SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C.
20549
FORM
10-KSB
£
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
OR
x
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from January 1, 2007 to September 30, 2007
Commission
file number: 000-23819
WILSON
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
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76-0547762
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(State
or other jurisdiction
of
incorporation or organization)
8121
Bee Caves Road, Austin, Texas
(Address
of principal executive offices)
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|
(I.R.S.
Employer
Identification
No.)
78746
(Zip
Code)
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(512)
732-0932
(Issuer’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each
Class
|
Name
of Each Exchange
on Which Registered
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Common
Stock, par value $0.001 per share
|
American
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
£
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
x
Yes
£
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-K.
£
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
£
Yes
x
No
State
issuers revenues for its most recent fiscal year. $4,444,500
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of its
common stock on December 26, 2007 was approximately $7,095,824(affiliates being,
for these purposes only, directors, executive officers and holders of more
than
5% of the registrant’s common stock).
As
of
December 26, 2007 the registrant had 23,135,539 outstanding shares of common
stock.
Wilson
Holdings, Inc.
Whenever
we refer in this filing to “Wilson Holdings,” “the Company,” “we,” “us,” or
“our,” we mean Wilson Holdings, Inc., a Nevada corporation, and, unless the
context indicates otherwise, its predecessors and subsidiaries, including its
wholly
-
owned
subsidiaries, Wilson
Family Communities, Inc., a Delaware corporation
(“WFC”), and Green
Builders, Inc., a Texas corporation (“Green Builders”). All
references in this report to “$” or “dollars” are to United States of America
currency.
Table
of Contents
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-KSB for the transition period from January 1, 2007
to
September 30, 2007 contains forward-looking statements. All statements regarding
our expected financial position and operating results, our business strategy,
and our financing plans are forward-looking statements. These statements can
sometimes be identified by our use of forward-looking words such as “may,”
“will,” “anticipate,” “estimate,” “expect,” “project,” or “intend.” These
forward-looking statements reflect our plans, expectations and beliefs and,
accordingly, are subject to certain risks and uncertainties. We
cannot guarantee that any of such forward-looking statements will be
realized.
Statements
regarding factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements, or cautionary statements,
include, among others, those under the caption “Management’s Discussion and
Analysis or Plan of Operation - Overview,” and elsewhere in this Annual Report
on Form 10-KSB, including in conjunction with the forward-looking statements
included in this Annual Report on Form 10-KSB. All of our subsequent
written and oral forward-looking statements (or statements that may be
attributed to us) are expressly qualified by the cautionary
statements. Our forward-looking statements are based on information
available to us today, and we will not update these statements. Our
actual results may differ significantly from the results discussed.
EXPLANATORY
NOTE
In
September 2007 our Board of Directors approved an amendment to our Bylaws to
change our fiscal year-end from December 31 to September 30, effective with
our
2007 fiscal year, in order to align our fiscal year more closely with our
business cycle. In this report, when we refer to “fiscal 2007” we are
referring to the fiscal period from January 1, 2007 to September 30,
2007. When we refer to “fiscal 2008” we are referring to the fiscal
year from October 1, 2007 to September 30, 2008.
PART
I
Item
1.
Description of Business
Overview
Wilson
Holdings, Inc. is a real estate development and homebuilding company. We are
focused on the acquisition of undeveloped land that we believe, based on our
understanding of population growth patterns and infrastructure development,
is
strategically located. The acquisition of land for development has required,
and
is expected to continue to require, the majority of our financial resources.
We
have funded these real estate acquisitions primarily with bank debt. In tandem
with our land acquisition efforts and based upon our market analysis, we also
prepare land for homebuilding and commenced homebuilding activities in June
2007. We believe that the central Texas economy will continue to expand, and
with this expansion our strategic land purchases, land development activities
and homebuilding activities will allow us to capitalize on the new population
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
our homebuilding strategy which is to build homes that are environmentally
responsible, resource efficient and consistent with local style. Our home
designs will be selected and prepared for each of our markets based on local
community tastes and the preferences of homebuyers, with substantially all
of
the construction work performed by subcontractors.
Until
we
commenced our homebuilding operations in June 2007, the primary focus of our
business had been the sale of developed lots to homebuilders, including national
homebuilders. During the second quarter 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
plan to build homes on the majority of the lots that we currently have under
development, will sell some of our lots to other homebuilders and may build
our
homes on lots that we purchase from other land builders or
developers.
Industry
Overview
The
real
estate industry is fragmented and highly competitive. We compete with numerous
developers, builders and others for the acquisition of property and with local,
regional and national developers, homebuilders and others with respect to the
sale of residential lots. Additionally we compete with local, regional and
national homebuilders in the sale of new homes, and with homebuilders and
developers for raw materials, skilled labor, and to obtain financing on
commercially reasonable terms.
A
primary
focus of our business has been the sale of developed lots to homebuilders,
including national homebuilders. During the second quarter of calendar 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.
Although
central Texas has been less affected than other areas, national real estate
trends impact home buyers and lenders and we believe that sales of new homes
in
our market may slow in fiscal 2008 due to these national trends. Given our
relative lack of exposure to areas of the country that have been hardest hit
by
the slowdown in the residential real estate industry, we believe that we can
strategically acquire lots from national builders who are trying to reduce
their
holdings as we as enter into joint venture arrangements with other land
developers and builders in order to preserve cash in case the slowdown impacts
our business for a longer period than expected. Our activities have been focused
in the central Texas area. Most of our competitors have substantially greater
financial resources than we do, as well as much larger staffs and marketing
organizations. However, we believe we compete effectively in our existing market
as a result of our development and homebuilding expertise, our environmentally
conscious approach and our reputation as a producer of quality residential
lots. Since our activities to date have been in the central Texas
area we also believe we have significantly less exposure to some of the issues
impacting larger homebuilders in areas where the real estate environment is
less
robust than in Texas.
Our
Strategy
Our
business strategy is focused on two segments:
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Homebuilding
and related services; and
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Land
acquisition, development and related services.
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Homebuilding
and Related Services
Our
strategy is to target “green” building. Green building today is most
often thought of in terms of products and technology. True green
building is an approach to the entire business from land planning to plan design
and from administration procedures to field processes. Green is
recognition that there are other options and choices within most areas of how
we
conduct our business. We start the homebuilding process by evaluating
our process options for earth-friendly alternatives that are attainable yet
reasonably cost-effective and are a sustainable value for the
customer. In our homebuilding activities, we follow earth-friendly
and efficient processes such as:
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considering
employees’ attitude and awareness of efficiency in their work space,
processes and daily routines;
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partnering
with vendors and trades in the field to eliminate waste, and create
earth-friendly processes and procedures for job sites that are efficient
and mutually beneficial;
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incorporating
sustainable building practices and energy-saving systems that respond
to
the demands of a particular environment in a specific region;
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monitoring
the marketplace and industry for new technology;
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emphasizing
job-site awareness, supervision and communication pursuing earth-friendly
procedures;
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evaluating
the marketplace for new home design and product technology acceptance;
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exploring
earth-friendly options for consumer choice, efficient applications
and
implementations;
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emphasizing
lot and site considerations, home orientations, sustainable lot
improvements, low-maintenance landscaping and energy, water, green
materials and methods; and
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Using
environmentally-friendly products.
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Land
Acquisition
Our
plan
for land development is to secure land strategically, based on our understanding
of population growth patterns and infrastructure development. We believe that
national homebuilding companies focus their acquisition efforts on very large
tracts of land. National homebuilders have also significantly reduced their
land
acquisition efforts as the industry has struggled in recent months. In our
opinion, these factors create an opportunity for us to secure high-quality,
smaller tracts that may be overlooked, as well as tracts that national
homebuilders may be trying to sell in an effort to reduce their land holdings.
Additionally, by providing a timely and diligent land acquisition effort with
decisions approved locally, we expect to have an advantage in the pursuit of
larger tracts that may become available in our market.
We
expect
to use our available assets, (primarily cash from issuances of equity and
subordinated notes, cash drawn from our credit facility, plus cash from
operations) for land acquisition, development and homebuilding activities.
We
are not limited by the amount we can invest in any particular stage of
development of the land. Almost all of the land and related development projects
will be financed by conventional real estate loans or through the use of our
current credit facility. Additionally, we defer payment for land when possible
and use owner-financed payment plans, such as the rolling option. The rolling
option has a variety of forms. One variation allows us to pay the landowner
for
sections of lots as they are actually needed and utilized in our business.
We
expect that a substantial portion of our future revenues will be generated
through the development of subdivisions and land sales.
Our
anticipated land sales will include sections of lots that are ready for
immediate home construction with all infrastructures in place, as well as
sections of lots that have all necessary approvals to begin construction but
have yet to be physically improved.
While
we
anticipate that the majority of our revenues will come from sales to national
and regional homebuilders, we also expect additional revenues from the sale
of
lots and homebuilding services to smaller, local builders. Lot sales to local
builders will typically involve fewer lots per transaction than sales to larger
national and regional companies.
We
plan
to support the purchase of land and development of our communities with specific
analysis of our target markets. We intend to utilize more thorough research
processes used within industries such as the auto, retail and banking to go
beyond benchmarking the current competition in the marketplace. For example,
successful automakers target their products to a type of consumer, based on
the
consumer’s age range, family and lifestyle attributes. We will
utilize a similar approach, gathering consumer preference data and customizing
our product offerings for a variety of buyer segments. We strive to
attract a diverse group of buyers by designing multi-product neighborhoods
within each community that will be desirable for homebuyers at differing income
levels and with different needs. By providing a more customized
product mix of varying lot sizes and amenities in our communities and addressing
underserved segments, we believe we can accelerate the absorption of our
subdivisions and earn superior returns for our stockholders.
Land
Development and Related Services
In
tandem
with our land acquisition efforts and based upon our strategic market analysis,
we plan to subcontract for the preparation of land for development. We seek
to
add value to the land through the process of development, which may include
permitting and constructing water and wastewater infrastructure, master-planning
of the community, and the construction of roads and community amenities. We
also
plan to sell entitled land to others for development. Entitled land is land
subject to development agreements, tentative maps or recorded plats, depending
on the jurisdiction within which the land is located.
In
conjunction with our land acquisition activities, we expect a portion of our
land revenues to come from sales of entitled land, developed land and bulk
lot
sales. To date, our revenues have been derived from lot sales and sales of
undeveloped parcels of land plus revenues from services provided to two
homebuilder customers. The revenue from these sales has been consolidated into
our results. We expect that sales of large parcels of land and sections of
developed lots will be sporadic, resulting in fluctuations in our revenues
and
gross margins, while the sale of parcels of developed lots and delivery of
services to homebuilders will be less volatile.
We
intend
to invest in real estate and real estate related activities and are not limited
as to the percentage of our assets that we may invest in any single type of
investment or as to the kinds of real estate assets in which we can invest.
A
vote of our security holders is not required to change the allocation or
concentration of such assets. However, we may be subject to certain limits
from
time to time because of covenant requirements under our agreements with
lenders.
Current
and Future Properties
We
intend
to sell some of the lots in our various projects and buy and sell additional
properties on an opportunistic basis as market conditions warrant. We believe
that our properties are adequately insured, and are suitable for their intended
purposes. Because of the nature of our land sales and land development services
operations, significant amounts of property are held as inventory in the
ordinary course of our business.
Details
of the properties we own or have options to purchase are set forth
below:
Name
of Project
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Date
Purchased /Optioned
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Location
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Finished
Lots/
Homes
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Approx-
imate
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Approx-
imate
Acreage
Under
Option
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Rutherford
West
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June
30, 2005
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Northern
Hays County, Texas, Hays Independent School District
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54
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521
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n/a
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Georgetown
Village
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August
22, 2005
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The
City of Georgetown, Texas, Georgetown Independent School
District
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50
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149
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419
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Villages
of New Sweden
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October
18, 2005
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Eastern
Travis County, Texas, Pflugerville Independent School
District
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-
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521
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-
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Elm
Grove
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December
15, 2005
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The
City of Buda, Texas, Hays Independent School District
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-
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30
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61
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Highway
183
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May
31, 2005
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U.S.
Route 183 at Evelyn Rd., Travis County, Texas
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5
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n/a
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Rutherford
West
– Rutherford West is a
residential community located southwest of Austin
.
Rutherford
West is planned as an
“earth-friendly” acreage development and each lot includes a deed restricted
conservation easement.
We commenced the
development
of this project
in October 2006 and will continue through 2010
in five phases by geography
and/or
regulation which limit the amount of the land that is able to be developed.
Phase 1 for this property
is financed through a development loan. The loan is secured by the
property being developed at an interest rate of prime plus 0.5%. The
loan requires monthly interest payments and principal pay downs as lots are
closed. The outstanding balance of the loan is approximately $1.5
million. Phases 2 through 5 are financed through a land
loan. The loan is secured by the land. The interest rate
is 12.5% annually and requires monthly interest payments. The
outstanding balance of the loan is $7.3 million. The loan matures in
March 2009. It is renewable for an additional year for a fee of 1% of
the principal balance at the time of the extension.
Georgetown
Village —
Georgetown Village is a mixed use master-planned development in
Williamson County, located just north of Austin, Texas in
Georgetown. We purchased the land for this project
pursuant
to
an option contract in August 2005. Under the option contract we are
required to purchase a minimum of 30 acres per year through 2017. We
own approximately 150 acres as of September 30, 2007. We commenced
the development of this project in January 2006 and will continue through
2013. We have completed development on a total of 120 lots in Section
6. To date, 50 lots are finished and ready for delivery and we have
delivered 70 lots. The property is pledged as collateral on a $3.0 million
land,
development, and construction loan, with an outstanding balance of approximately
$470,000 as of September 30, 2007 which matures in March 2008. The
loan for Section 6 requires monthly interest payments and principal pay downs
as
lots are closed. Interest payments are at 0.5% over prime and are due
monthly and principal payments are due as lots are closed. We closed
on Section 9 which is approximately 130 acres of this project in
2007. The loan for Section 9 is financed through our credit
facility. Construction commenced on this section in October
2007.
Villages
of New Sweden —
New
Sweden is a master planned, mixed-use community which includes single family
residential homes, commercial properties, an onsite school, an amenity center,
a
fire station, and an open green space in Manor, Texas. We purchased
the land for this project in October 2005 with a combination of bank financing,
seller financing and cash on hand. The development of this project will commence
in fiscal 2008, and will continue through 2017. The property is
pledged as collateral for a $4.7 million land loan and seller-financed notes
totaling $2.5 million. The interest rate on the land loan
is 12.5% with interest payable monthly. The interest payments on the
seller-financed notes are fixed at 7% for approximately $1.9 million of the
notes and at prime plus 2% for the remaining $600 thousand. The total principal
payments for the seller financed notes are due annually in the amount of
approximately $1.1 million in 2007, $0.3 million in 2008, $0.5 million in 2009
and $0.5 million in 2010. The land loan and seller-financed notes
payable mature in March 2009 and October 2010, respectively.
Elm
Grove
—
Elm Grove
is a residential
project located south of Austin, Texas in the city of Buda. The
master plan includes single-family residential and open green space all within
walking distance to Elm Grove elementary school. We acquired the
first phase of land for this project in December 2006 with a combination of
bank
financing and cash on hand. Development of this project commenced May
2007 and will continue through 2010. The property is pledged as
collateral on an approximate $3 million land, development, and construction
loan, with an outstanding balance of approximately $1.44 million as of September
30, 2007. Interest payments are at 0.5% over prime and the principal
on the loan will be paid downs as lots are closed.
Highway
183
— We own
approximately five acres in Travis County which are currently under an option
agreement to sell to an outside buyer. Ten of the original fifteen
acres located along the Highway 183 corridor were condemned by the State in
2007.
