Item
1. F
inancia
l Statements
WILSON
HOLDINGS, INC.
|
|
Consolidated
Balance Sheets
|
|
As
of December 31, 2007 and September 30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
December
31,
|
|
|
September
30,
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,453,287
|
|
|
|
13,073,214
|
|
Restricted
cash
|
|
|
117,603
|
|
|
|
-
|
|
Inventory
|
|
|
|
|
|
|
|
|
Land
and land development
|
|
|
34,753,456
|
|
|
|
32,463,411
|
|
Homebuilding
inventories
|
|
|
6,459,368
|
|
|
|
2,843,704
|
|
Total
inventory
|
|
|
41,212,824
|
|
|
|
35,307,116
|
|
Other
assets
|
|
|
1,029,186
|
|
|
|
729,471
|
|
Debt
issuance costs, net of amortization
|
|
|
1,205,965
|
|
|
|
1,265,218
|
|
Equipment
and software, net of accumulated depreciation and amortization
of
$35,640
and $32,294, respectively
|
|
|
275,066
|
|
|
|
232,357
|
|
Total
assets
|
|
|
56,293,931
|
|
|
|
50,607,375
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
3,086,799
|
|
|
|
1,404,151
|
|
Accrued
real estate taxes payable
|
|
|
319,423
|
|
|
|
405,060
|
|
Accrued
liabilities and expenses
|
|
|
797,958
|
|
|
|
215,372
|
|
Accrued
interest
|
|
|
282,303
|
|
|
|
464,809
|
|
Deferred
revenue
|
|
|
200
|
|
|
|
159,381
|
|
Notes
payable and lines of credit
|
|
|
26,034,855
|
|
|
|
20,638,358
|
|
Subordinated
convertible debt, net of $3,105,633 and $3,384,807 discount,
respectively
|
|
|
13,394,367
|
|
|
|
13,254,780
|
|
Total
liabilities
|
|
|
43,915,905
|
|
|
|
36,541,911
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and
23,135,538
shares
issued and outstanding, respectively
|
|
|
23,136
|
|
|
|
23,136
|
|
Additional
paid in capital
|
|
|
27,710,004
|
|
|
|
27,040,304
|
|
Retained
deficit
|
|
|
(15,355,114
|
)
|
|
|
(12,997,976
|
)
|
Total
stockholders' equity
|
|
|
12,378,026
|
|
|
|
14,065,464
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities and stockholders' equity
|
|
$
|
56,293,931
|
|
|
|
50,607,375
|
|
See
accompanying notes to the consolidated financial statements.
WILSON
HOLDINGS, INC.
|
|
Consolidated
Statements of Operations
|
|
For
the Three Months Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
$
|
-
|
|
|
|
1,032,659
|
|
Land
sales
|
|
|
1,108,312
|
|
|
|
437,141
|
|
Total
revenues
|
|
|
1,108,312
|
|
|
|
1,469,800
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
-
|
|
|
|
778,802
|
|
Land
sales
|
|
|
709,055
|
|
|
|
430,486
|
|
Total
cost of revenues
|
|
|
709,055
|
|
|
|
1,209,289
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
-
|
|
|
|
253,857
|
|
Land
sales
|
|
|
399,257
|
|
|
|
6,655
|
|
Total
gross profit
|
|
|
399,257
|
|
|
|
260,511
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Corporate
general and administration
|
|
|
1,680,714
|
|
|
|
983,156
|
|
Sales
and marketing
|
|
|
255,299
|
|
|
|
280,037
|
|
Total
costs and expenses
|
|
|
1,936,013
|
|
|
|
1,263,193
|
|
Operating
loss
|
|
|
(1,536,756
|
)
|
|
|
(1,002,681
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
(5,076,957
|
)
|
Interest
and other income
|
|
|
93,195
|
|
|
|
30,136
|
|
Interest
expense
|
|
|
(913,577
|
)
|
|
|
(717,729
|
)
|
Total
other expense
|
|
|
(820,382
|
)
|
|
|
(5,764,551
|
)
|
Net
loss
|
|
$
|
(2,357,138
|
)
|
|
|
(6,767,232
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.10
|
)
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
23,135,538
|
|
|
|
17,706,625
|
|
See
accompanying notes to the consolidated financial statements.
WILSON
HOLDINGS, INC.
|
|
Consolidated
Statements of Cash Flows
|
|
For
the Three Months Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,357,138
|
)
|
|
|
(6,767,232
|
)
|
Non
cash adjustments:
|
|
|
|
|
|
|
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
5,076,957
|
|
Amortization
of convertible debt discount
|
|
|
139,587
|
|
|
|
381,347
|
|
Amortization
of debt issuance costs
|
|
|
59,253
|
|
|
|
58,110
|
|
Stock-based
compensation expense
|
|
|
639,701
|
|
|
|
195,359
|
|
Services
provided without compensation by principal shareholders
|
|
|
30,000
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
129,486
|
|
|
|
10,637
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
Increase
in total inventory
|
|
|
(5,905,708
|
)
|
|
|
(3,326,342
|
)
|
Increase
in other assets
|
|
|
(425,854
|
)
|
|
|
(80,376
|
)
|
Increase
in accounts payable
|
|
|
1,682,648
|
|
|
|
829,644
|
|
(Decrease)
increase in real estate taxes payable
|
|
|
(85,637
|
)
|
|
|
305,902
|
|
Increase
(decrease) in accrued expenses
|
|
|
582,586
|
|
|
|
(290,257
|
)
|
(Decrease)
in deferred revenue
|
|
|
(159,181
|
)
|
|
|
-
|
|
(Decrease)
increase in accrued interest
|
|
|
(182,506
|
)
|
|
|
102,157
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(5,852,764
|
)
|
|
|
(3,504,094
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(46,055
|
)
|
|
|
(14,179
|
)
|
Net
cash used in investing activities
|
|
|
(46,055
|
)
|
|
|
(14,179
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(117,603
|
)
|
|
|
(2,192,226
|
)
|
Issuances
(repayments) of notes payable and lines of credit, net
|
|
|
5,396,495
|
|
|
|
(629,050
|
)
|
Proceeds
from issuance of subordinated conv debt
|
|
|
|
|
|
|
250,000
|
|
Cash
paid for debt issuance costs
|
|
|
-
|
|
|
|
(41,172
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
5,278,892
|
|
|
|
(2,612,448
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(619,927
|
)
|
|
|
(6,130,721
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
13,073,214
|
|
|
|
8,803,777
|
|
Cash
and cash equivalents at end of period
|
|
$
|
12,453,287
|
|
|
|
2,673,056
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
935,539
|
|
|
|
454,747
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
|
-
|
|
See
accompanying notes to the consolidated financial statements.
(1) Organization
and Business Activity
Wilson
Holdings, Inc., (the “Company”) is a Nevada corporation formerly known as Cole
Computer Corporation. 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, a majority of its stockholders,
Wilson Family Communities, Inc., a Delaware corporation (“WFC”) and Wilson
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the
Company, WFC and Wilson Acquisition Corp. merged and WFC became a wholly-owned
subsidiary of the Company.
The
consolidated financial statements and the notes of the Company as of December
31, 2007 and for the three months ending December 31, 2007 and 2006 have been
prepared by management without audit, pursuant to rules and regulations of the
Securities Exchange Commission and should be read in conjunction with the
September 30, 2007 audited financials statements contained in the Company’s
Annual Report on 10-KSB for the transitional period from January 1, 2007 to
September 30, 2007. In the opinion of management, all normal,
recurring adjustments necessary for the fair presentation of such financial
information have been included. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Certain
information and footnote disclosures normally included in the annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted.
