costs
to
maintain such coverage. If we are unable to maintain adequate director and
officer insurance, our ability to recruit and retain qualified officers and
directors, especially those directors who may be deemed independent, will be
significantly curtailed.
We
depend on our key personnel to manage our business
effectively.
We
believe our future success will depend in large part upon our ability to attract
and retain highly skilled managerial and sales and marketing personnel. In
particular, due to the relatively early stage of our business, we believe that
our future success is highly dependent on Clark N. Wilson, our Chief Executive
Officer and the founder of WFC, to provide the necessary leadership to execute
our growth plans. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future or delays
in
hiring required personnel, and in particular sales personnel, could impede
our
ability to expand our sales and marketing activities as desired, and negatively
impact our profitability.
We
have borrowed money at floating interest rates and if interest rates were to
significantly increase, our financial results could
suffer.
As
of
September 30, 2007 we have borrowed approximately $6.2 million at interest
rates
of prime plus 0.50% to 2.00% that adjust in relation to the prime rate. If
the
prime rate were to significantly increase, we will be required to pay additional
amounts in interest under these notes and line of credit and our financial
results could suffer.
We
are vulnerable to concentration risks because we intend to focus on the
residential rather than commercial market.
We
intend
to focus on residential rather than commercial properties. Economic shifts
affect residential and commercial property markets, and thus our business,
in
different ways. A developer with diversified projects in both sectors may be
better able to survive a downturn in the residential market if the commercial
market remains strong. Our focus on the residential sector can make us more
vulnerable than a diversified developer.
Our
growth strategy to expand into new geographic areas poses
risks.
We
may
expand our business into new geographic areas outside of the central Texas
region. We will face additional risks if we expand our operations in geographic
areas or climates in which we do not have experience, including:
|
·
|
adjusting
our land development
methods to different geographies and
climates;
|
|
·
|
obtaining
necessary entitlements
and permits under unfamiliar regulatory
regimes;
|
|
·
|
attracting
potential customers in
a market in which we do not have significant experience;
and
|
|
·
|
the
cost of hiring new employees and increased infrastructure
costs.
|
We
may
not be able to successfully manage the risks of such an expansion, which could
have a material adverse effect on our revenues, earnings, cash flows and
financial condition.
If
we are unable to generate sufficient cash from operations or secure additional
borrowings, we may find it necessary to curtail our development
activities.
Our
performance continues to be substantially dependent on future cash flows from
real estate financing and sales and there can be no assurance that we will
generate sufficient cash flow or otherwise obtain sufficient funds to meet
the
expected development plans for our current and future properties. If we are
unsuccessful in obtaining adequate loans or in generating positive cash flows,
we could be forced to: abandon some of our development activities, including
the
development of sub-divisions and entitling of land for development; forfeit
option fees and deposits; default on loans; violate covenants with our current
lenders and convertible note holders thereby putting us in default; and possibly
be forced to liquidate a substantial portion of our asset holdings at
unfavorable prices.
Our
results of operations and financial condition are greatly affected by the
performance of the real estate industry.
Our
real
estate activities are subject to numerous factors beyond our control, including
local real estate market conditions, substantial existing and potential
competition, general national, regional and local economic conditions,
fluctuations in interest rates and mortgage availability and changes in
demographic and environmental conditions. Real estate markets have historically
been subject to strong periodic cycles driven by numerous factors beyond the
control of market participants.
Real
estate investments often cannot easily be converted into cash and market values
may be adversely affected by these economic circumstances, market fundamentals,
competition and demographic conditions. Because of the effect these factors
have
on real estate values, it is difficult to predict with certainty the level
of
future sales or sales prices that will be realized for individual
assets.
Our
real
estate operations are also dependent upon the availability and cost of mortgage
financing for potential customers, to the extent they finance their purchases,
and for buyers of the potential customers’ existing residences.
Risks
Related to Investment in Our Securities
Our
company is a holding company, and the obligations of our company are subordinate
to those of our operating subsidiary.
Our
company is a holding company with no material assets other than our equity
interest in our wholly owned subsidiary, Wilson Family Communities, or WFC.
WFC
conducts substantially all of our operations and directly owns substantially
all
of our assets. WFC also has entered into a credit facility to finance the
purchase of some of our land holdings and this credit facility is secured by
the
assets of WFC. The holding company structure places any obligations
of Wilson Holdings subordinate to those of our operating subsidiary, WFC.
Therefore, in the event of a liquidation, creditors of WFC would be repaid
prior
to any distribution to the stockholders of Wilson Holdings. After the repayment
of all obligations incurred by WFC and the repayment of all obligations of
Wilson Holdings, any remaining assets could then be distributed to Wilson
Holdings as the holder of all shares of common stock of WFC and subsequently
would be distributed among the holders of our common stock.
