<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18001
THE PRESLEY COMPANIES*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0864902
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19 CORPORATE PLAZA 92660
NEWPORT BEACH, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(949) 640-6400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF COMMON STOCK NOVEMBER 12, 1999
--------------------- ------------------
<S> <C>
Common stock, par value $.01 10,439,135
</TABLE>
- -------------------------
* The Presley Companies, a Delaware corporation ("Old Presley"), on November 11,
1999 merged with and into Presley Merger Sub. Inc., a wholly owned subsidiary
with Presley Merger Sub, Inc. being the surviving corporation and changing its
name to "The Presley Companies." On that date, Presley Merger Sub, Inc. became
the successor registrant to Old Presley.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE PRESLEY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets -- September 30, 1999 and
December 31, 1998......................................... 3
Consolidated Statements of Operations -- Three and Nine
Months Ended September 30, 1999 and 1998.................. 4
Consolidated Statement of Stockholders' Equity -- Nine
Months Ended September 30, 1999........................... 5
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1999 and 1998............................... 6
Notes to Consolidated Financial Statements.................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 22
ITEM 3. NOT APPLICABLE.
PART II. OTHER INFORMATION........................................... 33
SIGNATURES........................................................... 35
</TABLE>
2
<PAGE> 3
As more fully described in Part I -- Item 2 on November 11, 1999, The
Presley Companies, a Delaware corporation ("Old Presley"), merged with and into
Presley Merger Sub, Inc., a wholly owned subsidiary ("New Presley") with New
Presley being the surviving corporation and changing its name to "The Presley
Companies." On that date, New Presley became the successor registrant to Old
Presley.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE PRESLEY COMPANIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
(NOTES 2 AND 3)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 7,223 $ 23,955
Receivables................................................. 17,087 8,613
Real estate inventories..................................... 164,777 174,502
Investments in and advances to unconsolidated joint
ventures -- Note 4........................................ 36,632 30,462
Property and equipment, less accumulated depreciation of
$4,023 and $3,156 at September 30, 1999 and December 31,
1998, respectively........................................ 2,259 2,912
Deferred loan costs......................................... 2,204 3,381
Other assets................................................ 5,325 2,579
-------- ---------
$235,507 $ 246,404
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 20,692 $ 17,364
Accrued expenses............................................ 23,839 27,823
Notes payable............................................... 35,271 55,393
12 1/2% Senior Notes due 2001 -- Notes 5 and 6.............. 120,000 140,000
-------- ---------
199,802 240,580
-------- ---------
Stockholders' equity -- Notes 1 and 3
Common stock, par value $.01 per share; 30,000,000 shares
authorized; 10,439,135 shares issued and outstanding at
September 30, 1999 and December 31, 1998,
respectively........................................... 104 104
Additional paid-in capital................................ 120,955 116,667
Accumulated deficit from January 1, 1994.................. (85,354) (110,947)
-------- ---------
35,705 5,824
-------- ---------
$235,507 $ 246,404
======== =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
(NOTES 2 AND 3)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Sales
Homes......................................... $ 87,630 $ 89,319 $ 261,686 $ 225,592
Lots, land and other........................ 733 190 4,689 10,925
-------- -------- --------- ---------
88,363 89,509 266,375 236,517
-------- -------- --------- ---------
Operating costs
Cost of sales -- homes...................... (72,071) (75,197) (216,188) (194,194)
Cost of sales -- lots, land and other....... (1,072) (1,227) (4,813) (11,378)
Sales and marketing......................... (4,198) (5,385) (12,658) (15,180)
General and administrative.................. (4,944) (3,188) (12,817) (10,144)
-------- -------- --------- ---------
(82,285) (84,997) (246,476) (230,896)
-------- -------- --------- ---------
Equity in income of unconsolidated joint
ventures.................................... 7,414 501 12,278 346
-------- -------- --------- ---------
Operating income.............................. 13,492 5,013 32,177 5,967
Interest expense, net of amounts
capitalized................................. (883) (2,180) (4,554) (7,073)
Financial advisory expenses -- Note 2......... (917) -- (2,197) --
Other income (expense), net................... 825 669 2,366 1,638
-------- -------- --------- ---------
Income before income taxes and extraordinary
item........................................ 12,517 3,502 27,792 532
(Provision) credit for income taxes........... (1,797) (203) (3,988) 160
-------- -------- --------- ---------
Income before extraordinary item.............. 10,720 3,299 23,804 692