(2)
Summary of Significant Accounting Policies
(a) Revenue
Recognition
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate.” Revenues from land development services to
builders are recognized when the properties associated with the services are
sold, when the risks and rewards of ownership are transferred to the buyer and
when the consideration has been received, or the title company has processed
payment. For projects that are consolidated, homebuilding revenues
and services will be categorized as homebuilding revenues and revenues from
property sales or options will be categorized as land sales.
(b) 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.
The
Company has restricted cash of approximately $118,000 with a financial
institution as part of a letter of credit issued for Elm Grove
development.
(c) 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, capitalized interest,
real estate taxes incurred during development and construction phases, and
homebuilding costs. No significant impairments of inventory were
recorded in 2007.
(d) 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.
(e) Municipal
Utility and Water District Reimbursements
The
Company owns one property located in a Municipal Utility District (MUD) and one
property located 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
the property has sufficient assessed value for the District taxes to repay the
bonds. As the project is completed and homes are sold within the District, the
assessed value increases. It can take several years before the assessed value is
sufficient to provide sufficient tax revenue for the Company to recapture its
costs. The Company has estimated that it will recover approximately
50% to 100% of eligible costs spent through December 31, 2007. The
Company has completed Phase 1 for the Rutherford West project and has
approximately $980,000 of water district reimbursements included in inventory
that it anticipates it will collect from bond issuances made by the
district. When the reimbursements are received they will be recorded
as reductions in the related asset’s balance. 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.
(f)
Subordinated Convertible Debt
The
company’s 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”.
(g)
Loss Per Common Share
Earnings
per share is accounted for in accordance with SFAS No. 128, “Earnings per
Share,” which require a dual presentation of basic and diluted earnings per
share on the face of the statements of earnings. Basic loss per share
is based on the weighted effect of common shares issued and outstanding, and is
calculated by dividing net loss by the weighted average shares outstanding
during the period. Diluted loss per share is calculated by dividing net loss by
the weighted average number of common shares used in the basic loss per share
calculation plus the number of common shares that would be issued assuming
exercise or conversion of all potentially dilutive common shares
outstanding.
The
Company has issued stock options and warrants convertible into shares of common
stock. These shares and warrants have been excluded from loss per share at
December 31, 2007 and 2006 because the effect would be anti-dilutive as
summarized in the table below:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Stock
options
|
|
|
1,990,000
|
|
|
|
925,000
|
|
Common
stock warrants
|
|
|
1,143,125
|
|
|
|
1,283,750
|
|
Subordinated
convertible debt warrants
|
|
|
8,250,000
|
|
|
|
8,375,000
|
|
Total
|
|
|
11,383,125
|
|
|
|
10,583,750
|
|
(h) Reclassification
Certain prior period amounts have been
reclassified to conform to current period presentation.
(i) Adoption
of New Accounting Pronouncements
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 will be effective for the Company’s
fiscal year beginning October 1, 2008. 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 obtainscontrol over another
business. The Company is currently evaluating the impact of the
adoption of SFAS No. 141 (R); 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.
(3) Liquidity
and Capital Resources
Liquidity
At
December 31, 2007, the Company had approximately $12.5 million in cash and cash
equivalents. The Company completed a public offering of common stock in May
2007, resulting in net proceeds of approximately $14 million.
On June
29, 2007, WFC entered into a $55 million revolving credit facility (the “Credit
Facility”) with a syndicate of banks led by RBC Centura Bank, as administrative
agent. 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. WFC’s obligations
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.
The
initial maturity date for the Credit Facility is June 29, 2008. The
facility will be reviewed by our syndicate of banks and renewed for successive
12 month periods, so long as the following items have been
satisfied: no event of default shall exist, no material adverse
effect in the financial condition, operations, business or management of WFC
shall exist and extension fees in the amount determined by the agent and all
costs associated incurred in connection with the proposed extension must be
paid. The final borrowing base calculation will be made twelve months
prior to the termination of the Credit Facility and no borrowings may be made in
excess of such amount. The Company is currently evaulating the amount
of capital needed for the next renewal term of the facility. The
Company anticipates that it will reduce the line of credit based on capital
requirements needed for that period to between $30 to $40 million. As
of December 31, 2007, we have borrowed approximately $10.5 million and have
issued an $118,000 letter of credit under the Credit Facility.
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. Quarterly principal
reductions will be required during the final 12 months of the term.
The
Company’s growth will require substantial amounts of cash for earnest money
deposits, land purchases, development costs, interest payments and homebuilding
costs. Until it begins to sell an adequate number of lots and homes to cover
monthly operating expenses, sales, marketing, general and administrative costs
will deplete cash.
To
maintain its liquidity, the Company has financed the majority of its land and
development activities with debt, and believes it can continue to do so in the
future through a combination of conventional and subordinated convertible debt,
joint venture financing, sales of selected lot positions, sales of land and lot
options, and by raising additional equity.
Capital Resources
The
Company has raised approximately $16.8 million of subordinated convertible debt,
and approximately $14 million in a public offering of the Company’s common stock
completed in May 2007. The Company also entered into a $55 million revolving
credit facility with a syndicate of banks mentioned previously. The Company is
currently evaulating the amount of capital needed for the next renewal term of
the facility. The Company anticipates that it will reduce the line of
credit based on capital requirements needed for that period to between $30 to
$40 million.
Due to
current conditions in the market, the Company has seen a slowdown in revenue
from home and lot sales. The Company is considering selling tracts of
commercial and residential land in order to achieve
profitability. If the Company is not able to sell tracts of
land, it expects that it will incur significant losses in 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 compose 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 if we are not in compliance with our debt
covenants, 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.
(4) Inventory
The
Company’s land inventory includes real estate held for sale or under development
and earnest money on land purchase options. Construction in progress includes
development costs, prepaid development costs, and development costs on land
under option but not owned. Homebuilding inventory represents speculative homes
under construction. The Company expects the homebuilding inventory to
increase as it continues to build in additional communities.
Earnest
money deposits for land costs and development costs on land under option, not
owned, totaled approximately $575,000 at December 31, 2007 and September 30,
2007, of which approximately $525,000 is non-refundable if the Company does not
exercise the option and purchase the land.
As of
December 31, 2007 the Company had approximately 593 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.
In April
2007 10 acres of the Company’s Highway 183 project was condemned by the State of
Texas. In July 2007 the Company received final judgment from the
State of Texas and received proceeds of approximately $410,000 for the condemned
land. The Company sold and closed the remaining 5 acres in December
2007 for approximately $190,000.
Effective
July 2007, the Company temporarily suspended development of phases 2 through 5
of Rutherford West. From that date, all interest costs related to
holding this property has been recorded as an expense.