Our
business plan for land development is to secure land strategically, based on
our
understanding of population growth patterns and infrastructure development
in
central Texas and its surrounding areas. We believe that our
management team has the expertise to acquire large tracts of land in central
Texas, and get them entitled in a relatively short time frame. In our
opinion, this creates an opportunity for us to secure high-quality tracts that
may have been overlooked or which larger homebuilders are trying to
sell. Additionally, we have developed a set of guidelines which
address environmental responsiveness, resource efficiency, and cultural
sensitivity. Some of our guidelines are:
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planning
of homesite orientation;
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preserving
natural open space;
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respecting
conservation easements;
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connecting
and enhancing our communities with walking and biking paths that
provide
easy access for meeting neighbors;
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reserving
land to provide public space for neighborhood public gardens;
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establishing
common areas irrigated with “gray water” along with rainwater collection
and drip irrigation systems that will help minimize water usage;
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ensuring
that storm water runoff is filtered and/or treated by the use of
wet ponds
and vegetative filter strips prior to its release;
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respecting
the local history of the land and cultural diversity;
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creating
mixed-used communities that encourage foot traffic with less vehicular
traffic;
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seeking
opportunities to enhance our relationships with builders, partners,
governmental agencies, and partnerships with environmental and
community-based organizations; and
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restoring
or recycling of existing structures.
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Geographic
Expansion
We
are
pursuing a strategic expansion philosophy based on potential growth
opportunities within what we believe are the most stable areas throughout the
United States. We plan to grow by investing available capital in our existing
market and into operations and strategic acquisitions in new markets. Based
on
current market conditions and issues that are facing the national homebuilders,
we may delay our expansion into future markets until such time as we believe
that conditions are favorable for expansion. We will expand into additional
markets that show the following trends:
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a
steady increase in the employment rate over the past three to five
years;
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an
unemployment rate below the national average;
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population
growth reported steady and positive population rates greater than
the
national average;
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an
increase in average home price or less devaluation than the national
average;
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the
presence of national builders that have been active for a considerable
amount of time (Greater than ten years);
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being
rated in the top 50 cities with the most stable growth rate;
and
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being
rated in the top 50 cities moving in the direction of being
environmentally sensitive either in their governmental attitudes
or in
their planning and entitlement processes for each city.
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Through
strategic acquisitions in markets with the qualifications above we hope to
gain
established land positions and inventories; existing relationships with local
governments, land owners, and developers; and a positive impact on our sources
of revenues. This diversification strategy will mitigate the effects of regional
economic cycles and position us for greater future growth.
Target
Market and Market Data
Our
current market, Austin, Texas has an unemployment rate of 3.5% in November
2007,
which is far below the national average of 4.5%. Job growth continues to be
strong with a projected annual growth of 29,500 jobs in September 2007 according
to the Texas Workforce Commission.
The
low
unemployment rate, strong job growth rate and the slow down of the expected
starts among national builders has created a short fall of housing starts and
closings in the Austin market area. The number of closings exceeds starts for
the first time since 2002, according to Metrostudy, a national market research
company. We believe that this shortfall may provide opportunities for new
homebuilders.
Texas
currently leads the nation in job growth, according to Metrostudy. We believe
that this job growth will continue and that Texas will continue to be among
the
strongest housing markets in the country.
We
believe that recent media attention and events focusing on “green” living and
sustainability has increased awareness of green building. A recent
survey conducted by McGraw Hill indicated that the profile of the green home
owner was highly educated and 45 years old. According to the
Brookings Institution Metropolitan Policy Program, Austin adults are more likely
to have a college degree, and are more likely to have graduate degrees than
the
U.S. averages. Newcomers to the Austin market are also more likely to
have college degrees. We believe that these factors make central
Texas a desirable location for “green” homebuilding.
Homebuilders,
developers and market researchers generally consider a 24 month supply of vacant
developed lots to be at equilibrium in the marketplace. As indicated in the
chart below, the Austin market during the 3
rd
quarter
2007 had less than a 21 month supply of vacant developed lots. Both
developers and builders have decreased their production of new homes and lot
inventory. We are carefully considering the inventory that does exist
to maximize market opportunities. The homes and lots developed by us
have been designed to take advantage of the short fall of supply and the
reduction of lot positions by the national builders as a result of their
national condition.
Water
District
Receivables
A
Water
Control and Improvement District or a Municipal Utility District No. 1
(collectively a “District”), is a political subdivision of the State of Texas,
subject to the oversight of the Texas Environmental Quality Commission, or
TCEQ.
Districts,
by definition, may in engage in some, or all, of the following: residential
and
commercial supply of water and wastewater services, solid waste disposal,
wastewater treatment, conservation, irrigation, drainage, fire fighting,
emergency services, and recreational facilities. Texas law gives a District
the
power to incur debt, levy taxes, charge for specific services, and adopt rules
for those services, enter into contracts, obtain easements, and condemn
property.
Typically,
Districts are formed by real estate developers in areas where the provision
of
utility services will not otherwise be furnished by another public or private
entity (e.g., an area outside the geographic confines of a city or village,
or a
rural area). Funding for a District’s initial creation and operating costs and
for its infrastructure (e.g. pipelines, water storage plants, and treatments
facilities or payments for capacity in such facilities under wholesale supply
agreements with third parties) usually comes from the developer because the
District has no funds available for these purposes when it is first
created. In certain Districts (as further discussed below), a
developer may also fund, and receive payment from the District for, costs of
land set aside for endangered species protection. Once a critical
mass of taxable property (usually residential houses) is constructed in a
District, the District is able to provide its own financing for operating costs;
however, the developer often continues to provide funding for infrastructure
through the period of full build-out of the District.
Any
creation, operating and infrastructure costs of a District paid by the developer
are repaid by the District from time to time pursuant to a reimbursement
agreement whereby the District issues its bonds payable from ad valorem taxes
on
property in the District and uses the bond proceeds to repay the developer’s
costs for these District items. Issuance of the District’s bonds is
subject to prior review and approval by the TCEQ and the Texas Attorney
General’s office.
The
time
period for issuance of a District’s bonds (which are issued in installments over
a period of many years usually continuing through the period of full build
out
of the District) and the consequent recovery period of the developer’s costs for
a District can be over either a long or short period of
time. If development in the District moves at a rapid
pace, full recovery of a developer’s initial creation and operating costs (which
is usually made from the District’s first bond issue) can occur, but cannot be
guaranteed, in as quickly as within twelve to eighteen months after District
creation. Residential developments that grow more slowly will,
accordingly, result in a more extended period of time for the recovery of the
District’s initial creation and operating costs. And, since the full
recovery of all the developer’s costs for infrastructure during the full build
out of the District goes on for the life of the subdivision development, the
pace at which the District issues its bond installments from time to time (and
the corresponding recovery of the developer’s costs incurred for infrastructure
from time to time during the build out period) is closely related to the pace
at
which houses (and corresponding taxable property value) are added in the
District.
A
District typically charges its customers for the following
services:
|
·
|
an
initial tap fee ranging from approximately $600 to $2,000 to cover
the
cost of installing the water and sewer tap;
|
|
·
|
an
annual ad valorem tax to recover its annual operating costs and to
pay
debt service on any District bonds which have been issued; and
|
|
·
|
monthly
fees for water and wastewater services, based primarily on a consumption
model.
|
The
costs
for these services are determined by the District and are usually not reviewed
by any county or state review board for reasonableness. These tap fee and
monthly service costs are in addition to the developer-funded creation,
operating and infrastructure costs described above.
District
operations are usually geographically limited to the lands within the District
which pay District ad valorem property taxes. If a nearby area lacks any utility
service, a District could annex that area or otherwise provide service to it
subject to reaching an equitable agreement with the owner of the land to be
annexed or otherwise served and meeting certain state law requirements. However,
Districts rarely agree to expand their services unless the original developer
is
agreeable and the owner of the annexed land is willing to enter into a
reimbursement agreement similar to the one the original developer signed with
the District.
We
currently have the community of Villages of New Sweden planned that is within
the boundaries of New Sweden Municipal Utility District No. 1 and the community
of Rutherford West planned in Greenhawe Water Control and Improvement District
No. 2. We incur development costs for the initial creation and operating costs
of these Districts and continuing costs for the water, sewer and drainage
infrastructure for these Districts. Also, in the case of Greenhawe Water Control
and Improvement District No. 2, we have paid for property set aside by us for
the preservation of endangered species and that District will reimburse those
costs from future District bond sales, too. Under reimbursement agreements
with
each of these Districts, we expect to be reimbursed partially for the
above-described developments costs. The Districts will issue bonds from time
to
time, in installments, to repay us as there is sufficient assessed value of
property in each District to enable it to issue bonds to raise funds to repay
us
while maintaining a reasonable tax rate so as not to impair continued
development within the District. As homes are constructed within the District,
the assessed value increases. It can take several years before there is enough
assessed value to recapture the costs. At this time, we estimate that we will
recover approximately 50 to 100% of eligible initial creation and operating
costs spent through September 2007 at such time as each District issues its
first bond issue. Usually a District issues its first bond issue only after
completion of construction of approximately 200 houses. Since developer
-
funded infrastructure
costs
have been minimal to date in each District, we have no estimate of the
percentage of those costs which will be recovered from each District or the
time
when they will be recovered. To the extent that the estimates are
dramatically different to the actual facts, it could have a material effect
on
the financial statements.
Regulation
The
housing and land development industries are subject to increasing environmental,
building, zoning and real estate sales regulations by various federal, state
and
local authorities. Such regulations affect home building by specifying, among
other things, the type and quality of building materials that must be used,
certain aspects of land use and building design. Some regulations affect
development activities by directly affecting the viability and timing of
projects.
We
must
obtain the approval of numerous governmental authorities that regulate such
matters as land use and level of density, the installation of utility services,
such as water and waste disposal, and the dedication of acreage for open space,
parks, schools and other community purposes. If these authorities determine
that
existing utility services will not adequately support proposed development,
building moratoria may be imposed. As a result, we use substantial resources
to
evaluate the impact of government restrictions imposed upon new residential
development. Furthermore, as local circumstances or applicable laws change,
we
may be required to obtain additional approvals or modifications of approvals
previously obtained or we may be forced to stop work. These increasing
regulations may result in a significant increase in resources between our
initial acquisition of land and the commencement and the completion of
developments. In addition, the extent to which we participate in land
development activities subjects us to greater exposure to regulatory
risks.
The
residential homebuilding industry is also subject to a variety of local, state
and federal statutes, ordinances, rules and regulations concerning the
protection of health and the environment. These environmental laws include
such
areas as storm water and surface water management, soil, groundwater and
wetlands protection, subsurface conditions and air quality protection and
enhancement. Environmental laws and existing conditions may result in delays,
may cause us to incur substantial compliance and other costs and may prohibit
or
severely restrict homebuilding activity in environmentally sensitive regions
or
areas.
Employees
On
September 30, 2007, we had 19 full-time employees, one part-time employee and
three full-time consultants. None of our employees are represented by a labor
union and we consider our relations with our employees and consultants to be
good.
Company
History
Wilson
Holdings, Inc. is a Nevada corporation formed
on August 4, 1987. We were originally incorporated as
Pandora's Golden Box and were renamed Cole Computer Corporation in
February 1999. Effective October 11, 2005 pursuant to an Agreement and Plan
of
Reorganization dated as of September 2, 2005 by and among us
,
a majority
of our
stockholders, Wilson Acquisition Corp. and Wilson Family Communities, Inc.,
Wilson Family Communities became our wholly-owned subsidiary. In June
2007 we acquired Green Builders, Inc. and commenced homebuilding operations
under the Green Builders name.
WFC’s
business was originally conducted in 2002, by Athena Equity Partners-Hays,
L.P.,
a Texas limited partnership, or Athena. Athena engaged in various
land acquisition and development activities, including the purchase, entitling,
and sale of a 2,400 acre mixed-use tract composed of office, retail and
residential lots in central Texas. From October 2003 to May 2005,
Athena did not have significant operations. In May 2005, Athena
merged with WFC.
Risk
Factors
Set
forth
below and elsewhere in this Report and in other documents we file with the
Securities and Exchange Commission are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this Report. Prospective and existing
investors are strongly urged to carefully consider the various cautionary
statements and risks set forth in this Report and our other public
filings.
Risks
Related to Our Business
We
have only recently commenced our homebuilding operations and there is no
assurance that we will be successful.
We
commenced our homebuilding operations in June 2007 though the acquisition of
Green Builders, Inc. While members of our management team have
extensive experience in homebuilding, our company has never conducted
homebuilding operations and there is no assurance that we will be
successful.
A
significant decline in demand for new homes would adversely affect our
business.
The
homebuilding industry continues to experience a significant decline in demand
for newly built homes in many markets. While the central Texas market
has not been as significantly impacted by this decline, if demand for new houses
were to decline it could have a significant impact on our
business. In addition, even in the central Texas market is not as
significantly impacted as other areas, national real estate trends impact home
buyers and lenders which could lead to a slowdown in sales of new homes in
the
central Texas area which could negatively impact our business.
Demand
for new homes is sensitive to economic conditions over which we have no
control.
Demand
for homes is sensitive to changes in economic conditions such as the level
of
employment, consumer confidence, consumer income, the availability of financing
and interest rate levels. Although the market has experienced some increase
in
mortgage interest rates over the past year, mortgage interest rates remain
lower
than their historical averages. If mortgage interest rates increase or if any
of
these other economic factors adversely change nationally, or in the market
in
which we operate, the ability or willingness of prospective buyers to purchase
new homes could be adversely affected.
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.
Increasing
interest rates could cause defaults for homebuyers who financed homes using
non-traditional financing products, which could increase the number of homes
available for resale.
During
the recent time of high demand in the homebuilding industry, many homebuyers
financed their purchases using non-traditional adjustable rate or interest
only
mortgages or other mortgages, including sub-prime mortgages that involve
significantly lower initial monthly payments. As a result, new homes have been
more affordable in recent years. However, as monthly payments for these homes
increase either as a result of increasing adjustable interest rates or as a
result of principal payments coming due, some of these homebuyers could default
on
their
payments and have their homes foreclosed, which would increase the inventory
of
homes available for resale. In addition, if lenders perceive deterioration
in
credit quality among homebuyers, lenders may eliminate some of the available
non-traditional and sub-prime financing products or increase the qualifications
needed for mortgages or adjust their terms to address any increased credit
risk.
In general, if mortgage rates increase or lenders make it more difficult for
prospective buyers to finance home purchases, it could become more difficult
or
costly for customers to purchase our homes, which would have an adverse affect
on our sales volume.
Inflation
can adversely affect us, particularly in a period of declining home sale
prices.
Inflation
can have a long-term impact on us because increasing costs of land, materials
and labor may require us to attempt to increase the sale prices of homes in
order to maintain satisfactory margins. However, in the event the housing market
in central Texas were to decline, we may be forced to decrease prices in order
to maintain sales volume. This deflation in sales price, in addition to
impacting our margins on new homes, also reduces the value of our land inventory
and makes it more difficult for us to recover the full cost of previously
purchased land in new home sales prices or, if we choose, to dispose of land
assets. In addition, depressed land values may cause us to walk away from
deposits on option contracts if we cannot satisfactorily renegotiate the
purchase price of the optioned land.
We
face significant competition in our efforts to sell homes.
The
homebuilding industry is highly competitive. We compete with numerous national,
regional and local homebuilders. This competition with other homebuilders could
reduce the number of homes we deliver, or cause us to accept reduced margins
in
order to maintain sales volume.