Our
largest stockholder, who is also our President and Chief Executive Officer,
will
continue to control our company.
Clark
N.
Wilson, our President and Chief Executive Officer, owns or controls
approximately 59% of our issued and outstanding common stock. This
ownership position will provide Mr. Wilson with the voting power to
significantly influence the election of all members of our Board of Directors
and, thereby, to exert substantial control over all corporate actions and
decisions for an indefinite period.
We
issued $16.75 million in convertible notes and if these notes are converted
into
shares of common stock, or if the warrants issued in conjunction with such
notes
are exercised, our stockholders would suffer substantial
dilution.
In
December 2005 and September 2006, we issued convertible promissory notes which
may be converted, at the election of the holders of the notes, into shares
of
our common stock at a conversion price of $2.00 per share. In conjunction with
these note financings, we also issued warrants to the purchasers which have
vested and to the placement agent evidencing the right to purchase an aggregate
of 1,157,187 shares of our common stock at an exercise price of $2.00 per share.
While the holders of these notes and warrants have not indicated to us that
they
plan to convert their notes into, or exercise their warrants for, shares of
our
common stock, in the event they elect to do so we would be required to issue
up
to 8,375,000 additional shares of our common stock in conversion of the notes
and 1,157,187 shares of our common stock upon exercise of the warrants, which
would be dilutive to our existing stockholders. Each convertible note is
convertible into shares of our common stock at the option of the holder. The
conversion price is subject to adjustment for stock splits, reverse stock
splits, recapitalizations and similar corporate actions. An anti-dilution
adjustment in the conversion price, and the corresponding rate at which the
convertible notes may be converted into shares of our common stock, also is
triggered upon the issuance of certain equity securities or equity-linked
securities with a conversion price, exercise price or share price of less than
$2.00 per share, provided that the conversion price cannot be lower than $1.00
per share.
Future
sales or the potential for sale of a substantial number of shares of our common
stock could cause the trading price of our common stock to decline and could
impair our ability to raise capital through subsequent equity
offerings.
Sales
of
a substantial number of shares of our common stock in the public markets, or
the
perception that these sales may occur, could cause the market price of our
stock
to decline and could materially impair our ability to raise capital through
the
sale of additional equity securities. For example, the grant of a large number
of stock options or other securities under an equity incentive plan or the
sale
of our equity securities in private placement transactions at a discount from
market value could adversely affect the market price of our common
stock.
We
have anti-takeover provisions that could discourage, delay or prevent our
acquisition.
Provisions
of our articles of incorporation and bylaws could have the effect of
discouraging, delaying or preventing a merger or acquisition that a stockholder
may consider favorable. Our authorized but unissued shares of common stock
are
available for our Board to issue without stockholder approval. We may use these
additional shares for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of our authorized but unissued shares of common
stock could render it more difficult or discourage an attempt to obtain control
of us by means of a proxy context, tender offer, merger or other transaction.
In
the future, we may elect to amend our charter to provide for authorized but
unissued shares of preferred stock that would be issuable at the discretion
of
the Board of Directors. We can amend and restate our charter by action of the
Board of Directors and the written consent of a majority of stockholders.
We
may
become subject to Nevada’s Control Share Acquisition Act (Nevada Revised
Statutes 78.378 -78.3793), which prohibits an acquirer, under certain
circumstances, from voting shares of a corporation’s stock after crossing
specific threshold ownership percentages, unless the acquirer obtains the
approval of the issuing corporation’s stockholders. The first such threshold is
the acquisition of at least one-fifth but less that one-third of the outstanding
voting power. Wilson Holdings may become subject to Nevada’s Control Share
Acquisition Act if it has 200 or more stockholders of record at least 100 of
whom are residents of the State of Nevada and does business in the State of
Nevada directly or through an affiliated corporation. Currently, we do not
conduct business in the State of Nevada directly or through an affiliated
corporation.
As
a
Nevada corporation, we also are subject to Nevada’s Combination with Interested
Stockholders Statute (Nevada Revised Statutes 78.411 - 78.444) which prohibits
an “interested stockholder” from entering into a “combination” with the
corporation, unless certain conditions are met. An “interested stockholder” is a
person who, together with affiliates and associates, beneficially owns (or
within the prior three years, did beneficially own) 10 percent or more of the
corporation’s voting stock.
Clark
N.
Wilson, our President and Chief Executive Officer owns approximately 59% of
our
issued and outstanding common stock. All of these factors may decrease the
likelihood that we would be, or the perception that we can be, acquired, which
may depress the market price of our common stock.