Below is
a summary of the property completed, owned or under contract by the Company at
December 31, 2007:
Property
|
|
Finished
Lots/Homes
|
|
|
Approximate
Owned Acreage
|
|
|
Approximate
Acreage Under Option
|
|
|
Land
and Project Costs at December 31, 2007
(in
thousands)
|
|
|
Approximate
Acreage under Development
|
|
Texas
County
|
Rutherford
West
|
|
|
43
|
|
|
|
521
|
|
|
|
n/a
|
|
|
$
|
12,263
|
|
|
|
521
|
|
Hays
|
Georgetown
Village
|
|
|
40
|
|
|
|
149
|
|
|
|
419
|
|
|
|
7,449
|
|
|
|
42
|
|
Williamson
|
Villages
of New Sweden
|
|
|
-
|
|
|
|
521
|
|
|
|
-
|
|
|
|
10,927
|
|
|
|
-
|
|
Travis
|
Elm
Grove
|
|
|
-
|
|
|
|
30
|
|
|
|
61
|
|
|
|
3,979
|
|
|
|
30
|
|
Hays
|
Other
land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
|
|
-
|
|
|
Sub-total
land
|
|
|
83
|
|
|
|
1,221
|
|
|
|
480
|
|
|
$
|
34,753
|
|
|
|
593
|
|
|
Homebuilding
inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,460
|
|
|
|
-
|
|
|
Total
inventory
|
|
|
83
|
|
|
|
1,221
|
|
|
|
480
|
|
|
$
|
41,213
|
|
|
|
593
|
|
|
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
|
|
|
|
1,226
|
|
|
|
480
|
|
|
$
|
32,463
|
|
|
|
593
|
|
|
Homebuilding
inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,844
|
|
|
|
-
|
|
|
Total
inventory
|
|
|
104
|
|
|
|
1,226
|
|
|
|
480
|
|
|
$
|
35,307
|
|
|
|
593
|
|
|
(5) Consolidation
of Variable Interest Entities
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), because the
Company has a significant, but less than controlling, interest in certain
entities also party to the homebuilder agreements. The results of these clients
have been consolidated into its financial statements for the three months ended
December 31, 2006.
On June
19, 2007, the Company purchased one of its VIEs, Green Builders, Inc, now a
wholly owned subsidiary of the Company, and commenced homebuilding operations
under the name Green Builders. The Company ceased providing services
to its homebuilder clients and 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. There was no
consolidation of VIEs for the three months ended December 31, 2007.
Below is
a summary of the effect of the consolidation of these entities for the three
months ended December 31, 2006
|
|
Three
Months Ended December 31, 2006
|
|
|
|
WFC
|
|
|
VIEs
|
|
|
|
Consolidating
entries
|
|
|
Consolidated
|
|
Revenues
|
|
|
705,299
|
|
|
|
1,032,659
|
|
(a)
|
|
|
(268,158
|
)
|
|
|
1,469,800
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
523,879
|
|
|
|
961,055
|
|
(a)
|
|
|
(275,646
|
)
|
|
|
1,209,288
|
|
General,
administrative, sales and marketing
|
|
|
1,154,889
|
|
|
|
141,948
|
|
|
|
|
(33,644
|
)
|
|
|
1,263,193
|
|
Costs
and expenses before interest
|
|
|
1,678,768
|
|
|
|
1,103,003
|
|
|
|
|
(309,290
|
)
|
|
|
2,472,481
|
|
Operating
income/(loss)
|
|
|
(973,469
|
)
|
|
|
(70,344
|
)
|
|
|
|
41,132
|
|
|
|
(1,002,681
|
)
|
|
(a)
|
Eliminates
WFC revenues in VIE expenses, eliminates VIE expenses in
WFC.
|
(6) Operating
and Reporting Segments
The
Company has two reporting segments: homebuilding and related services, and land
sales. The Company’s reporting segments are strategic business units that offer
different products and services. The homebuilding and related services segment
includes home sales and services provided to homebuilders. The Company is
required to consolidate its homebuilder services clients per FIN 46(R). The
Company identifies the clients it consolidates as “VIEs”. Land sales consist of
land in various stages of development sold, including finished lots. The Company
charges identifiable direct expenses and interest to each segment and allocates
corporate expenses and interest based on an estimate of each segment’s relative
use of those expenses. Depreciation expense is included in selling, general and
administrative and is immaterial.
The
following table presents segment operating results before taxes for the three
months ended December 31, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
|
|
Homebuilding
and Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
|
Homebuilding
and Related Services
|
|
|
Land
Sales
|
|
|
Total
|
|
Revenues
from external customers
|
|
$
|
-
|
|
|
|
1,108,312
|
|
|
|
1,108,312
|
|
|
|
1,032,659
|
|
|
|
437,141
|
|
|
|
1,469,800
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cost
of revenues
|
|
|
-
|
|
|
|
709,055
|
|
|
|
709,055
|
|
|
|
778,803
|
|
|
|
430,485
|
|
|
|
1,209,288
|
|
Selling,
general and administrative
|
|
|
1,273,058
|
|
|
|
662,955
|
|
|
|
1,936,013
|
|
|
|
778,760
|
|
|
|
484,433
|
|
|
|
1,263,193
|
|
Loss
on fair value of derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,076,957
|
|
|
|
5,076,957
|
|
Interest
& other income
|
|
|
(51,258
|
)
|
|
|
(41,938
|
)
|
|
|
(93,195
|
)
|
|
|
13,911
|
|
|
|
(44,047
|
)
|
|
|
(30,136
|
)
|
Interest
expense
|
|
|
190,210
|
|
|
|
723,367
|
|
|
|
913,577
|
|
|
|
802,383
|
|
|
|
(84,654
|
)
|
|
|
717,729
|
|
Total
costs and expenses
|
|
|
1,412,011
|
|
|
|
2,053,439
|
|
|
|
3,465,450
|
|
|
|
2,373,857
|
|
|
|
5,863,174
|
|
|
|
8,237,031
|
|
Loss
before taxes
|
|
$
|
(1,412,011
|
)
|
|
|
(945,127
|
)
|
|
|
(2,357,138
|
)
|
|
|
(1,341,198
|
)
|
|
|
(5,426,033
|
)
|
|
|
(6,767,231
|
)
|
Segment
Assets
|
|
$
|
14,810,802
|
|
|
|
41,483,130
|
|
|
|
56,293,931
|
|
|
|
3,048,126
|
|
|
|
28,016,470
|
|
|
|
31,064,596
|
|
Capital
expenditures
|
|
$
|
41,450
|
|
|
|
4,606
|
|
|
|
46,055
|
|
|
|
81,229
|
|
|
|
(67,050
|
)
|
|
|
14,179
|
|
(7) Related
Party Transactions
Issuance
of Convertible Debt
As part
of the December 2005 subordinated convertible debt issuance discussed in
Note 9, 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 9, existing common stock investors
purchased $1.0 million of the $6.75 million subordinated convertible debt.
In
connection with the placement of the $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 and reimbursed the Placement Agent for its expenses. John
J. Gorman is the Chairman of the Board of the Placement Agent and of Tejas
Incorporated, the parent company of the Placement Agent. Mr. Gorman is the
beneficial owner of 4,088,963 shares of our common stock. Clark N. Wilson,
who serves as our President and Chief Executive Officer and is a director of the
Company, has served on the board of directors of Tejas Incorporated since
October 1999, and is compensated for such service. Mr. Wilson
owns 1,000 shares of Tejas Incorporated common stock and options to purchase an
additional 60,000 shares of common stock. Our largest stockholder,
who is also our President and Chief Executive Officer, will continue to control
our company.
Barry A.
Williamson is a member of our board of directors and, until January 31,
2006, was a member of the board of directors of Tejas Incorporated, the parent
company of our Placement Agent for the sale of our convertible notes.
Mr. Williamson was re-elected to the board of directors of Tejas
Incorporated in November 2006.
In
September 2006, the Company entered into an agreement to lease approximately
5,000 square feet for its corporate offices, which it began occupying on
October 1, 2006. The lease requires monthly payments of approximately
$11,000 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.
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, for the three months ended December 31, 2007 the Company
has recorded $30,000 as compensation expense and credited equity for three
months of services recorded at fair market value.
Vendor
Payments
The
Company has entered into contractual work agreements with Wilson
Roofing. Wilson Roofing is owned by relatives of Clark N. Wilson, our
President and Chief Executive Officer. The company paid Wilson
Roofing approximately $89,000 for the three months ended December 31,
2007. Management believes that services were provided at fair market
value.