We
also
compete with the resale of existing homes, including foreclosed homes, sales
by
housing speculators and available rental housing. In the event that demand
for
homes has slows, competition, including competition with homes purchased for
speculation rather than as places to live, will create increased downward
pressure on the prices at which we are able to sell homes, as well as upon
the
number of homes we can sell.
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. We recently entered the homebuilding business and have
little experience building homes and there is no assurance that we will be
successful.
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.
Market
conditions may reduce the amount available to us under our lines of
credit.
Due
to
covenants in our lines of credit and the market conditions surrounding the
mortgage and related industries, we may not be able to utilize the entire line
of available funds. The amount available under our line of credit is tied to
the
appraisal value of our real estate holdings or property on which we have an
option. In the event that there is a devaluation of our land holdings
upon which our line of credit is secured, the lenders under our primary line
of
credit may elect to reduce the amount of credit available to us under the
line.
We
may seek 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 $525,000 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 and we have focused on the residential rather
than commercial market.
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.
In
addition, we have focused our development efforts 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.
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. Our land and homes under development represent our
primary assets. 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 or begin building homes. 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.
Homebuilding
is subject to warranty and liability claims in the ordinary course of business
that can be significant.
As
a
homebuilder, we are subject to home warranty and construction defect claims
arising in the ordinary course of business. We are also subject to liability
claims arising in the course of construction activities. We record warranty
and
other reserves for the homes we sell based on historical experience in our
markets and our judgment of the qualitative risks associated with the types
of
homes built. We have, and many of our subcontractors have, general liability,
property, errors and omissions, workers compensation and other business
insurance. These insurance policies protect us against a portion of our risk
of
loss from claims, subject to certain self-insured retentions, deductibles and
other coverage limits. However, because of the uncertainties inherent in these
matters, we cannot provide assurance that our insurance coverage or our
subcontractor arrangements will be adequate to address all warranty,
construction defect and liability claims in the future. Additionally, the
coverage offered by and the availability of general liability insurance for
construction defects are currently limited and costly. There can be no assurance
that coverage will not be further restricted and become even more
costly.
We
may be subject to risks as a result of our entry into joint
ventures.
We
have
made the decision to be very selective in our immediate growth plans and to
seek
joint venture partners for both future and existing land transactions. While
joint ventures by their very nature tend to have a lower pure dollar margin
they
also transfer risk to the joint venture entity thus helping preserve the
viability of our company. However, 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-ventures’ 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.
If
our customers are not able to obtain suitable financing, our business may
decline.
Our
business and earnings also depend on the ability of our potential customers
to
obtain mortgages for the purchase of our homes. The uncertainties created
by
recent events in the sub-prime mortgage market and their impact on the overall
mortgage market, including the tightening of credit standards, could adversely
affect the ability of our customers to obtain financing for a home purchase,
thus preventing our potential customers from purchasing our homes. If our
potential customers or the buyers of our customers’ current homes are not able
to afford or obtain suitable financing under such circumstances, our sales
and
revenues could decline. Similar risks apply to those buyers who are in our
backlog of homes to be delivered. If our customers cannot obtain suitable
financing in order to purchase our homes, our sales and profitability could
be
materially affected.
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.
In
addition, our President and Chief Executive Officer is our majority shareholder
and controls the company. He also has significant control over our daily
operations and we are required to implement proper and effective controls
and
procedures due to the extent of his control over the company.
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 and in fiscal 2008
we will be required to comply with the Section 404 of the Sarbanes-Oxley
Act which will require us and our independent public accounting firm to
report on the effectiveness of our internal controls over financial
reporting. The requirements of these laws and the rules and regulations
promulgated there under 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. We may be
required to increase the size of our finance and accounting group or to
retain consultants to assist us with our Sarbanes-Oxley Section 404
compliance which may be a significant expense and we will incur additional
fees
with our independent public accounting firm.
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, and in order to comply with the burden of Section 404 of the
Sarbanes-Oxley Act, 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 dependent on Clark N. Wilson, our Chief Executive Officer
and the founder of WFC, to provide the necessary leadership to execute our
growth plans. Although we intend to acquire a key-man life insurance policy
for
Mr. Wilson, the loss of the services of Mr. Wilson or the inability to attract
or retain qualified personnel in the future or delays in hiring required
personnel will impede our ability to become profitable.
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.
Land
and
homes under construction comprise the majority of our 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.
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:
|
·
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adjusting
our land development methods to different geographies and climates;
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·
|
obtaining
necessary entitlements and permits under unfamiliar regulatory regimes;
|
|
·
|
attracting
potential customers in a market in which we do not have significant
experience; and
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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.
Regulatory
Risks
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
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.
Federal
laws and regulations that adversely affect liquidity in the secondary mortgage
market could hurt our business.
Recent
federal laws and regulations could have the effect of curtailing the activities
of the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac). These organizations provide significant
liquidity to the secondary mortgage market. Any curtailment of their activities
could increase mortgage interest rates and increase the effective cost of our
homes, which could reduce demand for our homes and adversely affect our results
of operations.
The
federal financial institution agencies recently issued their final Interagency
Guidance on Nontraditional Mortgage Products (“Guidance”). This Guidance applies
to credit unions, banks and savings associations and their subsidiaries, and
bank and savings association holding companies and their subsidiaries. Although
the Guidance does not apply to independent mortgage companies, it likely will
affect the origination operations of many mortgage companies that broker or
sell
nontraditional mortgage loan products to such entities. This Guidance could
reduce the number of potential customers who could qualify for loans to purchase
homes from us and others.
Compliance
with federal, state and local regulations related to our business could create
substantial costs both in time and money, and some regulations could prohibit
or
restrict some homebuilding ventures.
We
are
subject to extensive and complex laws and regulations that affect the land
development and homebuilding process, including laws and regulations related
to
zoning, permitted land uses, levels of density, building design, elevation
of
properties, water and waste disposal and use of open spaces. In addition, we
are
subject to laws and regulations related to workers’ health and safety. We also
are subject to a variety of local, state and federal laws and regulations
concerning the protection of health and the environment. We may be required
to
pay environmental impact fees, use energy-saving construction materials and
give
commitments to municipalities to provide certain infrastructure such as roads
and sewage systems. We generally are required to obtain permits, entitlements
and approvals from local authorities to commence and carry out residential
development or home construction. Such permits, entitlements and approvals
may,
from time-to-time, be opposed or challenged by local governments, neighboring
property owners or other interested parties, adding delays, costs and risks
of
non-approval to the process. Our obligation to comply with the laws and
regulations under which we operate, and our obligation to ensure that our
employees, subcontractors and other agents comply with these laws and
regulations, could result in delays in construction and land development, cause
us to incur substantial costs and prohibit or restrict land development and
homebuilding activity in certain areas in which we operate.
Tax
law changes could make home ownership more expensive or less
attractive.
Significant
expenses of owning a home, including mortgage interest expense and real estate
taxes, generally are deductible expenses for the purpose of calculating an
individual’s federal, and in some cases state, taxable income, subject to
various limitations under current tax law and policy. If the federal government
or a state government changes income tax laws, as has been discussed recently,
to eliminate or substantially reduce these income tax deductions, then the
after-tax cost of owning a new home would increase substantially. This could
adversely impact demand for, and/or sales prices of, new homes.
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 contest, 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.
Item
2.
Description of Property
Our
corporate office, which we lease from a third party, contains approximately
5,000 square feet, and is located in Austin, Texas. We believe this
facility is adequate to meet our requirements at our current level of business
activity.
Item
3.
Legal Proceedings
We
are
not a party to any legal proceedings.
Item
4.
Submission of Matters to a Vote of Security Holders
None.
PART
II
Item
5.
Market for Common Equity and Related Stockholder
Matters
Our
common stock is traded on the American Stock Exchange under the symbol
“WIH.”
The
following table represents the range of the high and low bid prices of our
common stock as reported by the American Stock Exchange (for prices since May
19, 2007) and the OTC Bulletin Board Historical Data Service (for prices before
May 19, 2007). These quotations represent prices between dealers and may not
include retail markups, markdowns, or commissions and may not necessarily
represent actual transactions. The market prices reported prior to October
11,
2005 were prices reported for Cole Computer Corporation, our predecessor entity
that was a shell corporation with no material assets or liabilities. The share
prices reported below have been adjusted to take into account a 350-to-1 reverse
stock split with respect to the outstanding shares of our common stock that
was
affected on September 22, 2005.
2007
|
High
|
Low
|
January
1 to March 31
|
$6.25
|
$4.25
|
April
1 to June 30
|
$5.25
|
$2.65
|
July
1 to September 30
|
$2.65
|
$1.70
|
October
1 to December 27
|
$2.00
|
$0.90
|
2006
|
High
|
Low
|
January
1 to March 31
|
$7.50
|
$2.90
|
April
1 to June 30
|
$5.25
|
$3.00
|
July
1 to September 30
|
$4.95
|
$2.00
|
October
1 to December 31
|
$6.00
|
$2.50
|
2005
|
High
|
Low
|
January
1 to March 31
|
$10.49
|
$3.85
|
April
1 to June 30
|
$13.46
|
$3.85
|
July
1 to September 30
|
$13.99
|
$3.85
|
October
1 to December 31
|
$13.00
|
$4.00
|
The
last
reported sale price of our common stock on the American Stock Exchange on
December 26, 2007 was $1.10 per share. According to the records of our transfer
agent, there were approximately 334 record holders of our common stock as of
December 26, 2007.
Dividends
We
have
not declared or paid any dividends, and do not intend to pay any dividends
in
the foreseeable future, with respect to our common stock. We intend to retain
any future earnings for use in the operation and expansion of our business.
Any
future decision to pay dividends on our common stock will be at the discretion
of our Board of Directors and will depend upon our financial condition, results
of operations, capital requirements and other factors our Board of Directors
may
deem relevant.
Recent
Sales of Unregistered
Securities
We
did
not sell any unregistered securities in the period covered by this
report.
Issuer
Repurchases of Equity
Securities
We
did
not repurchase any shares of our common stock during the third quarter of ended
September 30, 2007.
The
following table provides information as of September 30, 2007 with respect
to
compensation plans under which our equity securities are authorized for
issuance.
Equity
Compensation Plan
Informaiton
|
|
|
|
|
|
|
|
|
|
|
Plan
Category
|
|
Number
of securities to be issued
upon exercise of outstanding warrants
|
|
|
Weighted
average exercise price of
outstanding options
|
|
|
Number
of securities remaining
available for future issuance under equity compensation
plans
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved
by security holders
|
|
|
1,835,000
|
|
|
$
|
2.24
|
|
|
|
665,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not
approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,835,000
|
|
|
$
|
2.24
|
|
|
|
665,000
|
|
Item
6.
Management’s Discussion and Analysis or Plan of Operation.
This
discussion contains forward-looking statements reflecting our current
expectations that involve risks and uncertainties. When used herein, the words
“believes,” “plans,” “expects,” “anticipates,” “intends,” “continue,” “may,”
“will,” “could,” “should,” “future,” “potential,” “estimate,” or the negative of
such terms and similar expressions as they relate to us or our management are
intended to identify 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
herein. These risks and uncertainties are beyond our control and, in
many cases, we cannot predict the risks and uncertainties that could cause
our
actual results to differ materially from those indicated by the forward-looking
statements. Historical results and percentage relationships among any
amounts in our consolidated financial statements are not necessarily indicative
of trends in operating results for any future periods.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with “Selected Consolidated Financial
Information” and our financial statements and accompanying notes included
elsewhere in this document.
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. 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.
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. National homebuilders have been trying
to reduce their real estate holdings for the past several months and we believe
this will continue. 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 believe that the national slowdown
will impact central Texas as national homebuilders continue to sell their real
estate holdings.
We
terminated our relationship with 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 $260,000 increase to stockholders equity.
Comparison
of
Nine Months Ended September 2007 and 2006
|
|
Nine
Months Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
|
|
(in
thousands)
|
|
Homebuilding
and related services
revenues
|
|
$
|
1,295
|
|
|
$
|
4,185
|
|
|
$
|
(2,889
|
)
|
|
|
-69
|
%
|
Land
revenues
|
|
$
|
3,149
|
|
|
$
|
1,080
|
|
|
$
|
2,069
|
|
|
|
192
|
%
|
Homebuilding
and related services
gross profit
|
|
$
|
270
|
|
|
$
|
705
|
|
|
$
|
(435
|
)
|
|
|
-62
|
%
|
Land
gross
profit
|
|
$
|
(646
|
)
|
|
$
|
455
|
|
|
$
|
(1,101
|
)
|
|
|
-242
|
%
|
Operating
expenses
|
|
$
|
4,244
|
|
|
$
|
4,010
|
|
|
$
|
234
|
|
|
|
6
|
%
|
Operating
loss
|
|
$
|
(4,620
|
)
|
|
$
|
(2,850
|
)
|
|
$
|
(1,770
|
)
|
|
|
62
|
%
|
Net
loss
|
|
$
|
(6,556
|
)
|
|
$
|
(7,626
|
)
|
|
$
|
1,070
|
|
|
|
-14
|
%
|
Results
of
Operations
Homebuilding
and Related Services Revenues
Background
-
Homebuilding and
related services consists of home sales and homebuilder services. 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 nine
months ended September 30, 2007, home sales accounted for approximately 29%
of
revenues at a gross profit margin of approximately 21%. All of the
homebuilding revenues were generated by one VIE consolidated into our operating
results. During the nine months ended September 30, 2007, home sales
declined approximately 69% from the same periods in 2006, primarily due to
the
reduced home sales from our VIEs.
In
June
2007 we acquired Green Builders and have commenced our homebuilding activities
under the name “Green Builders, Inc.” Our strategy is to build
homes that are environmentally 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 $200,000 to $700,000. We have derived our historical revenue from the
sale
of real estate and residential lots, and from services provided to homebuilder
clients. We ceased providing services to homebuilder clients in August 2007.
Prior to August 2007, we exercised significant influence over, but held no
controlling interest in, homebuilder clients, but in some cases we retained
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.
Land
and Land Development
Background
–
Land
sales
revenue consists of revenues from the sale of undeveloped land and 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 the delivery of these lots would likely be scheduled over periods
of
several months or years. We may use our developed lots for our own homebuilding
operations.
Revenues
–
During
the nine
months ended September 30, 2007, land sales accounted for approximately 71%
of
our total revenues at a gross loss of approximately 21% due to the write-off
of
approximate $1.3 million of development expenses incurred on the Bohls tract
that we elected not to exercise described below. For the nine months ended
September 30, 2007, approximately $800,000 of our land sale revenue came from
the sale of undeveloped acreage tracts of land, approximately $2.3 million
of
the revenue from the sale of developed finished lots. Revenues from
land and lot sales increased approximately 119% for the nine months ended
September 30, 2007 from the same periods in 2006, primarily due to the
completion and sale of residential lots. Excluding the write-off
of the Bohls tract, gross profit declined as a percentage of total
land revenues 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.
Costs
and
Expenses
Cost
of Sales
In
May 2007 we elected not to exercise a land purchase option to purchase the
Bohls
tract of approximately 428 acres for approximately $7.2 million. Due
to the market conditions in the homebuilding industry, our revenue projections
for the 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.