(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
$11,000 per month through October 2009. The Company also has office equipment
leases and trailers. The Company’s future minimum lease payments for future
fiscal years are as follows:
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
Lease
obligations
|
$
|
122,756
|
125,388
|
3,966
|
240
|
240
|
Employment
Agreement with Clark Wilson
On
February 14, 2007, the Company entered into an employment agreement with Clark
N. Wilson, its President and Chief Executive Officer. In the event of the
involuntary termination of Mr. Wilson’s service with the Company, the
agreement provides for monthly payments equal to Mr. Wilson’s monthly
salary payments to continue for 12 months. The agreement contains a provision
whereby Mr. Wilson is not permitted to be employed in any position in which
his duties and responsibilities comprise residential land development and
homebuilding in Texas or in areas within 200 miles of any city in which the
Company is conducting land development or homebuilding operations at the time of
such termination of employment for a period of one year from the termination of
his employment, if such termination is voluntary or for cause, or involuntary
and in connection with a corporate transaction.
Consulting
Arrangement with Arun Khurana
On
September 18, 2007, the Company 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 December 31, 2007 and ending on October 31,
2008. The transition into a consulting role is 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.
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 his unvested options to purchase the
Company’s common stock vested in full on October 31, 2007.
(9)
Indebtedness
Revolving
Credit Facility
On June
29, 2007, WFC entered into a $55 million revolving credit facility with a
syndicate of banks led by RBC Centura Bank, as administrative
agent. The initial maturity date for the Credit Facility is
June 29, 2008. The facility will be reviewed by our syndicate of banks and may
be extended for successive 12 month periods, so long as the following items have
been satisfied: no event of default shall exist, no material adverse
effect in the financial condition, operations, business or management of WFC
shall exist and extension fees in the amount determined by the agent and all
costs associated incurred in connection with the proposed extension must be
paid. The final borrowing base calculation will be made twelve months
prior to the termination of the Credit Facility and no borrowings may be made in
excess of such amount.
The
Company has 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. WFC currently has approximately $10.5 million in borrowings
outstanding and a letter of credit of approximately $118,000 under the credit
facility.
The
credit facility allows the Company to obtain revolving credit loans and provides
for the issuance of letters of credit. The amount available at any time under
the credit facility for revolving credit loans or the issuance of letters of
credit is determined by a borrowing base. The borrowing base is calculated as
the sum of the values for homes and lots in the subdivision to be developed as
agreed to by WFC and the agent.
Outstanding
borrowings under the credit facility will bear interest at the prime rate plus
0.25%. WFC is charged a letter of credit fee equal to 1.10% of each letter of
credit issued under the credit facility. WFC may elect to prepay the credit
facility at any time without premium or penalty.
The
credit facility contains customary terms and covenants limiting the Company’s
ability to take certain actions, including terms that limit the Company’s
ability to place liens on property, pay dividends and other restrictions and
payments. The covenants are as follows:
|
·
|
require
the Company to maintain a minimum net worth of $20,000,000, net worth
includes subordinated debt (although the minimum net worth may be
$17,000,000 for one quarter);
|
|
·
|
prohibit
the Company’s ratio of debt to equity from exceeding (A) 1.75 to 1.0 prior
to September 30, 2007, (B) 1.85 to 1.0 from September 30, 2007 until March
30, 2008 and (C) 2.0 to 1.0 thereafter;
and
|
|
·
|
require
the Company to maintain working capital of at least
$15,000,000.
|
An event
of default will occur under the credit facility if certain events occur,
including the following:
|
·
|
a
failure to pay principal or interest on any loan under the credit
facility;
|
|
|
|
|
·
|
the
inaccuracy of a representation or warranty when made;
|
|
|
|
|
·
|
the
failure to observe or perform covenants or agreements;
|
|
|
|
|
·
|
an
event of default beyond any applicable grace period with respect to any
other indebtedness;
|
|
·
|
the
commencement of proceedings under federal, state or foreign bankruptcy,
insolvency, receivership or similar laws;
|
|
|
|
|
·
|
a
condition where any loan document, or any lien created thereunder, ceases
to be in full force and effect;
|
|
|
|
|
·
|
the
entry of a judgment greater than $1,000,000 that remains undischarged;
or
|
|
|
|
If an
event of default occurs under the credit facility, then the lenders may: (1)
terminate their commitments under the credit facility; (2) declare any
outstanding indebtedness under the credit facility to be immediately due and
payable; and (3) foreclose on the collateral securing the
obligations. The Company is in compliance with its covenants as of
December 31, 2007.
The above
description of the material terms of the credit facility is not a complete
statement of the parties’ rights and obligations with respect to such
transactions. The above statements are qualified in their entirety by reference
to the Borrowing Base Loan Agreement executed in connection with the credit
facility, a copy of which is filed with the Company's Annual report filed on
December 31, 2007.
The
following schedule lists the Company’s notes payable and lines of credit
balances at December 31, 2007 and September 30, 2007:
|
In
Thousands
|
Rate
|
Maturity
Date
|
|
2007
|
2006
|
a
|
Line
of Credit, $3 million, development
|
Prime+.50%
|
Mar-1-08
|
$
|
-
|
472
|
b
|
Notes
payable, land
|
12.50%
|
Mar-1-09
|
|
4,700
|
4,700
|
c
|
Notes
payable, seller financed
|
7.00%
|
Oct.
2010/11
|
|
2,475
|
2,475
|
d
|
Notes
payable, land
|
12.50%
|
Mar-1-09
|
|
7,300
|
7,300
|
e
|
Notes
payable, development
|
Prime+.50%
|
Feb-1-10
|
|
-
|
1,502
|
f
|
Notes
payable, land and development
|
Prime+3.00%
|
Feb-1-09
|
|
-
|
1,440
|
g
|
Line
of Credit, $55 million facility, land, land development, and
homebuilding
|
Prime+..25%
|
June-29-08
|
|
10,507
|
2,749
|
h
|
Notes
payable, land and land development
|
12.50%
|
Nov-1-09
|
|
1,053
|
-
|
i
|
2005
$10 million, Subordinated convertible notes, net of discount of
$438
thousand and $459 thousand, respectively
|
5.00%
|
Dec-1-12
|
|
9,562
|
9,541
|
j
|
2006
$6.50 million as of June 30, 2007, $6.75 million,
Subordinated
convertible notes, net of discount of $2,668 and $2,786 thousand
respectively
|
5.00%
|
Sep-1-13
|
|
3,832
|
3,714
|
|
|
Total
|
|
$
|
39,429
|
33,893
|
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 was secured by property being
developed totaling approximately 32.6 acres located in Williamson
County. The loan was paid in December 2007 and the lots were
refinanced as a developed lot loan with our $55 million credit
facility
(b) In
March 2007, the Company secured a $4.7 million term land loan maturing March
2009. The loan is secured by land of 534 acres located in
eastern Travis County. The interest rate on the loan is 12.5%, with interest
payable monthly. The loan has no financial covenants.
(c) As
part of the purchase of 534 acres in Travis County described above, the Company
entered into four notes payable, seller financed with a cumulative balance of
approximately $2.5 million. 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 prime rate plus
2.0%. The terms of the note were modified in October 2007 with the principal
payments extended for one year. The revised 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.
(d) In
February 2007 the company secured a loan of approximately $7.3 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.
(e)
In February 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%. The
loan was paid in December 2007 and the lots were refinanced as a developed lot
loan with our $55 million credit facility
(f) In
February 2007 the Company obtained a development loan of approximately $3.1
million to develop approximately 30 acres. The loan has an interest rate of
prime plus 3.00%, with interest payable monthly. The loan was paid in December
2007 and the lots were refinanced as a developed lot loan with our $55 million
credit facility.
(g) In
June 2007 the Company established a $55 million credit facility with a syndicate
of banks. The Company currently has approximately $10.5 million in
borrowing for land and home construction.
(h) In
October 2007 the Company refinanced its land obligation on a land loan for
approximately 120 acres in Williamson County of approximately $1.1 million and
obtained a new loan of approximately $4.3 million to finance development
approximately 40 acres in Williamson County. The interest rate
is 12.5% annually and requires monthly interest payments, with a maturity of two
years.
Subordinated
Convertible Debt
The
Company accounts for all derivative financial instruments in accordance with
SFAS No. 133. Prior to 2007, derivative financial instruments were recorded as
liabilities in the consolidated balance sheet and measured at fair value. The
Company accounted for the various embedded derivative features as being bundled
together as a single, compound embedded derivative instrument that was
bifurcated from the debt host contract, referred to as the “single compound
embedded derivatives.” The single compound embedded derivative
features include within the convertible note the conversion feature, the early
redemption option and the fixed price conversion adjustment. The initial value
of the single compound embedded derivative liability was bifurcated from the
debt host contract and recorded as a derivative liability, which resulted in a
reduction of the initial carrying amount (as unamortized discount) of the
convertible notes. The unamortized discount was amortized using the
straight-line method over the life of the convertible note, or 7 years. The
penalty warrants were valued based on the fair value of the Company’s common
stock on the issuance date using a Black-Scholes valuation model and the
unamortized discount was to be amortized as interest expense over the 7-year
life of the notes using the straight-line method. In January 2007, the Company
adopted FSP EITF 00-19-2. 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 filed a registration statement registering the resale of the underlying
shares with the SEC. 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 the date on which each warrant has been
exercised in full and after which by the terms of such Warrant there are no
additional warrant shares as to which the warrant may become exercisable;
provided that in either case, such date shall be extended by the amount of time
of any suspension period. Thereafter the Company shall be entitled to withdraw
the registration statement, and upon such withdrawal and notice to the
investors, the investors shall have no further right to offer or sell any of the
registrable shares pursuant to the registration statement. The registration
statement filed pursuant to the registration rights agreement was declared
effective by the SEC on August 1, 2006.
The
Company also issued warrants to purchase an aggregate of 750,000 shares of
common stock to the purchasers of the subordinated convertible debt, 562,500
shares which vested and the remaining shares will never vest. The
warrants were exercisable only upon the occurrence of certain events and then
only in the amount specified as follows: (i) with respect to 25% of the warrant
shares, on February 3, 2006 if the registration statement shall not have
been filed with the SEC by such date (the Company filed a Form SB-2 registration
statement on February 2, 2006); (ii) with respect to an additional 25% of
the warrant shares, on April 19, 2006 if the registration statement shall
not have been declared effective by the SEC by such date; (iii) with respect to
an additional 25% of the warrant shares, on May 19, 2006 if the
registration statement shall not have been declared effective by the SEC by such
date; and (iv) with respect to the final 25% of the warrant shares, on
June 18, 2006 if the registration statement shall not have been declared
effective by the SEC by such date. Management has recorded the fair value of
these warrants due to the uncertainty surrounding the timeline of getting the
registration statement effected and the high probability that these warrants
would be issued. The shelf registration statement relating to these
warrants was declared effective on August 1, 2006 and 562,500 of these
warrants have vested and the remaining 187,500 warrants will never
vest.
The
penalty warrants were valued based on the fair value of the Company’s common
stock on the issuance date of $1.60, using a Black-Scholes approach, risk free
interest rate of 4.25%; dividend yield of 0%; weighted-average expected life of
the warrants of 10 years; and a 60% volatility factor, resulting in an allocated
value of approximately $613,000. 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 $588,000 which included placement agent
fees of $450,000 plus reimbursement of expenses to the placement agent of
$125,000, plus 750,000 fully vested warrants to purchase Company’s common stock
at $2.00 per share with a 10 year exercise period, valued at $829,000, 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 December 31, 2007 and September 30, 2007:
|
|
December
31,
2007
|
|
|
September
30,
2007
|
|
Notional
balance
|
|
$
|
10,000,000
|
|
|
|
10,000,000
|
|
Unamortized
discount
|
|
|
(437,524
|
)
|
|
|
(459,400
|
)
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
9,562,476
|
|
|
|
9,540,600
|
|
2006,
$6.5MM, 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 Bohl’s tract purchased common stock with a promissory
note. Under the terms of the promissory note, should the Company not
exercise the option to purchase the Bohl’s tract the convertible debt would be
used for repayment of the promissory note. As the Company did not
exercise the option to purchase Bohl’s tract the promissory note was repaid from
the repayment 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 March 1 and September 1 of each year, with interest
payments beginning on March 1, 2006. The subordinated convertible debt is due on
September 1, 2013 and is convertible, at the option of the holder, into
shares of common stock at a conversion price of $2.00 per share. The conversion
price is subject to adjustment for stock splits, reverse stock splits,
recapitalizations and similar corporate actions. An adjustment in the conversion
price is also triggered upon the issuance of certain equity or equity-linked
securities with a conversion price, exercise price, or share price less than
$2.00 per share. The anti-dilution provisions state the conversion price cannot
be lower than $1.00 per share.
The
Company may redeem all or a portion of the subordinated convertible debt after
September 1, 2009 at a redemption price that incorporates a premium that
ranges from 3% to 10% during the period beginning September 1, 2009 and
ending on the due date. In addition, the redemption price will include any
accrued but unpaid interest on the subordinated convertible debt. Upon a change
in control event, each holder of the subordinated convertible debt may require
us to repurchase some or all of its subordinated convertible debt at a purchase
price equal to 100% of the principal amount of the subordinated convertible debt
plus accrued and unpaid interest. The due date may accelerate in the event the
Company commences any case relating to bankruptcy or insolvency, or related
events of default. The Company’s assets will be available to pay obligations on
the subordinated convertible debt only after all senior indebtedness has been
paid.
The
subordinated convertible debt has a registration rights agreement whereby the
Company filed a registration statement registering the resale of the underlying
shares with the SEC. 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. The Company met certain of these milestones
and has recorded 75% of the fair value of these warrants but the registration
statement was not declared effective by the SEC prior to March 28, 2007 and
therefore 75% of the warrant shares have vested and remain exercisable. 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 $25,000, for a total of $95,000 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 $846,000 and are recorded as
part of the debt discount and an increase in additional paid in capital, and
amortized over the 7-year life of the notes using the straight-line rate
method.
Convertible
Note at December 31, 2007 and September 30, 2007:
|
|
December
31,
2007
|
|
|
September
30, 2007
|
|
Notional
balance
|
|
$
|
6,500,000
|
|
|
|
6,500,000
|
|
Unamortized
discount
|
|
|
(2,668,109
|
)
|
|
|
(2,785,820
|
)
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
3,831,891
|
|
|
|
3,714,180
|
|
(10) Common
Stock
The
Company is authorized to issue 100,000,000 shares of common stock. Each common
stockholder is entitled to one vote per share of common stock
owned.
The
Company sold 5,000,000 shares of common stock in a public offering at $3.25 per
share that closed on May 19, 2007 and concurrently began trading on the American
Stock Exchange under the symbol “WIH”. Related to the financing, the Company
incurred the following transaction costs:
(In
thousands)
|
|
|
|
Cash
paid to investment banker for underwriting and other fees
|
|
$
|
1,219
|
|
Legal,
printing, accounting and stock exchange registration fees
|
|
|
497
|
|
Travel
and selling related costs
|
|
|
503
|
|
Warrants
to purchase 500,000 shares at $4.06 with a fair value based on the
Black-Scholes option pricing model with a risk free interest rate of
4.64%; dividend yield of 0%; weighted-average expected life of the
warrants of 1 years; and a 60% volatility factor at $0.56 per
warrant.
|
|
|
280
|
|
Total
expenses
|
|
$
|
2,499
|
|
During
June 2007, the Company issued 80,000 shares of common stock for the purchase of
Green Builders, Inc.