General
and Administrative Expenses
|
|
Nine
Months Ended September
30,
|
|
Breakdown
of G&A
Expenses
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
Salaries,
benefits, taxes and
related employee expenses
|
|
$
|
1,197,000
|
|
|
$
|
1,300,000
|
|
|
|
(103,000
|
)
|
|
|
-8
|
%
|
Stock
compensation
|
|
|
541,000
|
|
|
|
350,000
|
|
|
|
191,000
|
|
|
|
55
|
%
|
Legal,
accounting, and
audit
|
|
|
666,000
|
|
|
|
664,000
|
|
|
|
2,000
|
|
|
|
0
|
%
|
Warranty
expense, architecture
fees, and consulting services
|
|
|
288,000
|
|
|
|
535,000
|
|
|
|
(247,000
|
)
|
|
|
-46
|
%
|
General
overhead, including rent,
office expenses and insurance
|
|
|
662,000
|
|
|
|
320,000
|
|
|
|
342,000
|
|
|
|
107
|
%
|
Depreciation
expense
|
|
|
22,000
|
|
|
|
44,000
|
|
|
|
(22,000
|
)
|
|
|
-50
|
%
|
Amortization
of subordinated debt
issuance costs
|
|
|
320,000
|
|
|
|
157,000
|
|
|
|
163,000
|
|
|
|
104
|
%
|
Loss
on homebuilder services
clients
|
|
|
176,000
|
|
|
|
-
|
|
|
|
176,000
|
|
|
|
n/a
|
|
Total
G&A
|
|
$
|
3,872,000
|
|
|
$
|
3,370,000
|
|
|
|
502,000
|
|
|
|
15
|
%
|
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 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. While there was an overall
increase in both employees and salaries in 2007 as compared to 2006, it was
offset by a 2006 accrual of $200,000 for severance, thus resulting in the 2007
decrease of approximately $100,000.
Stock
compensation expense was approximately $541,000 and $350,000 for the nine months
ended September 30, 2007 and 2006, respectively. 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.
Legal,
accounting, audit and transaction expense, which includes the expense of filing
our registration statements and other SEC filings, totaled $666,000 and $664,000
for the nine months ended September 30, 2007 and 2006,
respectively. In 2007, we saw an increase in these expenses due to an
increase in overall filings for the Company in 2007, offset by a reduction
in
expenses relating to the 2007 offering that were a reduction in net proceeds
versus expenses in the same periods the prior year.
Warranty
expense, architecture fees and consulting services were approximately $288,000
and $535,000 for the nine months ended September 30, 2007 and 2006,
respectively. These expenses declined predominately due to a decrease
in consulting services in 2007.
There
was
approximately $662,000 and $320,000 for general overhead, including rent, office
expenses and insurance, respectively, for the nine months ended September 30,
2007 and 2006. This increase is due to approximately a $204,000
increase for directors and officers insurance and general liability
insurance. This increase was to due to an increase in directors and
officers insurance for the public offering and the general liability insurance
increase due to an increase in land development activities. The
additional increase for general overhead expenses is due to the ramping up
of our homebuilding activities in 2007.
Depreciation
expense was approximately $22,000 and $44,000 for the nine months ended
September 30, 2007 and 2006, respectively. This expense decreased
primarily due to the disposal of model furnishing assets in August 2006 which
eliminated the associated depreciation expense.
Amortization
of subordinated convertible debt issuance costs was approximately $320,000
and
$157,000 for the nine months ended September 30, 2007 and 2006,
respectively. This expense increased due to the issuance of $6.75
million of subrogated convertible debt in September 2006, thus increasing the
associated amortization of the issuance costs for 2007.
There
was
a loss of $176,000 for homebuilder services for the nine months ended
September 30, 2007 due to indirect operating losses of variable interest
entities that we incurred in 2007.
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 nine months ended September 30, 2007 and 2006 increased by
$584,000, which was related to the increased subordinated convertible debt
issued in September 2006 and the increase in interest expensed instead of
capitalized for property temporarily 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 $536,000 for each period. 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.
Comparison
of
Fiscal Years 2006 and 2005
|
|
Year
Ended December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
Change
|
|
|
|
(in
thousands)
|
|
Homebuilding
and related services
revenues
|
|
$
|
5,218
|
|
|
$
|
-
|
|
|
$
|
5,218
|
|
|
|
n/a
|
|
Land
revenues
|
|
$
|
1,517
|
|
|
$
|
255
|
|
|
$
|
1,262
|
|
|
|
495
|
%
|
Homebuilding
and related services
gross profit
|
|
$
|
871
|
|
|
$
|
-
|
|
|
$
|
871
|
|
|
|
n/a
|
|
Land
gross
profit
|
|
$
|
446
|
|
|
$
|
140
|
|
|
$
|
306
|
|
|
|
218
|
%
|
Operating
expenses
|
|
$
|
5,171
|
|
|
$
|
1,425
|
|
|
$
|
3,746
|
|
|
|
263
|
%
|
Operating
loss
|
|
$
|
(3,853
|
)
|
|
$
|
(1,284
|
)
|
|
$
|
(2,569
|
)
|
|
|
200
|
%
|
Net
loss
|
|
$
|
(14,393
|
)
|
|
$
|
(1,714
|
)
|
|
$
|
(12,679
|
)
|
|
|
740
|
%
|
Results
of
Operations
Homebuilding
and Related Services Revenues
Revenues
-
During the year
ended December 31, 2006, home sales accounted for approximately 77% of revenues
at a gross profit margin of approximately 17%. All of the
homebuilding revenues were generated by our two VIEs consolidated into our
operating results. Revenues from each homebuilder client were
approximately $1.8 and $3.4 million, respectively. The client that
generated $1.8 million of revenues has not commenced any new homes or utilized
our homebuilding services since June 30, 2006.
We
had no
homebuilding revenues during the year ended December 31, 2005 as no homes were
built.
Land
Sales
Revenues
-
Land sales
accounted for approximately 23% of our total revenues, totaling approximately
$1.5 million for the year ended December 31, 2006, at a gross profit margin
of
approximately 29%. For the year ended December 31, 2006,
approximately $616,000 of our land sale revenue came from the sale of
undeveloped acreage tracts of land, approximately $851,000 of the revenue from
the sale of developed finished lots and $50,000 from land option
revenue. During the year ended December 31, 2005, we were in the
process of acquiring and developing land and generated revenues of approximately
$255,000 through the sale of undeveloped acreage lots at a gross profit of
approximately $140,000.
Costs
and
Expenses
General
and Administrative Expenses
|
|
Year
Ended December
31,
|
|
Breakdown
of G&A
Expenses
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
Change
|
|
Salaries,
benefits, taxes and
related employee expenses
|
|
$
|
1,540,000
|
|
|
$
|
386,000
|
|
|
|
1,154,000
|
|
|
|
299
|
%
|
Stock
compensation
expense
|
|
|
545,000
|
|
|
|
-
|
|
|
|
545,000
|
|
|
|
n/a
|
|
Legal,
accounting, and
audit
|
|
|
776,000
|
|
|
|
292,000
|
|
|
|
484,000
|
|
|
|
166
|
%
|
Transaction
cost
amortization
|
|
|
367,000
|
|
|
|
-
|
|
|
|
367,000
|
|
|
|
n/a
|
|
Warranty
expense, architecture
fees, and consulting services
|
|
|
482,000
|
|
|
|
283,000
|
|
|
|
199,000
|
|
|
|
70
|
%
|
General
overhead, including rent,
office expenses and insurance
|
|
|
643,000
|
|
|
|
239,000
|
|
|
|
404,000
|
|
|
|
169
|
%
|
Total
G&A
|
|
$
|
4,353,000
|
|
|
$
|
1,200,000
|
|
|
|
3,153,000
|
|
|
|
263
|
%
|
During
the year ended December 31, 2006, salaries, benefits, taxes and related employee
expenses totaled approximately $1.5 million and represented approximately 35%
of
total general and administrative costs for the period. Also included
is an accrual of approximately $180,000 for severance payments that were paid
to
our former Chief Financial Officer over a ten month period. Stock
compensation expense totaled approximately $545,000, which is 13% of total
general and administrative expenses. Legal, accounting, and audit
expense which includes the expense of filing our registration statements and
other SEC filings, totaled approximately $776,000. Transaction cost
amortization and other transaction costs totaled approximately
$367,000. Warranty expense, architecture fees, and consulting
services were approximately $482,000. Miscellaneous expenses were
approximately $643,000 for
general
overhead, including rent, office expenses and insurance. Depreciation
expense included in general and administrative expenses was approximately
$56,000 for the year ended December 31, 2006. General and
administrative expenses included from the consolidation of our VIEs were less
than 5% of the total general and administrative expenses for the year ended
December 31, 2006.
Prior
to
our merger with Athena in May 2005, we had minimal business
activity. From June 2005 until December 2005, we spent money on
developing our business strategy, hiring staff, acquiring a 752 acre land tract
and merging with a public company, issuing $10 million of convertible debt
and
preparing all the documents and filings related to the merger
activities. At December 31, 2005, we had nine employees as compared
to three at June 30, 2005. The majority of expenses were for salaries
and related employee expenses of $386,000, legal fees of $203,000, consulting
relating to the preparation of home plans and designs of $283,000, accounting
and auditing fees of $89,000 and office rent, software, equipment and general
expenses of $156,000. Legal and accounting expenses related primarily
to the mergers of WFC with Athena, and Wilson Holdings and Cole. 64%
of our general and administrative expenses were incurred in the fourth quarter
of 2005.
Sales
and Marketing Expenses
Sales
and
marketing expenses for the year ended December 31, 2006 were approximately
$243,000 and represented approximately 30% of our total marketing costs for
the
period. Expenses for advertising, brochures and catalogs, signage,
public relations and other selling expenses for the year ended December 31,
2006
were approximately $378,000 and represented approximately 46% of total sales
and
marketing costs for the period. The remaining expenses for the year
ended December 31, 2006, were for other incidental items and
services. Approximately 17% of the sales and marketing expenses in
the period resulted from the consolidation of the VIEs.
Sales
and
marketing expenses for the year ended 2005 were for salaries and related
expenses which included $129,000 and $73,000 of website expenses, signage,
advertising and marketing. Sales and marketing expenses for the year
ended December 31, 2005 reflect our limited operations prior to June
2005.
Interest
Expense and Income
Interest
expense for the year ended December 31, 2006 of approximately $2.4 million
is
related to debt on properties purchased, convertible debt interest costs and
amortization of the convertible debt discounts. The convertible debt
discount amortization was approximately $917,000 for the year ended December
31,
2006. Interest on the convertible debt was approximately $586,000 for
the year ended December 31, 2006.
Interest
expense for the year ended December 31, 2005 of approximately $358,000 was
for
interest costs on land acquired and held for sale or development, a line of
credit, bridge loans and convertible debt.
We
experienced a loss on the fair value of derivatives during the years ended
December 31, 2006 and 2005 of approximately $8.5 million and $173,000,
respectively, due to the increases in the fair value of the derivative
liabilities related to the convertible notes and contingent
warrants. These increases were primarily the result of the increase
in value of our common stock and warrants.
Interest
income of approximately $291,000, $290,000 and $100,000 for the years ended
September 30, 2007, December 31, 2006 and December 31, 2005 respectively,
consisted of interest earned on our cash and cash equivalents and immaterial
amounts of 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 approximately $14 million of cash.
On
June
29, 2007, WFC entered into a three-year $55 million revolving credit facility
(the “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
the 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(excluding convertible debt) to equity(including
convertible debt) 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;
|
|
·
|
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;
|
|
·
|
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.
During
2007 we elected not to 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 have
substantially declined. We concluded that we currently have adequate
single-family lots for our needs, excluding 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; and
|
|
·
|
We
commenced homebuilding under Green Builders 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 $200,000 to $700,000.
|
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.
Due
to
market conditions stated above and longer than expected ramp up of homebuilding
operations our financial projections have changed. We expect to incur
significant losses during 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 fiscal 2008 if market opportunities for land
development and homebuilding growth arise.
Land
and
homes under construction comprise the majority of our 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 secured
by
our real estate holdings might then be called which may require us to liquidate
assets to satisfy our debt obligations. 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 seller-financed notes payable for New Sweden,
the 534 acre project 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
The
SEC
defines “critical accounting policies” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods. 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 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 than the
actual amounts, it could have a material effect on the financial
statements.
Municipal
Utility and Water District Receivables
We
currently have the community of Villages of New Sweden planned that is within
the boundaries of New Sweden Municipal Utility District No. 1 and the community
of Rutherford West planned in Greenhawe Water Control and Improvement District
No. 2. We incur development costs for the initial creation and
operating costs of
these
Districts and continuing costs for the water, sewer and drainage infrastructure
for these Districts. At this time, we estimate that we will recover
approximately 50 to 100% of eligible initial creation and operating costs spent
through September, 2007 at such time as each District issues its first bond
issue. Usually, a District issues its first bond issue only after
completion of construction of approximately 200 houses. Since
developer-funded infrastructure costs have been minimal to date in each
District, we have no estimate of the percentage of those costs which will be
recovered from each District or the time when they will be
recovered. To the extent that the estimates are dramatically
different to the actual facts, it could have a material effect on the financial
statements.
Concentrations
Our
current activities are currently in 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.
Recent
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
|
|
In
July
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes - An Interpretation of FASB Statement 109" ("FIN 48") which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48, effective for fiscal years beginning
after December 15, 2006, requires that the tax benefit from an uncertain tax
position may be recognized only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based
on
the technical merits of the position. The amount of tax benefits
recognized from such a position are measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate
resolution. The Company has completed the process of evaluating the
effect of FIN 48 on its consolidated financial statements. The
company has analyzed its tax positions and concluded that there is no cumulative
or current effect from the adoption of the provisions of FIN 48. The
Company's income tax returns are not currently under examination by the Internal
Revenue Service or other tax authorities. The Company does not
foresee any recognition of any unrecognized tax benefits during the next twelve
months.
In
September 2006, the FASB issued
SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).
SFAS 157 provides guidance for using fair value to measure assets and
liabilities. The standard also responds to investors’ request for expanded
information about the extent to which a company measures assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. SFAS 157 will be effective for the
Company’s fiscal year beginning October 1, 2008. The Company is currently
reviewing the effect SFAS 157 will have on its financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an amendment of
FASB Statement No. 115.” The statement permits entities to choose to
measure certain financial assets and liabilities at fair value. Unrealized
gains
and losses on items for which the fair value option has been elected are
reported in earnings. SFAS No. 159 is effective as of the beginning of
an entity’s fiscal year that begins after November 15, 2007. The Company is
currently evaluating the impact of the adoption of SFAS No. 159;
however, it is not expected to have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (FAS
141(R)), which establishes accounting principles and disclosure requirements
for
all transactions in which a company obtains control over another
business. The Company is currently evaluating the impact of the
adoption of SFAS No. 141; however, it is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" (FAS 160), which prescribes the accounting
by
a parent company for minority interests held by other parties in a subsidiary
of
the parent company. The Company is currently evaluating the impact of
the adoption of SFAS No. 160; however, it is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
Item
7.
Financial Statements
The
Financial Statements required by this item are included in Part III, Item 13
and
are presented beginning on Page F-1.
Item
8.
Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure
None.
Item
8A.
Controls
and
Procedures.
Evaluation
of Effectiveness of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and our Principal Financial
Officer, have evaluated our disclosure controls and procedures (as defined
in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended), as of the period ended September 30, 2007, the period covered by
this
Annual Report on Form 10-KSB. Based upon that evaluation, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures were effective as of September 30, 2007
to
ensure the timely collection, evaluation and disclosure of information relating
to our company that would potentially be subject to disclosure under the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. Internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability
of our financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting
principles. Because of its inherent limitations, internal control over financial
reporting is not intended to provide absolute assurance that a misstatement
of
our financial statements would be prevented or detected. Also, projections
of
any evaluation of internal control effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with internal control policies
or
procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting. Based on our evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of
September 30, 2007.