(11) Common
Stock Option / Stock Incentive Plan
In August
2005, the Company adopted the Wilson Family Communities, Inc. 2005 Stock
Option/Stock Issuance Plan or the Stock Option Plan. The plan contains two
separate equity programs: 1) the Option Grant Program for eligible persons at
the discretion of the plan administrator, be granted options to purchase shares
of common stock and 2) the Stock Issuance Program under which eligible persons
may, at the discretion of the plan administrator, be issued shares of common
stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered to the Company or any parent or subsidiary. The
market value of the shares underlying option issuance prior to the merger of the
Company and WFC was determined by the Board of Directors as of the grant date.
This plan was assumed by Wilson Holdings, Inc. The fair value of the options
granted under the plan was determined by the Board of Directors or the Board
prior to the merger of the Company and WFC.
The Board
is the plan administrator and has full authority (subject to provisions of the
plan) and it may delegate a committee to carry out the functions of the
administrator. Persons eligible to participate in the plan are employees,
non-employee members of the Board or members of the board of directors of any
parent or subsidiary, and consultants or other independent contractors or
advisors who provide services to the Company.
The stock
issued under the Stock Option Plan shall not exceed 2,500,000 shares. Unless
terminated at an earlier date by action of the Board of Directors, the Stock
Option Plan terminates upon the earlier of (1) the expiration of the ten year
period measured from the date the Stock Option Plan is adopted by the Board or
(2) the date on which all shares available for issuance under the Stock Option
Plan shall have been issued as fully-vested shares.
The
Company had 510,000 shares of common stock available for future grants under the
Stock Option Plan at December 31, 2007. Compensation expense related to the
Company’s share-based awards for the three months ended December 31, 2007 and
2006 was approximately $640,000 and $195,000, respectively.
Before
January 1, 2006, options granted to non-employees were recorded at fair
value in accordance with SFAS No. 123 and EITF 96-18. These options are issued
pursuant to the Stock Option Plan and are reflected in the disclosures
below.
During
the three months ended December 31, 2007, the Company issued options to purchase
155,000 shares of common stock at an exercise price of $1.78 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 5 years; and a 60% volatility factor, management
estimated the fair market value of the grants to be $0.99 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 three months ended December 31, 2007
are as follows:
|
Shares
|
Range
of Exercise Prices
|
Weighted-Average
Exercise Price
|
Options
outstanding, September 30, 2007
|
1,835,000
|
$1.65
- $3.25
|
$2.
50
|
Options
granted
|
155,000
|
$1.78
|
$1.78
|
Options
outstanding, December 31, 2007
|
1,990,000
|
$1.65
- $3.25
|
$2.45
|
Add:
Available for issuance
|
510,000
|
|
|
Total
available under plan
|
2,500,000
|
|
|
The
following is a summary of options outstanding and exercisable at December 31,
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
|
1,990,000
|
6.07
|
2.45
|
1,024,515
|
4.55
|
2.64
|
At
December 31, 2007, there was approximately $1.3 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 6.07
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.
(12)
Purchase
of Green Builders, Inc.
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 which was 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).
(13)
Subsequent
Events
On January 10, 2008, the Company
appointed Cindy Hammes as its Vice President of Finance and as its principal
financial officer and principal accounting officer.
E
ffective January 10, 2008, Lisa Tucker,
the Chief Accounting Officer and principal accounting officer of the Company, no
longer serves in those capacities with the Company. In addition, as disclosed in
the Company’s Current Report on Form 8-K dated September 18, 2007, effective
with the filing of the Company’s Annual Report on Form 10-KSB for the transition
period from January 1, 2007 to September 30, 2007, Arun Khurana transitioned
from his position as the Company’s principal financial officer into a consulting
role to the Company.
On
January 10, 2008, Wilson Holdings, Inc. effected a reduction in force which
resulted in the termination five of the Company’s
employees. Following this reduction in force, the Company has 17
full-time employees, three sales agents, and three consultants. These
actions are a part of the Company’s efforts to continue to reduce its
expenditures through fiscal 2008.
It
em
2. M
anagemen
t’s Discussion and Analysis or Plan of
Operation
The
information presented in this section should be read in conjunction with
, and is
qualified in its entirety to, the financial statements and notes thereto
included in Item 1 of this Form 10-QSB and
our audited financial
statements and related notes
and our
Management’s Discussion and Analysis or Plan of Operation
for the periods
ended September 30, 2007 and December 31, 2006 included in our Annual
Report on Form 10-KSB, as well as the information contained in the financial
statements, including the notes thereto, appearing in Part 1 of this report.
This report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, that involve risks and uncertainties. Our expectations with respect to
future results of operations that may be embodied in oral and written
forward-looking statements, including any forward looking statements that may be
included in this report, are subject to risks and uncertainties that must be
considered when evaluating the likelihood of our realization of such
expectations. Our actual results could differ materially. The words “believe,”
“expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate
to us are intended to identify such forward-looking
statements. Actual results and the timing of events may differ
materially from those contained in these forward-looking statements due to a
number of factors, including those discussed in the section entitled “Risk
Factors” below.
Overview
Our
business plan focuses on the acquisition of undeveloped land that we believe,
based on our understanding of population growth patterns and infrastructure
development, is strategically located. This portion of our business
focus has required, and is expected to continue to require, the majority of our
financial resources. We have funded these acquisitions primarily with
bank debt. In tandem with our land acquisition efforts, and based
upon our strategic market analysis, we also prepare land for homebuilding.
Additionally, we have recently commenced homebuilding activities. We
believe that as the central Texas economy expands, the strategic land purchases,
land development activities and homebuilding activities will enable us to
capitalize on the new growth centers we expect will be created. We
plan to continue to acquire and develop strategically placed land.
A primary
focus of our business has been the sale of developed lots to homebuilders,
including national homebuilders. Due to national conditions in the
market for homes and in the homebuilding industry during the second quarter of
2007 and continuing through February 2008, demand for finished lots by national
homebuilders was significantly reduced and orders placed for some of our
finished lots were cancelled. We elected to retain some of our lots
by our new homebuilding business (described below). We believe that
this strategy will allow us to generate homebuilding revenue to replace revenue
from the loss of sales of these finished lots.
In June
2007 we purchased Green Builders, Inc. and commenced our homebuilding operations
under that name. We are in the process of developing the Green
Builders brand. Our strategy 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.
Substantially all of our construction work will be performed by subcontractors
who will be retained for specific subdivisions pursuant to contracts entered in
2007 and 2008. We intend to build homes on the majority of the lots
we currently have under development and sell those finished
homes. Although we believe that our inventory of land for
homebuilding is sufficient to meet our needs in 2008, we may also build on lots
that we purchase from other land developers or
homebuilders.
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 will continue to decline in fiscal 2008. We feel this
slowdown is attributable to a decline in consumer confidence, the inability of
some buyers to sell their current home and the direct and indirect impact of the
well publicized turmoil in the mortgage and credit markets. Due to
current market conditions, we feel that we will see a reduction in revenue from
home and lot sales in fiscal 2008. We are considering selling tracts
of commercial and residential land in order to achieve
profitability. If we are not able to sell tracts of land, we
expect that we will incur significant losses in 2008.
In order
to offset potential losses we have taken measures to reduce
expenditures. In January 2008, in order to reduce expenditures, we
effected a reduction in force which resulted in the termination of five of our
employees and two of our sales agents. Following this reduction in
force, we have 17 full-time employees, three sales agents, and three outside
consultants. We may also 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.
|
|
Three
Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
|
|
(in
thousands)
|
|
Homebuilding
and related services revenues
|
|
$
|
-
|
|
|
$
|
1,033
|
|
|
$
|
(1,033
|
)
|
|
|
-100
|
%
|
Land
revenues
|
|
$
|
1,108
|
|
|
$
|
437
|
|
|
$
|
671
|
|
|
|
154
|
%
|
Homebuilding
and related services gross profit
|
|
$
|
-
|
|
|
$
|
254
|
|
|
$
|
(254
|
)
|
|
|
-100
|
%
|
Land
gross profit
|
|
$
|
399
|
|
|
$
|
7
|
|
|
$
|
393
|
|
|
|
5900
|
%
|
Operating
expenses
|
|
$
|
1,936
|
|
|
$
|
1,263
|
|
|
$
|
673
|
|
|
|
53
|
%
|
Operating
loss
|
|
$
|
(1,537
|
)
|
|
$
|
(1,003
|
)
|
|
$
|
(534
|
)
|
|
|
53
|
%
|
Net
loss
|
|
$
|
(2,357
|
)
|
|
$
|
(6,767
|
)
|
|
$
|
4,410
|
|
|
|
-65
|
%
|
Results
of Operations
Homebuilding
and Related Services
Background -
Homebuilding and
related services revenue consists of revenue from home sales and from providing
services to our homebuilder customers. To date, our home sales have
been generated by our homebuilder customers utilizing our homebuilder
services. We ceased providing services to homebuilder customers in
August 2007 and any future revenues from home sales will be from the sale of
homes we build through our Green Builders brand. We consolidate our
homebuilder customers into our operating results based on accounting
requirements according to FIN 46(R) and refer to these homebuilder customers as
Variable Interest Entities, or VIEs.
Revenues -
During the three
months ended December 31, 2007, we had no revenue from homebuilding or
homebuilding services. For the three months ended December 31, 2006
all of the homebuilding revenues were generated by one VIE consolidated into our
operating results.
In June
2007 we acquired Green Builders and have commenced our homebuilding activities
under the name “Green Builders, Inc.” We plan to sell homes in
the Austin, Texas area for prices ranging from $200,000 to
$700,000. As of December 31, 2007 we were actively building in two
communities. We had 23 speculative units under construction, 6 models
under construction, and 3 units in backlog. Backlog is defined as
homes under contract
but not yet delivered to our home buyers.
We anticipate that
we will be building in three communities in fiscal
2008. Although we feel that the central Texas market is
relatively strong, we believe that the turmoil in the mortgage market combined
with national attention of a potential recession has caused a lack of urgency
for buyers. As such, sales were lower than anticipated for the three
months ended December 31, 2007 and we expect that they will continue to be slow
throughout fiscal 2008. In accordance with these expected market
conditions, our strategy is to build a limited number of speculative units per
community and not build additional units until we have a signed agreement of
sale and earnest money from a buyer.
Land
and Land Development
Background –
Land sales
revenue consists of revenues from the sale of undeveloped land and developed
lots. Developing finished lots from raw land takes approximately one
to three years. In response to the slowdown in the national housing market and
the reduction in demand for finished lots, we changed our strategy and have
elected to use our developed lots for our own homebuilding
operations. We may still sell our lots to national, regional and
local homebuilders that may purchase anywhere from five to one hundred or more
lots at a time. The delivery of these lots would likely be scheduled over
periods of several months or years.
Revenues –
Revenue from the
sale of land increased 154% during the three months ended December 31, 2007
compared to the same period in 2006. Land sales accounted for 100% of
our total revenues for the three months ended December 31, 2007. For
the three months ended December 31, 2007, approximately $349,000 of our land
sale revenue came from the sale of 5 undeveloped acres, approximately $759,000
of the revenue from the sale of developed finished lots in our Rutherford West
and Georgetown Village projects, located in Northern Hays County, Texas and the
City of Georgetown, Texas, respectively. The increase compared to the
same period in 2006 was primarily due to the sale of 5 undeveloped acres and the
completion and sale of additional residential lots in the Rutherford West
project. Land sales during the same periods of 2006 consisted of
developed lot sales for the Georgetown Village project. Gross profit
on land and land development increased 37% for the quarter ended December 31,
2007 compared to the same period in 2006 primarily due to higher margins in the
sale of undeveloped land in 2007.
We are
considering selling tracts of undeveloped or developed land in order to increase
revenue from the sale of land in 2008 to counteract the anticipated slowdown in
revenue from homebuilding activity. We anticipate that sales from
developed lots will be slow in fiscal 2008 due to the decreased demand for
finished lots from national homebuilders.
General
and Administrative Expenses
|
|
Three
Months Ended December 31,
|
Breakdown
of G&A Expenses
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
Salaries,
benefits, payroll taxes and related emp. exps.
|
|
$
|
502,749
|
|
|
$
|
241,598
|
|
|
|
261,151
|
|
|
|
108
|
%
|
Stock
Compensation expense
|
|
|
639,700
|
|
|
|
195,359
|
|
|
|
444,341
|
|
|
|
227
|
%
|
Legal,
accounting, auditing, and investor relations
|
|
|
167,102
|
|
|
|
154,052
|
|
|
|
13,050
|
|
|
|
8
|
%
|
Consultants
|
|
|
54,572
|
|
|
|
16,472
|
|
|
|
38,100
|
|
|
|
231
|
%
|
General
overhead, including office expenses, insurance, and travel
|
|
|
254,205
|
|
|
|
166,104
|
|
|
|
88,101
|
|
|
|
53
|
%
|
Amortization
of subordinated debt costs and transaction costs
|
|
|
62,385
|
|
|
|
209,570
|
|
|
|
(147,185
|
)
|
|
|
-70
|
%
|
Total
G&A
|
|
$
|
1,680,714
|
|
|
$
|
983,156
|
|
|
|
697,558
|
|
|
|
558
|
%
|
General
and administrative expenses are composed primarily of salaries of general and
administrative personnel and related employee benefits and taxes. During the
three months ended December 31, 2007 and 2006, salaries, benefits, taxes and
related employee expenses totaled approximately $503,000 and $242,000,
respectively, and represented approximately 30% and 14%, respectively, of total
general and administrative expenses for the periods. The increase is
due to an approximate 50% increase in employee headcount over prior
year. We anticipate that general and administrative expenses
will decrease in upcoming quarters in fiscal 2008 due to the reduction in force
in January 2008. The reduction in force will reduce our salary and
related benefit expenditures as well as stock compensation expense.
Stock
compensation expense was approximately $640,000 and $195,000 for the three
months ended December 31, 2007 and 2006, respectively. The
increase in stock compensation expense was due primarily to an increase in
acceleration of stock options vesting for our former principal financial officer
in connection with the terms of his new consulting agreement. Stock
compensation expense also increased as a result of stock options granted to the
additional personnel hired.
Legal,
accounting, audit and investor relations expense totaled $167,000 and $154,000
for the three months ended December 31, 2007 and 2006,
respectively. These expenses increased due to an increase
in fees payable to our recently retained investor relations firm, offset by a
decrease in audit fees. Audit fees decreased from the comparable
period in 2006 due to the change in fiscal year form December 31 to September
30.
Consultant
expenses were approximately $55,000 and $17,000 for the three months ended
December 31, 2007 and 2006, respectively. These expenses increased
due to an increase in consulting services for the development of our
homebuilding activities.
General
overhead expenses, including rent, office expenses and insurance totaled
$254,000 and $166,000 for the three months ended December 31, 2007 and 2006,
respectively. This increase is attributable to costs associated with
the increase in personnel and costs associated with the commencement of
homebuilding activities in 2007.