We
will
be required to be in compliance with Sarbanes Oxley Section 404 certification
requirements relating to internal controls for the fiscal year ended September
30, 2008. We have recently commenced our homebuilding
operations. We have also recently implemented a new enterprise wide
information technology system. In addition, following the filing of
this report, our principal financial officer will leave his position with
us and
become a consultant to the company. We will need to replace him with
a new principal financial officer. We are continuing to work with our
Audit Committee to implement internal controls due to the above noted
activities. Any failure to develop adequate these internal controls
or in the retention of a qualified principal financial officer may result
in a
material weakness in our internal control.
Item
8B.
Other Information.
None.
PART
III
Items
9
through 12 and Item 14 will be included in our proxy statement for our 2008
Annual Meeting of Shareholders, and are incorporated herein by
reference.
Item
9.
Directors, Executive Officers, Promoters and
Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act
The
information required by this Item will be included under the section captioned
“Election of Directors ” in our Proxy Statement for the 2008 Annual Meeting of
Shareholders, which information is incorporated into this Annual Report by
reference.
Item
10.
Executive Compensation
The
information required by this Item will be included under the sections captioned
“Executive Compensation” and “Certain Relationships and Related Transactions” in
our Proxy Statement for the 2008 Annual Meeting of Shareholders, which
information is incorporated into this Annual Report by reference.
Item
11.
Security Ownership of Certain Beneficial Owners
and Management and Related
Stockholder Matters
The
information required by this Item will be included under the section captioned
“Security Ownership of Certain Beneficial Owners and Management” in our Proxy
Statement for the 2008 Annual Meeting of Shareholders, which information is
incorporated into this Annual Report by reference.
Item
12.
Certain Relationships and Related Transactions,
and Director
Independence
The
information required by this Item will be included under the section captioned
“Certain Relationships and Related Transactions” in our Proxy Statement for the
2008 Annual Meeting of Shareholders, which information is incorporated into
this
Annual Report by reference.
Item
13.
Exhibits
The
Exhibit Index set forth below is incorporated herein by reference.
Item
14.
Principal Accountant Fees and Services
Information
required by this Item will be included under the section captioned “Ratification
of the Appointment of the Independent Auditors” in our Proxy Statement for the
2008 Annual Meeting of Shareholders, which information is incorporated into
this
Annual Report by reference.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
WILSON
HOLDINGS,
INC.
|
|
|
|
|
By:
|
/s/
Clark
N.
Wilson
|
|
|
Clark
N.
Wilson
|
Date:
December 31,
2007
|
|
President
and Chief Executive Officer
|
Power
of Attorney
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
severally constitutes and appoints, Clark Wilson and Arun Khurana , and each
or
any of them, his true and lawful attorney-in-fact and agent, each with the
power
of substitution and resubstitution, for him in any and all capacities, to sign
any and all amendments to this Annual Report on Form 10-KSB and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that
each said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated on December 31, 2007.
Name
|
|
Title
|
|
|
|
/s/
Clark
N.
Wilson
|
|
|
Clark
N.
Wilson
|
|
President,
Chief Executive Officer and Director
|
|
|
(Principal
Executive Officer)
|
|
|
|
/s/
Arun
Khurana
|
|
Principal
Financial Officer
|
Arun
Khurana
|
|
|
|
|
|
/s/
Victor
Ayad
|
|
Director
|
Victor
Ayad
|
|
|
|
|
|
/s/
Jay
Gouline
|
|
Director
|
Jay
Gouline
|
|
|
|
|
|
/s/
Sidney
Christopher Ney
|
|
Director
|
Sidney
Christopher Ney
|
|
|
|
|
|
/s/
Barry
A. Williamson
|
|
Director
|
Barry
A. Williamson
|
|
|
EXHIBIT
INDEX
LIST
OF EXHIBITS
|
|
1.1
|
Underwriting
Agreement, dated May 14, 2007, by and between Wilson Holdings,
Inc. and
Capital Growth Financial, LLC (filed as Exhibit 1.1 to the Registrant’s
Current Report on Form 8-K dated May 15, 2007 and incorporated
herein by
reference)
|
3.1
|
Amended
and Restated Bylaws of Registrant (filed as Exhibit 3.1 to Registrant’s
Current Report on Form 8-K dated July 19, 2006 and incorporated
herein by
reference)
|
3.2
|
Amended
and Restated Articles of Incorporation of Registrant (filed as
Exhibit 3.2
to the Registrant’s Current Report on Form 8-K dated May 15, 2007 and
incorporated herein by reference)
|
4.1
|
Amended
and restated Articles of Incorporation of Registrant (filed as
Exhibit 3.6
to the Registrant’s Registration Statement on Form SB-2 (File No.
333-131486) and incorporated herein by reference)
|
4.2
|
Underwriter
Warrant issued by Registrant to Capital Growth Financial, LLC (filed
as
Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-140747) (the “2007 S-1”) and incorporated herein by
reference)
|
10.1
|
Lease
Agreement dated September 14, 2006 by and between Registrant and
TI
Building Partnership, Ltd. (filed as Exhibit 10.4 to Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended September
30, 2006
and incorporated herein by reference)
|
10.2+
|
Wilson
Family Communities, Inc. 2005 Stock Option/Stock Issuance Plan
(filed as
Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated October 11,
2005 and incorporated herein by reference)
|
10.3+
|
Amendment
No. 1 to Wilson Holdings, Inc. 2005 Stock Option/Stock Issuance
Plan
(filed as Exhibit 10.2 to the 2007 S-1 and incorporated herein
by
reference)
|
10.4
|
Master
Construction Loan Agreement dated September 28, 2005 by and among
Registrant and Plains Capital Bank (filed as Exhibit 10.4 to Registrant’s
Current Report on Form 8-K dated October 11, 2005 and incorporated
herein
by reference)
|
10.5
|
Promissory
Note dated September 28, 2005 issued by Registrant to Plains Capital
Bank
(filed as Exhibit 10.5 to Registrant’s Current Report on Form 8-K dated
October 11, 2005 and incorporated herein by reference)
|
10.6
|
Registration
Rights Agreement by and among the Registrant and the purchasers
of
Registrant’s Convertible Notes issued December 19, 2005 (filed as Exhibit
10.2 to Registrant’s Current Report on Form 8-K dated December 19, 2005
and incorporated herein by reference)
|
10.7
|
Form
of Warrant issued to Purchasers of Convertible Notes dated December
19,
2005 (filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K
dated December 19, 2005 and incorporated herein by
reference)
|
10.8
|
Registration
Rights Agreement dated September 29, 2006 by and among the Registrant
and
the purchasers of the Registrant’s Convertible Notes issued September 29,
2006 (filed as Exhibit 10.2 to Registrants Current Report on Form
8-K
dated October 4, 2006 and incorporated herein by
reference)
|
10.9
|
Form
of Warrant issued to Purchasers of Convertible Notes dated September
29,
2006 (filed as Exhibit 10.3 to Registrants Current Report on Form
8-K
dated October 4, 2006 and incorporated herein by
reference)
|
10.10+
|
Letter
Agreement dated December 14, 2006 by and between Registrant and
Capital
Growth Financial (filed as Exhibit 10.12 to the 2007 S-1 and
incorporated herein by reference)
|
10.11+
|
Amendment
No. 1 to Letter Agreement by and between Registrant and Capital
Growth
Financial (filed as Exhibit 10.13 to the 2007 S-1 and incorporated
herein
by reference)
|
10.12+
|
Employment
Letter Agreement dated February 14, 2007 by and between Registrant
and
Clark Wilson (filed as Exhibit 10.10 to Registrant’s Annual Report on Form
10-KSB for the year ended December 31, 2006 and incorporated herein
by
reference)
|
10.13+
|
Employment
Letter Agreement dated February 14, 2007 by and between Registrant
and
Arun Khurana (filed as Exhibit 10.11 to Registrant’s Annual Report on Form
10-KSB for the year ended December 31, 2006 and incorporated herein
by
reference)
|
10.14
|
Borrowing
Base Loan Agreement by and between Wilson Family Communities, Inc
and RBC
Centura Bank, with Franklin Bank SSB and International Bank of
Commerce as
co-lenders dated June, 30, 2007 (filed as Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-KQSB for the quarter ended June 30,
2007 and
incorporated herein by reference)
|
10.15+
|
Consulting
Agreement dated September 18, 2007 by and between Registrant and
Arun
Khurana (filed as Exhibit 10.1 to the Registrant’s Current Report on Form
8-K dated September 20, 2007 and incorporated herein by
reference)
|
21*
|
Subsidiaries
of Registrant
|
24*
|
Power
of Attorney (included in signature page).
|
31.1*
|
Certification
of Principal Executive Officer
|
31.2*
|
Certification
of Principal Financial Officer
|
32*
|
Certification
of Principal Executive Officer and Principal Financial
Officer
|
* Filed herewith
+ Indicates a management contract or compensatory plan or
arrangement.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
Wilson
Holdings, Inc.
We
have
audited the accompanying consolidated balance sheets of Wilson Holdings, Inc.
as
of September 30, 2007 and December 31, 2006 and 2005, and the related
consolidated statements of operations, partners’ equity and stockholders’
equity, and cash flows for the nine months ended September 30, 2007 and for
the
years ended December 31, 2006 and 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 2007 and December 31, 2006 and 2005 and the consolidated results of
their operations and their cash flows for the nine months ended September 30,
2007 and the years ended December 31, 2006 and 2005
in
conformity with generally accepted accounting principles in the United States
of
America.
PMB
HELIN DONOVAN, LLP
/s/
PMB
Helin Donovan, LLP
Austin,
Texas
December 31,
2007
WILSON
HOLDINGS,
INC.
|
|
Consolidated
Balance
Sheets
|
|
September
30, 2007 and December
31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
13,073,214
|
|
|
$
|
2,673,056
|
|
|
$
|
10,019,816
|
|
Restricted
cash
|
|
|
-
|
|
|
|
2,192,226
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
and land
development
|
|
|
32,463,411
|
|
|
|
29,908,325
|
|
|
|
12,299,872
|
|
Homebuilding
inventories
|
|
|
2,843,704
|
|
|
|
847,653
|
|
|
|
655,145
|
|
Total
inventory
|
|
|
35,307,115
|
|
|
|
30,755,978
|
|
|
|
12,955,017
|
|
Other
assets
|
|
|
729,471
|
|
|
|
196,195
|
|
|
|
48,056
|
|
Debt
issuance costs, net of
amortization
|
|
|
1,265,218
|
|
|
|
1,458,050
|
|
|
|
1,420,669
|
|
Equipment
and software, net of
accumulated depreciation and amortization of
$32,294
and $46,358,
respectively
|
|
|
232,357
|
|
|
|
97,956
|
|
|
|
70,875
|
|
Total
assets
|
|
$
|
50,607,375
|
|
|
$
|
37,373,461
|
|
|
$
|
24,514,433
|
|
LIABILITIES
AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,404,151
|
|
|
$
|
1,376,117
|
|
|
$
|
111,275
|
|
Accrued
real estate taxes
payable
|
|
|
405,060
|
|
|
|
454,764
|
|
|
|
148,862
|
|
Accrued
liabilities and
expenses
|
|
|
215,372
|
|
|
|
529,090
|
|
|
|
135,168
|
|
Accrued
interest
|
|
|
464,809
|
|
|
|
302,555
|
|
|
|
237,592
|
|
Deferred
revenue
|
|
|
159,381
|
|
|
|
11,223
|
|
|
|
11,223
|
|
Lines
of
credit
|
|
|
472,365
|
|
|
|
6,436,706
|
|
|
|
253,945
|
|
Notes
payable
|
|
|
20,165,993
|
|
|
|
9,466,621
|
|
|
|
7,108,579
|
|
Notes
payable, related
party
|
|
|
-
|
|
|
|
279,800
|
|
|
|
279,800
|
|
Subordinated
convertible debt, net
of $3,384,807, $5,224,502, and $5,002,500
discount,
respectively
|
|
|
13,254,780
|
|
|
|
8,395,876
|
|
|
|
4,997,500
|
|
Derivative
liability, convertible
note compound embedded derivative
|
|
|
-
|
|
|
|
7,462,659
|
|
|
|
4,500,000
|
|
Derivative
liability, contingent
warrants issued to subordinated convertible debt
holders
|
|
|
-
|
|
|
|
1,883,252
|
|
|
|
675,000
|
|
Total
liabilities
|
|
|
36,541,911
|
|
|
|
36,598,663
|
|
|
|
18,458,944
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value,
100,000,000, 80,000,000, and 80,000,000 shares
authorized,
respectively,
23,135,538, 18,055,538, and 17,706,625 shares issued
and
outstanding at September 30,
2007, December 31, 2006 and 2005, respectively
|
|
|
23,136
|
|
|
|
18,056
|
|
|
|
17,707
|
|
Additional
paid in
capital
|
|
|
27,040,304
|
|
|
|
16,809,885
|
|
|
|
7,697,868
|
|
Retained
deficit
|
|
|
(12,997,976
|
)
|
|
|
(16,053,143
|
)
|
|
|
(1,660,086
|
)
|
Total
stockholders'
equity
|
|
|
14,065,464
|
|
|
|
774,798
|
|
|
|
6,055,489
|
|
Commitments
and
contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities and
stockholders' equity
|
|
$
|
50,607,375
|
|
|
$
|
37,373,461
|
|
|
$
|
24,514,433
|
|
See
accompanying notes to the consolidated financial statements.
WILSON
HOLDINGS, INC.
|
|
Consolidated
Statements of Operations
|
|
For
the Nine Months Ended September 30, 2007 and 2006
|
|
And
for the Years Ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended Sept 30,
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
$
|
1,295,406
|
|
|
$
|
4,184,905
|
|
|
$
|
5,217,564
|
|
|
$
|
-
|
|
Land
sales
|
|
|
3,149,093
|
|
|
|
1,079,811
|
|
|
|
1,516,952
|
|
|
|
255,000
|
|
Total
revenues
|
|
|
4,444,499
|
|
|
|
5,264,716
|
|
|
|
6,734,516
|
|
|
|
255,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
1,025,514
|
|
|
|
3,480,403
|
|
|
|
4,346,186
|
|
|
|
-
|
|
Land
sales
|
|
|
3,794,712
|
|
|
|
624,487
|
|
|
|
1,070,856
|
|
|
|
114,587
|
|
Total
cost of revenues
|
|
|
4,820,226
|
|
|
|
4,104,890
|
|
|
|
5,417,042
|
|
|
|
114,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
269,892
|
|
|
|
704,502
|
|
|
|
871,378
|
|
|
|
-
|
|
Land
sales
|
|
|
(645,619
|
)
|
|
|
455,324
|
|
|
|
446,096
|
|
|
|
140,413
|
|
Total
gross profit
|
|
|
(375,727
|
)
|
|
|
1,159,826
|
|
|
|
1,317,474
|
|
|
|
140,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
general and administration
|
|
|
3,871,587
|
|
|
|
3,369,843
|
|
|
|
4,352,999
|
|
|
|
1,199,578
|
|
Sales
and marketing
|
|
|
372,820
|
|
|
|
640,421
|
|
|
|
817,595
|
|
|
|
224,936
|
|
Total
costs and expenses
|
|
|
4,244,407
|
|
|
|
4,010,264
|
|
|
|
5,170,594
|
|
|
|
1,424,514
|
|
Operating
loss
|
|
|
(4,620,134
|
)
|
|
|
(2,850,438
|
)
|
|
|
(3,853,120
|
)
|
|
|
(1,284,101
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
(3,392,500
|
)
|
|
|
(8,469,457
|
)
|
|
|
(172,500
|
)
|
Interest
and other income
|
|
|
291,478
|
|
|
|
260,199
|
|
|
|
290,335
|
|
|
|
100,346
|
|
Interest
expense
|
|
|
(2,227,233
|
)
|
|
|
(1,643,086
|
)
|
|
|
(2,360,815
|
)
|
|
|
(358,188
|
)
|
Total
other expense
|
|
|
(1,935,755
|
)
|
|
|
(4,775,387
|
)
|
|
|
(10,539,937
|
)
|
|
|
(430,342
|
)
|
Net
loss
|
|
$
|
(6,555,889
|
)
|
|
$
|
(7,625,825
|
)
|
|
$
|
(14,393,057
|
)
|
|
$
|
(1,714,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
20,586,649
|
|
|
|
17,706,625
|
|
|
|
17,711,405
|
|
|
|
7,755,646
|
|
See
accompanying notes to the consolidated financial statements.