Amortization
of subordinated convertible debt issuance costs and transaction costs was
approximately $62,000 and $210,000 for the three months ended December 31, 2007
and 2006, respectively. This decrease is attributable to
approximately $150,000 in one-time costs incurred in 2006 relating to consulting
services for capital raising and the initial underwriting fees for our public
offering.
Selling
and Marketing Expenses
|
|
Three
Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
Selling
and Marketing Expenses
|
|
$
|
255,299
|
|
|
$
|
280,037
|
|
|
|
(24,738
|
)
|
|
|
-44
|
%
|
Sales and
marketing expenses include selling costs, salaries and related taxes and
benefits, marketing activities including websites, brochures, catalogs, signage,
and billboards, and market research, all of which benefit our corporate presence
and are not included as homebuilding cost of sales. As a percentage
of revenues during the three months ended December 31, 2007, we increased
selling and marketing costs, when compared to the same periods of the prior
year, to help develop our homebuilding business, increase awareness of our brand
through advertising, public relations, and community marketing initiatives
and sell our existing inventory.
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
and Other Expense and Income
|
|
Three
Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
Loss
on fair value of derivatives
|
|
$
|
-
|
|
|
$
|
5,076,957
|
|
|
|
(5,076,957
|
)
|
|
|
-100
|
%
|
Interest
expense - convertible debt
|
|
|
206,250
|
|
|
|
209,306
|
|
|
|
(3,056
|
)
|
|
|
-1
|
%
|
Interest
discount expense - convertible debt
|
|
|
139,587
|
|
|
|
381,348
|
|
|
|
(241,761
|
)
|
|
|
-63
|
%
|
Interest
expense - land and development loans
|
|
|
567,740
|
|
|
|
127,076
|
|
|
|
440,665
|
|
|
|
347
|
%
|
Interest
income and misc income
|
|
|
(93,195
|
)
|
|
|
(30,136
|
)
|
|
|
(63,060
|
)
|
|
|
209
|
%
|
Total
interest and other expense and income
|
|
$
|
820,382
|
|
|
$
|
5,764,551
|
|
|
|
(4,944,169
|
)
|
|
|
391
|
%
|
Loss on
fair value of derivatives decreased approximately $5.1 million for the three
months ended December 31, 2007 over the same period in 2006 due to the adoption
of FSP EITF 00-19-2 for the subordinated convertible debt. In
addition discount expense for the convertible debt decreased by approximately
$242,000 due to the adoption of FSP 00-10-2. Interest expense for
land and development loans increased by approximately $441,000 for the three
months ended December 31, 2007 over the same period in
2006. The increase is attributable to our determination to
expense, rather than to capitalize, interest related to property temporarily not
under development.
Interest
and other income increased approximately $63,000 for the three months ended
December 31, 2007 over the same period in 2006. The increase consisted of
interest earned on the cash raised in our May 2007 public offering as well as
cash equivalents and immaterial amounts of miscellaneous other
income.
Financial
Condition and Capital Resources
Liquidity
At
December 31, 2007, we had approximately $12.5 million in cash and cash
equivalents. We completed a public offering of our common stock in May 2007,
resulting in net proceeds to us of approximately $14 million.
On June
29, 2007, WFC entered into a $55 million revolving credit facility (the “Credit
Facility”) with a syndicate of banks led by RBC Centura Bank, as administrative
agent. We have guaranteed the obligations of WFC 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 by WFC and the agent. WFC’s obligations 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.
The
initial maturity date for the Credit Facility is June 29, 2008. The
facility will be reviewed by our syndicate of banks and renewed for
successive 12 month periods, so long as the following items have been
satisfied: no event of default shall exist, no material adverse
effect in the financial condition, operations, business or management of WFC
shall exist and extension fees in the amount determined by the agent and all
costs associated incurred in connection with the proposed extension must be
paid. The final borrowing base calculation will be made twelve months
prior to the termination of the Credit Facility and no borrowings may be made in
excess of such amount. We are currently evaulating the amount of capital needed
for the next renewal term of the facility. We anticipate that we will
reduce the line of credit based on capital requirements needed for that period
to between $30 to $40 million. As of December 31, 2007, we have
borrowed approximately $10.5 million and have issued a $118,000 letter of credit
under the Credit Facility.
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. Quarterly principal
reductions will be required during the final 12 months of the
term.
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
December 31, 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.
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 (including the Credit Facility),
joint venture financing, sales of selected lot positions, sales of land and lot
options, and by raising additional equity.
Capital
Resources
We have
raised approximately $16.8 million of subordinated convertible debt, and
approximately $14 million in a public offering of the Company’s common stock
completed in May 2007. WFC entered into a $55 million revolving
credit facility with a syndicate of banks. We are currently
evaulating the amount of capital needed for the next renewal term of
the
facility. We anticipate that we will reduce the line of credit based
on capital requirements needed for that period to between $30 to $40
million.
Due to a
change in market conditions discussed above and longer than expected ramp up of
homebuilding operations our financial projections have changed. We
are considering selling tracts of commercial and residential land in order to
achieve profitability. If we are not able to sell tracts of
land, we expect that we will incur significant losses in 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 the next twelve months 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.
Off-Balance
Sheet Arrangements
As of
December 31, 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 Reimbursements
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 December 31, 2007 at such time as
each District issues its first bond issue. We have completed Phase 1
for the Rutherford West project and have approximately $980,000 of water
district reimbursements included in inventory that we anticipate will be
collected from bond issuances made by the District. When the
reimbursements are received we will record them as reductions of the related
asset’s balance. Usually, a District issues its first bond issue only after
completion of construction of approximately 200 houses. To the extent
that the estimates are dramatically different to the actual facts, it could have
a material effect on the financial statements.
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
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.
Risk
Factors
We
are exposed to certain risks and uncertainties that could have a material
adverse impact on our business, financial condition and operating results. Our
annual report on Form 10-KSB for the transition period ended September
30, 2007 described various risk factors applicable to our business under the
item titled “Risk Factors.”
Other
than as disclosed below, there have been no material changes to the risk factors
described in the “Risk Factors” section of our annual report on Form
10-KSB for the year ended September 30, 2007.
We
are a small company and have a correspondingly small financial and accounting
organization.
We are a
small company with a correspondingly small financial and accounting
organization. In January 2008 we had a reduction of force that further
reduced the size of our finance and accounting organization. In
addition, in January 2008 our former principal financial officer ceased his
employment with us and now serves in a consulting capacity and the role of both
principal financial officer and principal accounting officer were consolidated
with Cindy Hammes, our Vice President of Finance, filling those
roles. While we believe our current finance and accounting
organization is of appropriate size and has appropriate personnel to support our
current operations, the rigorous demands of being a public reporting company may
lead to a determination that our finance and accounting group is undersized or
lacks necessary expertise. In addition, the loss of any employees in this
organization could significantly impact us. As a public company, we
are subject to the reporting requirements of the Securities Exchange Act of 1934
and the Sarbanes-Oxley Act of 2002. The requirements of these laws and the rules
and regulations promulgated thereunder entail significant accounting, legal and
financial compliance costs, and have made, and will continue to make, some
activities more difficult, time consuming or costly and may place significant
strain on our personnel, systems and resources.
We
may continue to be particularly affected by the general economic
downturn.
Economic
statistics show that the United States economy may be slowing and many financial
experts are predicting a recession in 2008. Concerns about the health
of the mortgage industry and the availability of credit for home buyers
continue. Home sales are linked to the availability of credit,
employment rates and the status of the general economy, all of which have shown
signs of slowing. Potential home buyers may elect not to purchase new
homes due to these economic factors, and our business will suffer as a
result.