WILSON
HOLDINGS,
INC.
|
|
Statements
of Partners’ Equity and
Stockholders' Equity
|
|
For
the Nine Months Ended
September 30, 2007
|
|
And
for the Years Ended December
31, 2006, and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
Partners’
Equity
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid In
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balances
at December 31,
2004
|
|
|
72,643
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,643
|
|
Net
loss through May31,
2005
|
|
|
(54,357
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(54,357
|
)
|
Common
Stock issued in exchange
Cash and Partnership interests
|
|
|
(18,286
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,000,000
|
|
|
|
9,000
|
|
|
|
9,286
|
|
|
|
-
|
|
|
|
-
|
|
Sale
of Common
Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
59,000
|
|
|
|
-
|
|
|
|
60,000
|
|
Sales
of Series A
Convertible Preferred Stock
|
|
|
-
|
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
4,395,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,400,000
|
|
Series
A Preferred Stock exchanged
for land
|
|
|
-
|
|
|
|
2,404,789
|
|
|
|
2,405
|
|
|
|
2,402,384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,404,789
|
|
Preferred
Stock exchanged for
Common Stock
|
|
|
-
|
|
|
|
(6,804,789
|
)
|
|
|
(6,805
|
)
|
|
|
(6,797,984
|
)
|
|
|
6,804,789
|
|
|
|
6,805
|
|
|
|
6,797,984
|
|
|
|
-
|
|
|
|
-
|
|
Shares
Issued in
Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
901,836
|
|
|
|
902
|
|
|
|
(902
|
)
|
|
|
-
|
|
|
|
-
|
|
Warrants
issued for transaction
costs for convertible
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
832,500
|
|
|
|
-
|
|
|
|
832,500
|
|
Net
loss from June 1 through
December 31, 2005
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,660,086
|
)
|
|
|
(1,660,086
|
)
|
Balances
December 31,
2005
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,706,625
|
|
|
|
17,707
|
|
|
|
7,697,868
|
|
|
|
(1,660,086
|
)
|
|
|
6,055,489
|
|
Stock-based
compensation
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
544,866
|
|
|
|
-
|
|
|
|
544,866
|
|
Warrants
issued at fair
value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,117,500
|
|
|
|
-
|
|
|
|
1,117,500
|
|
Benificial
conversion feature at
fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,450,000
|
|
|
|
-
|
|
|
|
7,450,000
|
|
Cashless
exercise of
warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
348,913
|
|
|
|
349
|
|
|
|
(349
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,393,057
|
)
|
|
|
(14,393,057
|
)
|
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
|
|
WILSON
HOLDINGS,
INC.
|
Consolidated
Statements of Cash
Flows
|
For
the Nine Months Ended
September 30, 2007
|
And
for the Years Ended December
31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended Sept
30,
|
|
|
Year
Ended December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Cash
flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,555,889
|
)
|
|
$
|
(7,625,825
|
)
|
|
$
|
(14,393,057
|
)
|
|
$
|
(1,714,443
|
)
|
Non
cash
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on fair value of
derivatives
|
|
|
-
|
|
|
|
3,392,500
|
|
|
|
8,469,457
|
|
|
|
172,500
|
|
Amortization
of convertible debt
discount
|
|
|
536,230
|
|
|
|
535,983
|
|
|
|
917,330
|
|
|
|
-
|
|
Amortization
of debt issuance
costs
|
|
|
192,832
|
|
|
|
157,927
|
|
|
|
216,037
|
|
|
|
-
|
|
Stock-based
compensation
expense
|
|
|
540,900
|
|
|
|
349,507
|
|
|
|
544,866
|
|
|
|
-
|
|
Services
provided without
compensation by principal shareholders
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation
and
amortization
|
|
|
55,309
|
|
|
|
44,940
|
|
|
|
55,577
|
|
|
|
4,961
|
|
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
|
|
|
(5,806,105
|
)
|
|
|
(7,620,582
|
)
|
|
|
(10,946,924
|
)
|
|
|
(3,283,886
|
)
|
Increase
in other
assets
|
|
|
(272,341
|
)
|
|
|
(67,763
|
)
|
|
|
(148,139
|
)
|
|
|
(48,056
|
)
|
Increase
in accounts
payable
|
|
|
28,034
|
|
|
|
435,198
|
|
|
|
1,264,842
|
|
|
|
111,276
|
|
(Decrease)
in real estate taxes
payable
|
|
|
(49,704
|
)
|
|
|
-
|
|
|
|
305,902
|
|
|
|
148,862
|
|
(Decrease)
increase in accrued
expenses
|
|
|
(313,718
|
)
|
|
|
684,179
|
|
|
|
393,922
|
|
|
|
135,108
|
|
Increase
in deferred
revenue
|
|
|
148,158
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,641
|
|
(Decrease)
increase in accrued
interest
|
|
|
162,254
|
|
|
|
(37,194
|
)
|
|
|
64,963
|
|
|
|
232,380
|
|
Net
cash used in operating
activities
|
|
|
(9,799,193
|
)
|
|
|
(9,751,130
|
)
|
|
|
(13,255,224
|
)
|
|
|
(4,235,657
|
)
|
Cash
flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed
assets
|
|
|
(201,565
|
)
|
|
|
(68,479
|
)
|
|
|
(82,658
|
)
|
|
|
(75,836
|
)
|
Cash
paid for Green Builders,
Inc.
|
|
|
(32,919
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
cash used in investing
activities
|
|
|
(234,484
|
)
|
|
|
(68,479
|
)
|
|
|
(82,658
|
)
|
|
|
(75,836
|
)
|
Cash
flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in restricted
cash
|
|
|
2,192,226
|
|
|
|
-
|
|
|
|
(2,192,226
|
)
|
|
|
-
|
|
Repayments
to related parties,
net
|
|
|
(279,800
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,000
|
)
|
Issuances
(repayments) of notes
payable, net
|
|
|
10,699,372
|
|
|
|
(897,579
|
)
|
|
|
(908,579
|
)
|
|
|
217,591
|
|
(Repayments)
advances on lines of
credit, net
|
|
|
(5,964,341
|
)
|
|
|
3,213,395
|
|
|
|
2,595,345
|
|
|
|
253,945
|
|
Proceeds
from issuance of
convertible debt
|
|
|
-
|
|
|
|
6,500,000
|
|
|
|
6,750,000
|
|
|
|
10,000,000
|
|
Cash
paid for debt issuance
costs
|
|
|
-
|
|
|
|
(212,246
|
)
|
|
|
(253,418
|
)
|
|
|
(588,170
|
)
|
Proceeds
from issunace of Series A
convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,400,000
|
|
Partnership
contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock sales, net of
transaction costs
|
|
|
13,786,377
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
Net
cash provided by financing
activities
|
|
|
20,433,834
|
|
|
|
8,603,570
|
|
|
|
5,991,122
|
|
|
|
14,322,366
|
|
Net
increase (decrease) in cash
and cash equivalents
|
|
|
10,400,158
|
|
|
|
(1,216,039
|
)
|
|
|
(7,346,760
|
)
|
|
|
10,010,873
|
|
Cash
and cash equivalents at
beginning of period
|
|
|
2,673,056
|
|
|
|
10,019,816
|
|
|
|
10,019,816
|
|
|
|
8,943
|
|
Cash
and cash equivalents at end
of period
|
|
$
|
13,073,214
|
|
|
$
|
8,803,777
|
|
|
$
|
2,673,056
|
|
|
$
|
10,019,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for
interest
|
|
$
|
1,872,716
|
|
|
$
|
1,064,421
|
|
|
$
|
1,519,168
|
|
|
$
|
96,168
|
|
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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance
of common stock for notes
payable, cancellation of notes payable in exchange for
cancellation
of subordinated
debt
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
See
accompanying notes to the consolidated financial statements.
WILSON
HOLDINGS, INC.
Notes
to 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.
In
September 2007, the Company changed the fiscal year end from December 31 to
September 30 in order to align the Company’s fiscal year more closely with its
business cycle.
The
Company is currently focused on building and selling homes and making strategic
land acquisitions and developing residential communities.
|
·
|
Homebuilding
and Related Services: The Company commenced its homebuilding operations
in
June 2007 with the purchase of Green Builders, Inc. The Company’s strategy
is to build homes that are environmentally responsible, resource
efficient
and consistent with local style. The Company will build homes
on the majority of the lots that it currently has under
development. Its home designs will be selected and prepared for
each of its markets based on local community tastes and preferences
of
homebuyers. Substantially all of the Company’s construction work will be
performed by subcontractors.
|
|
·
|
Land
Acquisition and Development: The Company’s land development business plan
is to secure land strategically, based on its understanding of population
growth patterns and infrastructure development. In tandem with
its land acquisition efforts and based upon its strategic market
analysis,
the Company plans to subcontract for the preparation of land for
development. They seek to add value to the land through the process
of
development, which may include permitting and constructing water
and
wastewater infrastructure, master-planning of the community, and
the
construction of roads and community amenities. The Company also plans
to
sell entitled land to others for development.
|
(2)
Summary of Significant Accounting Policies
(a)
Basis of Accounting
These
financial statements are presented on the accrual basis of accounting in
accordance with U.S. generally accepted accounting principles whereby revenues
are recognized in the period earned and expenses when incurred.
(b)
Cash and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers all short term,
highly liquid investments with an original maturity of three months or less
to
be cash and cash equivalents.
(c)
Consolidation of Variable Interest Entities
The
Company offers certain homebuilder clients surety for their interim construction
loans and cash advances to facilitate sales of the Company’s residential lots.
The Company 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. The Company accounts for each of these
entities in accordance with FIN 46(R). Management uses its judgment when
determining if the Company is the primary beneficiary of, or has a controlling
interest in, any of these entities. Factors considered in determining whether
the Company has 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.
The
Company terminated its relationship with its homebuilder clients in
2007.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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, capitalized interest,
real estate taxes incurred during development and construction phases, and
homebuilding costs. No significant impairments of inventory were
recorded in 2007, 2006 or 2005.
(e) Land
Held Under Option Agreements, Not Owned
In
order
to ensure the future availability of land for development, the Company enters
into lot option purchase agreements with unaffiliated third parties. Under
the
agreements, the Company pays a stated deposit in consideration for the right
to
purchase land at a future time, usually at predetermined prices or 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.
Lot
option payments are initially capitalized as inventory costs. If the
lot option is exercised the option cost is included in the cost of the land
acquired. At the earlier of the time that it is determined that the
lot option will not be exercised or, at the date the lot option expires, the
cost of the lot option will be expensed. Earnest money deposits for
land costs and development costs on land under option, not owned, totaled
approximately $525,000, $625,000 and $525,000 at September 30, 2007 and December
31, 2006 and 2005 respectively, of which approximately $520,000, $625,000,
and
$420,000 is non-refundable if the Company does not exercise the option and
purchase the land.
(f) Interest
and Real Estate Taxes
Interest
and real estate taxes attributable to land and homes are capitalized as
inventory while they are being actively developed. As of
September 30, 2007 and December 31, 2006 and 2005, there were approximately
$405,000, $460,000, and $151,000 of estimated real estate taxes. As
of September 30, 2007 and December 31, 2006 there was approximately $816,000
and
$241,000 of interest in inventory.
(g) 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.
(h) Income
Taxes
Prior
to
the merger of Athena with WFC at May 31, 2005, Athena was a partnership and
therefore did not have income taxes as the income and losses passed through
to
the partners. Also, the VIEs are pass through entities. Since the merger, income
taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes,” deferred tax assets and liabilities are determined based on temporary
differences between financial reporting carrying amounts of existing assets
and
liabilities and their respective tax bases and net operating loss and credit
carry-forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates will be recognized
in the period that includes the enactment date. A valuation allowance
is recorded for the entire deferred tax assets due to the uncertainty of the
net
realizable value of the asset.
(i)
Advertising and Selling Costs
The
Company has incurred advertising, marketing, selling, and promotion costs as
part of the sales efforts to market the real estate for sale and services
offered. These costs, including the cost of developing and printing various
brochures and mail out documents, are expensed as incurred. For the nine months
ended September 30, 2007 and 2006 the Company incurred approximately $370,000
and $640,000 of advertising and selling costs, respectively. For the
years ended December 31, 2006, and 2005, the Company incurred $820,000 and
$230,000 of advertising and selling costs, respectively.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(j) Property
and Equipment
Property
and equipment is carried at cost less accumulated depreciation. Depreciation
and
amortization is recorded using the straight-line method over the estimated
useful life of the asset. Depreciation and amortization for equipment and
computer software typically ranges from 2 to 5 years. Leasehold improvements
are
depreciated over the shorter of the life of the respective leases or the assets.
Repairs and maintenance are expensed as incurred. Costs and accumulated
depreciation applicable to assets retired or sold are eliminated from the
accounts and any resulting gains or losses are recognized at such
time.
(k) 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 dramatically different
to the actual amounts, it could have a material effect on the financial
statements.
(l)
Municipal Utility and Water District Receivables
The
Company has one of its properties in a Municipal Utility District (MUD) and
one
property in a Water Control and Improvement District (WCID). 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 districts, the Company expects to be reimbursed partially for the above
developments costs. The Districts will issue bonds to repay the Company, once
there is enough assessed value on the property for the District taxes to repay
the bonds. As homes are sold within the District, 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 100% of eligible costs spent through September 30, 2007. In
some circumstances, the Districts will pay for property set aside for the
preservation of endangered species, greenbelts and similar uses. To
the extent that the estimates are dramatically different to the actual amounts,
it could have a material effect on the financial statements.
(l)
Impairment of Long-Lived Assets
The
Company reviews its long-lived assets, which consist primarily of trademarks,
equipment and software, and real estate inventory for impairment according
to
whenever events or changes in
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(2)
Summary of Significant Accounting Policies (continued)
(m) Impairment
of Long-Lived Assets (continued)
circumstances
indicate. Inventory is stated at the lower of cost (including direct
construction costs, capitalized interest and real estate taxes) or fair value
less cost to sell. Equipment and software is carried at cost less accumulated
depreciation. The Company assesses these assets for recoverability in accordance
with the provisions of statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No.
144. SFAS No. 144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable. Recoverability of assets is measured by
comparing the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. These evaluations for impairment are
significantly impacted by estimates of revenues, costs and expenses and other
factors. If long-lived assets are considered to be impaired, the impairment
to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. No significant
impairments of long-lived assets were recorded in 2007, 2006 or
2005.
(n) 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, warrants convertible into shares of common
stock. These shares and warrants have been excluded from loss per share at
September 30, 2007 and 2006, and December 31, 2006 and 2005 because the
effect would be anti-dilutive as summarized in the table below:
|
|
September
|
|
|
December
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,835,000
|
|
|
|
1,145,000
|
|
|
|
925,000
|
|
|
|
780,000
|
|
Common
stock
warrants
|
|
|
1,143,125
|
|
|
|
1,312,500
|
|
|
|
1,283,750
|
|
|
|
1,500,000
|
|
Subordinated
convertible debt
warrants
|
|
|
8,250,000
|
|
|
|
8,375,000
|
|
|
|
8,375,000
|
|
|
|
5,000,000
|
|
Total
|
|
|
11,228,125
|
|
|
|
10,832,500
|
|
|
|
10,583,750
|
|
|
|
7,280,000
|
|
(o) Financial
Instruments and Credit Risk
Financial
instruments that potentially subject the Company to credit risk include cash
and
cash equivalents. Cash is deposited in demand accounts in federally
insured domestic institutions to minimize risk. Although the balances
in these accounts exceeded the federally insured limit by $12.9 million at
September 30, 2007, the Company has not incurred losses related to these
deposits. Cash equivalents consist of money market accounts and are typically
held in accounts with investment brokers or banks which are secured with high
quality short maturity investment securities.
The
amounts reported for cash and cash equivalents, notes payable, accounts payable,
accrued liabilities, and line of credit are considered to approximate their
market values based on comparable market information available at the respective
balance sheet dates and their short-term nature.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(2)
Summary of Significant Accounting Policies (continued)
(p)
Concentrations
Our
current activities are currently in 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.
In
prior
periods we have been 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 nine
months ended September 30, 2007. At September 30, 2007 we no
longer have homebuilder services customers.
(q) 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.
(r)
Derivative Financial Instruments
Wilson
Holdings accounts for all derivative financial instruments in accordance with
SFAS No. 133. Derivative financial instruments are recorded as liabilities
in
the consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(2)
Summary of Significant Accounting Policies (continued)
(r)
Derivative Financial Instruments (continued)
However,
if quoted market prices are not available, Wilson Holdings estimates fair value
using either quoted market prices of financial instruments with similar
characteristics or other valuation techniques.
The
value
of the derivative liabilities relating to the convertible note in the
consolidated financial statements are subject to the changes in the trading
value of Wilson Holdings common stock and other assumptions. As a result, our
quarterly financial statements may fluctuate from quarter to quarter based
on
factors, such as the trading value of Wilson Holdings common stock, the amount
of shares converted by subordinated convertible debt holders in connection
with
the subordinated convertible notes and exercised in connection with the
subordinated convertible debt holders’ penalty warrants. Consequently, the
consolidated financial position and results of operations may vary from quarter
to quarter based on conditions other than Wilson Holdings operating revenues
and
expenses. See Note 10 regarding valuation methods used for derivative
liabilities.
Derivative
financial instruments that are not designated as hedges or that do not meet
the
criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
with gains or losses reported currently in earnings. All derivative financial
instruments held by the Company as of September 30, 2007 and December 31,
2006 and 2005, were not designated as hedges.
(s)
Stock-Based Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123
(revised 2004), Share-Based Payment, (“SFAS 123R”) using the
prospective-transition method. Under this transition method, compensation
expense recognized during the year ended December 31, 2006 included: (a)
compensation expense for all share-based awards granted prior to, but not yet
vested as of December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, and (b)
compensation expense for all share-based awards granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R. In accordance with the
modified-prospective-transition method, results for prior periods have not
been
restated. Before January 1, 2006, the Company accounted for its
stock options using the intrinsic value method under “Accounting Principles
Board Opinion No. 25.”
If
the
Company had elected to recognize compensation expense for options granted based
on their fair values at the grant dates, consistent with SFAS No. 123, net
income and earnings per share for the year ended December 31, 2005 would
have changed to the pro forma amounts indicated below:
|
|
2005
|
|
Net
loss as reported
|
|
$
|
(1,714,443
|
)
|
Deduct:
Total stock based employee compensation expense determined under
the
fair value based method for all awards, net of the related tax
effects
|
|
|
(123,479
|
)
|
Pro
forma net loss
|
|
$
|
(1,837,922
|
)
|
Net
loss per share
|
|
|
|
|
Basic
and diluted - as
reported
|
|
$
|
(0.22
|
)
|
Basic
and diluted - pro forma
|
|
$
|
(0.23
|
)
|
The
fair
value of the options was calculated at the date of grant using the Black-Scholes
pricing model with the following weighted-average assumptions for the year
ended
2005. For the year ended 2005, the following assumptions were used:
risk free interest rate of 4.25%, dividend yield of 0%, weighted-average life
of
options of 5 years, and a 60% volatility factor.
(t) 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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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
|
|
In
July
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes -- An Interpretation of FASB Statement 109" ("FIN 48") which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48, effective for fiscal years beginning
after December 15, 2006, requires that the tax benefit from an uncertain tax
position may be recognized only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based
on
the technical merits of the position. The amount of tax benefits
recognized from such a position are measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate
resolution. The Company has completed the process of evaluating the
effect of FIN 48 on its consolidated financial statements. The
company has analyzed its tax positions and concluded that there is no cumulative
or current effect from the adoption of the provisions of FIN 48. The
Company's income tax returns are not currently under examination by the Internal
Revenue Service or other tax authorities. The Company does not
foresee recognition of unrecognized tax benefits during the next twelve
months.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair
value to measure assets and liabilities. The standard also responds to
investors’ request for expanded information about the extent to which a company
measures assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. SFAS 157
will be effective for the Company’s fiscal year beginning October 1, 2008. The
Company is currently reviewing the effect SFAS 157 will have on its
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an amendment of
FASB Statement No. 115.” The statement permits
entities
to choose to measure certain financial assets and liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective as of the
beginning of an entity’s fiscal year that begins after November 15, 2007.
The Company is currently evaluating the impact of the adoption of
SFAS No. 159; however, it is not expected to have a material impact on
the Company’s consolidated financial position, results of operations or cash
flows.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (FAS
141(R)), which establishes accounting principles and disclosure requirements
for
all transactions in which a company obtains control over another
business. The Company is currently evaluating the impact of the
adoption of SFAS No. 141; however, it is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" (FAS 160), which prescribes the accounting
by
a parent company for minority interests held by other parties in a subsidiary
of
the parent company. The Company is currently evaluating the impact of
the adoption of SFAS No. 160; however, it is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
(u)
Reclassification
Certain
prior period amounts have been reclassified to conform to current period
presentation.
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 approximately $525,000, $625,000 and $525,000 at September 30,
2007 and December 31, 2006 and 2005 respectively, of which approximately
$520,000, $625,000, and $420,000 is non-refundable if the Company does not
exercise the option and purchase the land.
As
of
September 30, 2007 it had approximately 738 acres under development and
construction in Hays County, Travis County and Williamson County,
Texas. The Company completed Phase 1 in Rutherford West in 2007 and
Phase 6 in Georgetown Village in 2006. During 2007, the Company
elected not to exercise the option on Bohl’s tract. The Company
recorded approximately $1.3 million of cost of sales during the nine months
ended September 30, 2007 to reflect the development costs which accumulated
on
this property.
In
April
2007 10 acres of Highway 183 was condemned by the State. In July 2007
the Company received final judgment from the State and received proceeds of
approximately $410,000 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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Below
is
a summary of the property completed, owned or under contract by the Company
at
September 30, 2007:
Property
|
|
Finished
Lots/Homes
|
|
|
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
|
|
|
54
|
|
|
|
521
|
|
|
|
n/a
|
|
|
$
|
12,369
|
|
|
|
521
|
|
Hays
|
Highway
183
|
|
|
-
|
|
|
|
5
|
|
|
|
n/a
|
|
|
|
113
|
|
|
|
-
|
|
Travis
|
Georgetown
Village
|
|
|
50
|
|
|
|
149
|
|
|
|
419
|
|
|
|
6,199
|
|
|
|
42
|
|
Williamson
|
Villages
of New Sweden
|
|
|
-
|
|
|
|
521
|
|
|
|
-
|
|
|
|
10,716
|
|
|
|
-
|
|
Travis
|
Elm
Grove
|
|
|
-
|
|
|
|
30
|
|
|
|
61
|
|
|
|
3,011
|
|
|
|
30
|
|
Hays
|
Other
land projects
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
Sub-total
land
|
|
|
104
|
|
|
|
1,266
|
|
|
|
480
|
|
|
$
|
32,463
|
|
|
|
593
|
|
|
Homebuilding
inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,844
|
|
|
|
-
|
|
|
Total
inventory
|
|
|
104
|
|
|
|
1,266
|
|
|
|
480
|
|
|
$
|
35,307
|
|
|
|
593
|
|
|
Below
is
a summary of the property completed, owned or under contract by the Company
at
December 31, 2006:
Property
|
|
Finished
Lots/Homes
|
|
|
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
|
|
|
|
n/a
|
|
|
$
|
11,251
|
|
|
|
697
|
|
Hays
|
Highway
183
|
|
|
-
|
|
|
|
15
|
|
|
|
n/a
|
|
|
|
377
|
|
|
|
-
|
|
Travis
|
Georgetown
Village
|
|
|
102
|
|
|
|
52
|
|
|
|
613
|
|
|
|
5,342
|
|
|
|
52
|
|
Williamson
|
Villages
of New Sweden
|
|
|
-
|
|
|
|
521
|
|
|
|
-
|
|
|
|
10,120
|
|
|
|
-
|
|
Travis
|
Elm
Grove
|
|
|
-
|
|
|
|
30
|
|
|
|
61
|
|
|
|
1,755
|
|
|
|
-
|
|
Hays
|
Bohls
Ranch
|
|
|
-
|
|
|
|
-
|
|
|
|
428
|
|
|
|
1,011
|
|
|
|
-
|
|
Travis
|
Other
land projects
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
|
|
|
Sub-total
land
|
|
|
102
|
|
|
|
1,315
|
|
|
|
1,102
|
|
|
|
29,908
|
|
|
|
749
|
|
|
Homebuilding
inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
848
|
|
|
|
-
|
|
|
Total
inventory
|
|
|
102
|
|
|
|
1,315
|
|
|
|
1,102
|
|
|
$
|
30,756
|
|
|
|
749
|
|
|
Below
is a summary of the property completed, owned or under contract by the Company
at December 31, 2005:
Property
|
|
Finished
Lots/Homes
|
|
|
Approximate
Owned
Acreage
|
|
|
Approximate
Acreage
Under
Option
|
|
|
Land
and Project Costs
at
December 31, 2005
In
thousands
|
|
|
Approximate
Acreage
under Development
|
|
Texas
County
|
Rutherford
West
|
|
|
-
|
|
|
|
732
|
|
|
|
n/a
|
|
|
$
|
9,592
|
|
|
|
-
|
|
Hays
|
Highway
183
|
|
|
-
|
|
|
|
15
|
|
|
|
n/a
|
|
|
|
388
|
|
|
|
-
|
|
Travis
|
Georgetown
Village
|
|
|
-
|
|
|
|
52
|
|
|
|
613
|
|
|
|
1,614
|
|
|
|
52
|
|
Williamson
|
Villages
of New Sweden
|
|
|
-
|
|
|
|
-
|
|
|
|
534
|
|
|
|
270
|
|
|
|
-
|
|
Travis
|
Elm
Grove
|
|
|
-
|
|
|
|
-
|
|
|
|
91
|
|
|
|
50
|
|
|
|
-
|
|
Hays
|
Other
projects
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,041
|
|
|
|
|
|
|
Total
inventory
|
|
|
-
|
|
|
|
799
|
|
|
|
1,238
|
|
|
|
12,955
|
|
|
|
52
|
|
|
(4)
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 nine
months ended September 30, 2007 and 2006 and the year ended December 31,
2006:
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
|
|
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
|
|
|
|
(unaudited)
|
|
|
|
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
|
)
|
|
|
Year Ended
December 31, 2006
|
|
|
|
WFC
|
|
|
VIEs
|
|
|
|
Consolidating
entries
|
|
|
Consolidated
|
|
Revenues
|
|
|
2,592,878
|
|
|
|
5,229,564
|
|
(a)
|
|
|
(1,087,926
|
)
|
|
|
6,734,516
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
1,654,436
|
|
|
|
4,850,532
|
|
(a)
|
|
|
(1,087,926
|
)
|
|
|
5,417,042
|
|
General,
administrative, sales and marketing
|
|
|
4,674,060
|
|
|
|
342,467
|
|
(b)
|
|
|
154,067
|
|
|
|
5,170,594
|
|
Costs
and expenses before interest
|
|
|
6,328,496
|
|
|
|
5,192,999
|
|
|
|
|
(933,859
|
)
|
|
|
10,587,636
|
|
Operating
income/(loss)
|
|
|
(3,735,618
|
)
|
|
|
36,565
|
|
|
|
|
(154,067
|
)
|
|
|
(3,853,120
|
)
|
(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 $260,000 increase in
stockholders equity.
(5)
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 nine
months ended September 30, 2007 and 2006:
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
|
|
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
|
|
The
following table presents segment operating results before taxes for the years
ended December 31, 2006 and 2005:
|
|
2006
|
|
|
2005
|
|
|
|
Homebuilding
and Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
|
Homebuilding
and Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
Revenues
from external customers
|
|
$
|
5,217,564
|
|
|
|
1,516,952
|
|
|
|
6,734,516
|
|
|
|
-
|
|
|
|
255,000
|
|
|
|
255,000
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
4,346,186
|
|
|
|
1,070,856
|
|
|
|
5,417,042
|
|
|
|
-
|
|
|
|
114,587
|
|
|
|
114,587
|
|
Selling,
general and administrative
|
|
|
3,342,924
|
|
|
|
1,827,670
|
|
|
|
5,170,594
|
|
|
|
63,477
|
|
|
|
483,200
|
|
|
|
546,677
|
|
Loss
of fair value of derivatives
|
|
|
-
|
|
|
|
8,469,457
|
|
|
|
8,469,457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
& other income
|
|
|
(129,840
|
)
|
|
|
(160,495
|
)
|
|
|
(290,335
|
)
|
|
|
-
|
|
|
|
(44,122
|
)
|
|
|
(44,122
|
)
|
Interest
expense
|
|
|
1,453,099
|
|
|
|
907,716
|
|
|
|
2,360,815
|
|
|
|
-
|
|
|
|
144,710
|
|
|
|
144,710
|
|
Total
costs and expenses
|
|
|
9,012,369
|
|
|
|
12,115,204
|
|
|
|
21,127,573
|
|
|
|
63,477
|
|
|
|
698,375
|
|
|
|
761,852
|
|
Loss
before taxes
|
|
$
|
(3,794,805
|
)
|
|
|
(10,598,252
|
)
|
|
|
(14,393,057
|
)
|
|
|
(63,477
|
)
|
|
|
(443,375
|
)
|
|
|
(506,852
|
)
|
Segment
Assets
|
|
$
|
4,293,166
|
|
|
|
33,080,295
|
|
|
|
37,373,461
|
|
|
|
-
|
|
|
|
14,092,338
|
|
|
|
14,092,338
|
|
Capital
expenditures
|
|
$
|
81,229
|
|
|
|
1,429
|
|
|
|
82,658
|
|
|
|
46,406
|
|
|
|
29,430
|
|
|
|
75,836
|
|
(6)
Related Party Transactions
Notes
Payable
In
March
of 2005, some of the trusts belonging to the Wilson family purchased a note
for
approximately $280,000 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
June
2005, Clark N. Wilson, President and CEO of the Company and another investor
purchased 2,200,000 and 2,000,000 shares, respectively, of Series A Convertible
Preferred Stock from WFC for $1.00 per share.
In
August
2005, WFC repaid $121,000 that Mr. Wilson had advanced to WFC before the merger
with Athena for working capital. In October 2005, WFC repaid the remaining
$140,000 advanced by Mr. Wilson to WFC.
In
2005,
WFC obtained a line of credit of $2 million that was personally guaranteed
by
Mr. Wilson. The personal guarantee was released during May 2006.
During
the twelve months ended December 31, 2006, Mr. Wilson’s brother provided
services to the Company for
which
he
was paid approximately $20,000. These services were primarily related to the
development of information systems for the Company. Management believes that
these services were provided at fair market value.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Real
Property Purchase
SGL
Development, Ltd. and SGL Investments, Ltd., (collectively, “SGL”) were owners
of approximately 736 acres of undivided land in Hays County, Texas. Clark N.
Wilson directly and beneficially (through Steamboat Joint Venture) owned 13.59%
(the “Wilson Beneficial Interest”) of the property and John O. Gorman indirectly
owned 12.33% (the “Gorman Beneficial Interest”) of the property. In June 2005,
SGL distributed to Mr. Wilson and Mr. Gorman their beneficial ownership in
the
property which they sold to WFC in exchange for 1,260,826 and 1,143,963,
respectively, of the 2,404,789 preferred shares issued by WFC in the
transaction. SGL then sold the remaining property, approximately 74.08%, to
WFC
in exchange for notes payable of approximately $6.9 million. The Company
believes that WFC purchased the property at fair market value due to the price
paid for the preferred stock paid by the other parties involved in the
transaction. The notes payable issued had principal and interest due at maturity
on June 30, 2006, with interest at the prime rate as reported in the Wall Street
Journal adjusted for changes, (“Prime Rate”) for the first six months, Prime
Rate plus 2.00% for the second six months and Prime Rate plus 2.25% with an
exercise of an extension period of 90 days on the notes if the notes are not
in
default. The interest rate on the notes increased to 9.75% as of March 31,
2006.
The notes were secured by the entire property acquired. There is a provision
for
partial releases of the land, lots, and tracts, with assignments ranging from
100% to 140% of the par value per acre as a condition of the
releases.
During
June 2006, the Company refinanced the loan balance of $6.2 million with a
financial institution (Note 10).
Issuance
of Convertible Debt
As
part
of the December 2005 subordinated convertible debt issuance discussed in
Note 10, an existing common stock investor purchased $800,000 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 $70,000, issued 750,000 warrants, 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 is 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
$10,000 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
$250,000 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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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 $20,000 as compensation expense
and credited equity for two months of services recorded at fair market
value.
|
(7)
|
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.
In
May
2007 the Company elected not to 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 have
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 $200,000 to $700,000.
|
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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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 fiscal 2008 as additional market opportunities
arise
for homebuilding and land development.
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.
(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
$10,000 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
|
|
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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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 naming a replacement principal financial officer
beginning in early 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. Mr. Khurana will have
90 days following October 31, 2008 to exercise any vested stock
options.
(9)
Income Taxes
The
Company's provision for income taxes for the tax year ended September 30, 2007
consists of approximately $11,400 of Texas gross margin tax. A
reconciliation of expected income tax benefit (computed by applying a statutory
income tax rate of 34% to income before income tax expense) to total tax expense
(benefit) in the accompanying consolidated statements of operations
follows:
|
|
September
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Tax
benefit at Statutory Rate (34%)
|
|
$
|
2,229,002
|
|
|
$
|
4,893,639
|
|
|
$
|
505,779
|
|
State
income tax benefit
|
|
|
-
|
|
|
|
379,977
|
|
|
|
59,503
|
|
Texas
tax
|
|
|
113
|
|
|
|
-
|
|
|
|
-
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
(3,218,394
|
)
|
|
|
-
|
|
Other
|
|
|
6,733
|
|
|
|
194,615
|
|
|
|
-
|
|
Impact
on change in Texas tax law
|
|
|
(379,977
|
)
|
|
|
-
|
|
|
|
|
|
Net
increase in valuation allowance
|
|
$
|
(1,844,495
|
)
|
|
$
|
(2,249,837
|
)
|
|
$
|
(565,282
|
)
|
Provision
for income taxes
|
|
|
11,376
|
|
|
|
-
|
|
|
|
-
|
|
The
effect of the change in Texas tax law represents a decrease in the state rate
applied to the temporary differences, and the exclusion of the deferred tax
assets related to Texas loss carryforwards. The state rate applied to
the temporary difference has been reduced as the temporary differences do not
affect the Company's Texas gross margin tax and thus, do not represent a future
tax benefit or liability for the Texas tax.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and liabilities at September 30, 2007 and December 31,
2006
and 2005 are as follows:
|
|
September
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Deferred
tax assets (liabilities)
|
|
|
|
|
|
|
|
|
|
Stock
compensation
|
|
$
|
369,160
|
|
|
$
|
207,049
|
|
|
$
|
-
|
|
Accrued
expenses
|
|
|
34,000
|
|
|
|
38,000
|
|
|
|
-
|
|
Other
temporary differences
|
|
|
12,966
|
|
|
|
(4,107
|
)
|
|
|
-
|
|
Net
operating loss carryforwards
|
|
|
4,243,488
|
|
|
|
2,574,177
|
|
|
|
565,282
|
|
Valuation
allowance
|
|
|
(4,659,614
|
)
|
|
|
(2,815,119
|
)
|
|
|
(565,282
|
)
|
Net
deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the lack
of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it
is
more likely than not the Company will not realize the benefits of these
deductible differences. The Company has provided a 100% valuation allowance
on
its deferred tax assets.
For
the
nine months ended September 30, 2007, the Company had net operating loss
carryforwards of approximately $12.5 million which begin to expire in 2025
if
not utilized. The Internal Revenue Code Section 382 limits net operating loss
carryforwards when an ownership change of more than fifty percent of the value
of the stock in a loss corporation occurs within a three-year period.
Accordingly, the ability to utilize net operating loss carryforwards may be
significantly restricted.
(10) Indebtedness
The
following schedule lists the Company’s notes payable and lines of credit
balances at September 30, 2007 and December 31, 2006 and 2005:
In
Thousands
|
|
|
|
|
Rate
|
|
|
Maturity
Date
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
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
|
|
|
|
-
|
|
Line
of Credit, $2 million, land and construction
|
|
|
c
|
|
|
|
7.25%
|
|
|
April-1-07
|
|
|
|
-
|
|
|
|
-
|
|
|
|
254
|
|
Notes
payable, land
|
|
|
d
|
|
|
|
12.50%
|
|
|
Mar-1-09
|
|
|
|
4,700
|
|
|
|
-
|
|
|
|
-
|
|
Notes
payable, seller financed
|
|
|
e
|
|
|
|
7.00%
|
|
|
Oct.
2009/10
|
|
|
|
2,475
|
|
|
|
2,474
|
|
|
|
-
|
|
Line
of Credit, $5 million / $10 million, land and construction
|
|
|
f
|
|
|
Prime+.50%
|
|
|
Feb-6-08
|
|
|
|
-
|
|
|
|
600
|
|
|
|
-
|
|
Notes
payable, land
|
|
|
g
|
|
|
Prime+.75%
|
|
|
Jun-1-08
|
|
|
|
-
|
|
|
|
6,200
|
|
|
|
6,683
|
|
Notes
payable, land
|
|
|
h
|
|
|
|
12.50%
|
|
|
Mar-1-09
|
|
|
|
7,300
|
|
|
|
-
|
|
|
|
-
|
|
Notes
payable, development
|
|
|
i
|
|
|
Prime+.50%
|
|
|
Feb-1-10
|
|
|
|
1,502
|
|
|
|
-
|
|
|
|
-
|
|
Notes
payable, family trust
|
|
|
j
|
|
|
|
8.00%
|
|
|
Apr-1-08
|
|
|
|
-
|
|
|
|
280
|
|
|
|
280
|
|
Notes
payable, land, due
|
|
|
k
|
|
|
Prime+.75%
|
|
|
Dec-1-09
|
|
|
|
-
|
|
|
|
792
|
|
|
|
-
|
|
Notes
payable, land and development
|
|
|
l
|
|
|
Prime+3.00%
|
|
|
Feb-1-09
|
|
|
|
1440
|
|
|
|
-
|
|
|
|
-
|
|
Line
of Credit, $55 million facility, land, land development, and
homebuilding
|
|
|
m
|
|
|
Prime+.25%
|
|
|
June-29-08
|
|
|
|
2749
|
|
|
|
-
|
|
|
|
-
|
|
Notes
payable, land
|
|
|
n
|
|
|
|
6.5%
|
|
|
2-15-08
|
|
|
|
-
|
|
|
|
-
|
|
|
|
425
|
|
2005
$10 million, Subordinated convertible notes, net of discount of $459
thousand and $4,288 thousand, respectively
|
|
|
|
|
|
|
5.00%
|
|
|
Dec-1-12
|
|
|
|
9,541
|
|
|
|
5,712
|
|
|
|
4,998
|
|
2006
$6.50 million as of June 30, 2007, $6.75 million, Subordinated convertible
notes,
net of discount of $2,786 and $4,066 thousand
respectively
|
|
|
|
|
|
|
5.00%
|
|
|
Sep-1-13
|
|
|
|
3,714
|
|
|
|
2,684
|
|
|
|
-
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
33,893
|
|
|
|
24,579
|
|
|
|
12,640
|
|
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(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
$315,000, 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
$600,000 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 (d).
(c)
In September 2005, the Company secured a $2 million one year of credit master
construction loan that provides for draws and repayments for construction and
lots. Interest is payable monthly and each draw must be repaid within one year.
The Company had drawn approximately $254,000 against the loan at December 31,
2005. The note was paid completely in 2006.
(d)
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.
(e)
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 $600,000 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, $500,000 in 2009 and $500,000 in 2010, payable on October 12. The
notes can be prepaid at anytime without penalty and are secured by the real
estate purchased.
(f)
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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(g)
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 $800,000 per quarter beginning June 12, 2007. Principal
reductions from sales of the real estate are credited towards the $800,000
per
quarter requirement. This loan was refinanced in February 2007 (h).
(h)
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.
(i)
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%.
(j)
In October 2003, a predecessor entity of the Company exchanged notes payable
of
approximately $280,000 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.
(k)
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.
(l)
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.
(m) 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.
(n)
In November 2005, the Company paid cash and issued a long term note payable
of
$424,700 with a maturity date of February 15, 2008 at an interest rate of 6.5%
for the purchase of approximately 31 acres of land. The Company paid the note
in
March 2006.
Subordinated
Convertible Debt
Derivatives
Associated with Subordinated Convertible Debt
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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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 recorded the fair value of these
warrants at the time of the subordinated convertible debt issuance 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 $450,000 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, December 31, 2006 and
2005
|
|
September
30,
|
|
December
31,
|
2007
|
|
2006
|
|
2005
|
Notional
balance
|
$
|
10,000,000
|
$
|
10,000,000
|
$
|
10,000,000
|
Unamortized
discount
|
|
(459,400)
|
|
(4,287,857)
|
|
(5,002,500)
|
Subordinated
convertible debt balance, net of unamortized discount
|
$
|
9,540,600
|
$
|
5,712,143
|
$
|
4,997,500
|
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 $250,000 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
$250,000. In addition, during the quarter ended June 30, 2007,
one of our convertible debt holders who is also the seller of Bohls 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
Bohls tract the convertible debt would be used for repayment of the promissory
note. As the Company did not exercise the option to purchase Bohls
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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
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 $140,000, including placement agent
fees
of approximately $70,000 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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Convertible
Note at September 30, 2007 and December 31, 2006:
|
|
September
30,
|
|
December
31,
|
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
|
(11) 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 has 23,135,538 shares outstanding and has reserved
for 11,228,125 options and warrants.
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
|
|
|
544
|
|
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 year; and a 60% volatility factor at $0.56 per
warrant.
|
|
|
280
|
|
Total
expenses
|
|
$
|
2,546
|
|
During
June 2007, the Company issued 80,000 shares of common stock for the purchase
of
Green Builders, Inc.
(12)
|
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.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
The
Company had 665,000 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 $541,000 and $350,000 thousand,
respectively. Compensation expense related to the Company’s
share-based awards during the year ended December 31, 2006, was
approximately $545,000.
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 $1.65 to 3.25
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 life of options of 1-5 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, 2005
and 2006 and the nine months ended September, 2007 are as follows:
|
Shares
|
Range
of Exercise
Prices
|
Weighted-Average
Exercise
Price
|
Options
granted at plan inception
|
850,000
|
$2.00
|
$2.00
|
Options
forfeited
|
(70,000)
|
$2.00
|
$2.00
|
Options
outstanding, December 31, 2005
|
780,000
|
$2.00
|
$2.00
|
Options
granted
|
555,000
|
$2.00
- $2.26
|
$2.16
|
Options
forfeited
|
(410,000)
|
$2.00
- $2.26
|
$2.03
|
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
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 $1.8 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.
(13) Employee
Benefits
In
2006,
the Company instituted a defined contribution plan under section 401(k) of
the
Internal Revenue Code. The plan allows all employees who are over 21 years
old
to defer a predetermined portion of their compensation for federal
income
tax purposes. The Company will match 100% up to the first 4% of the employee’s
contribution subject to Internal Revenue Service limitations. The
Company contributed approximately $9,000 and $35,000 for the nine months ended
September 30, 2007 and 2006 and $13 thousand for the year ended December 31,
2006.
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(14)
|
Purchase
of Green Builders
|
On
June
19, 2007, the Company purchased Green Builders, Inc. for $65,000 in cash and
80,000 shares of the Company’s common stock valued at $2.70 per share on the
date of the transaction. The total purchase price for the acquisition was
approximately $281,000. In addition the Company spent approximately
$24,000 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).
(15)
|
Quarterly
Results
(Unaudited)
|
The
following tables set forth selected quarterly consolidated statements of
operations information for the quarters ended December 31, 2005 through
September 30, 2007.
|
|
Dec.
31,
|
|
|
March
31.
|
|
|
June
30,
|
|
|
Sept.
30,
|
|
|
Dec.
31,
|
|
|
March
31,
|
|
|
June
30,
|
|
|
Sept,
30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
thousands)
|
Sales
|
|
$
|
-
|
|
|
$
|
1,033
|
|
|
$
|
2,355
|
|
|
$
|
1,897
|
|
|
$
|
1,470
|
|
|
$
|
1,767
|
|
|
$
|
1,384
|
|
|
$
|
1,293
|
|
Gross
profit
|
|
$
|
-
|
|
|
$
|
374
|
|
|
$
|
418
|
|
|
$
|
367
|
|
|
$
|
158
|
|
|
$
|
289
|
|
|
$
|
(885
|
)
|
|
$
|
220
|
|
Operating
expenses
|
|
$
|
878
|
|
|
$
|
1,119
|
|
|
$
|
1,441
|
|
|
$
|
1,450
|
|
|
$
|
1,160
|
|
|
$
|
1,072
|
|
|
$
|
1,769
|
|
|
$
|
1,403
|
|
Operating
loss
|
|
$
|
(878
|
)
|
|
$
|
(745
|
)
|
|
$
|
(1,022
|
)
|
|
$
|
(1,083
|
)
|
|
$
|
(1,002
|
)
|
|
$
|
(783
|
)
|
|
$
|
(2,654
|
)
|
|
$
|
(1,183
|
)
|
Net
loss
|
|
$
|
(1,208
|
)
|
|
$
|
(1,508
|
)
|
|
$
|
(4,059
|
)
|
|
$
|
(2,059
|
)
|
|
$
|
(6,767
|
)
|
|
$
|
(1,354
|
)
|
|
$
|
(3,316
|
)
|
|
$
|
(1,886
|
)
|
Basic
and diluted loss per
share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.08
|
)
|
WILSON
HOLDINGS, INC.
Notes
to Consolidated Financial Statements
(16)
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 $1.1 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.
The
Company is currently considering refinancing some of its land and land
development loans.
Wilson Holdings, (AMEX:WIH)
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