Extraordinary item -- gain from retirement of
debt, net of applicable income taxes -- Note
6........................................... -- -- 1,789 522
-------- -------- --------- ---------
Net income.................................... $ 10,720 $ 3,299 $ 25,593 $ 1,214
======== ======== ========= =========
Basic and diluted earnings per common share
-- Notes 1 and 3:
Before extraordinary item................... $ 1.03 $ 0.32 $ 2.28 $ 0.07
Extraordinary item.......................... -- -- 0.17 0.05
-------- -------- --------- ---------
After extraordinary item.................... $ 1.03 $ 0.32 $ 2.45 $ 0.12
======== ======== ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
(NOTES 2 AND 3)
<TABLE>
<CAPTION>
OLD PRESLEY
--------------------------------------
NEW PRESLEY COMMON STOCK
---------------- -------------------------------------- ACCUMULATED
COMMON STOCK SERIES A SERIES B ADDITIONAL DEFICIT FROM
---------------- ----------------- ----------------- PAID-IN JANUARY 1,
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL 1994 TOTAL
------ ------ ------- ------ ------- ------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31,
1998 as previously
reported............. -- $ -- 34,793 $ 348 17,403 $ 174 $116,249 $(110,947) $ 5,824
Adjustment for
retroactive effect of
merger with wholly-
owned subsidiary and
conversion of each
share of Series A and
Series B common stock
into 0.2 common share
of the surviving
company -- Note 3...... 10,439 104 (34,793) (348) (17,403) (174) 418 -- --
------ ---- ------- ----- ------- ----- -------- --------- -------
Balance -- December 31,
1998, as adjusted.... 10,439 104 -- -- -- -- 116,667 (110,947) 5,824
Net income............. -- -- -- -- -- 25,593 25,593
Income tax benefits
relating to temporary
differences existing
prior to the quasi-
reorganization --
Note 1............... -- -- -- -- -- -- 4,288 -- 4,288
------ ---- ------- ----- ------- ----- -------- --------- -------
Balance -- September
30, 1999............. 10,439 $104 -- $ -- -- $ -- $120,955 $ (85,354) $35,705
====== ==== ======= ===== ======= ===== ======== ========= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(NOTES 2 AND 3)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income.................................................. $ 25,593 $ 1,214
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization.......................... 879 811
Equity in income of unconsolidated joint ventures...... (12,278) (346)
Extraordinary gain on repurchase of Senior Notes....... (2,089) (885)
Provision for income taxes............................. 4,288 203
Net changes in operating assets and liabilities:
Other receivables.................................... (2,870) (2,576)
Real estate inventories.............................. 16,940 4,377
Deferred loan costs.................................. 966 (1,069)
Other assets......................................... (2,746) (1,083)
Accounts payable..................................... 3,328 7,643
Accrued expenses..................................... (3,984) (5,709)
--------- --------
Net cash provided by operating activities................. 28,027 2,580
--------- --------
Cash flows from investing activities
Investments in and advances to unconsolidated joint
ventures............................................... 6,108 (11,560)
Proceeds from contribution of land to joint venture....... -- 25,431
Issuance of notes receivable.............................. (34,242) --
Principal payments on notes receivable.................... 28,638 708
Property and equipment, net............................... (226) (501)
--------- --------
Net cash provided by investing activities................. 278 14,078
--------- --------
Cash flows from financing activities
Proceeds from borrowing on notes payable.................. 123,368 92,577
Principal payments on notes payable....................... (150,705) (87,719)
Purchase of 12 1/2% Senior Notes.......................... (17,700) (18,825)
--------- --------
Net cash used in financing activities..................... (45,037) (13,967)
--------- --------
Net increase (decrease) in cash and cash equivalents........ (16,732) 2,691
Cash and cash equivalents -- beginning of period............ 23,955 4,569
--------- --------
Cash and cash equivalents -- end of period.................. $ 7,223 $ 7,260
========= ========
Supplemental disclosures of cash flow information
Cash paid during the period for interest, net of amounts
capitalized............................................ $ 9,633 $ 13,458
========= ========
Issuance of notes payable for land acquisitions........... $ 7,215 $ 2,748
========= ========
</TABLE>
See accompanying notes.
6
<PAGE> 7
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited consolidated financial statements of The Presley Companies
(the "Company" or "Presley") have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
accordance with the rules and regulations of the Securities and Exchange
Commission. The consolidated financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements
included herein should be read in conjunction with the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1998.
The interim consolidated financial statements have been prepared in
accordance with the Company's customary accounting practices. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a presentation in accordance with generally accepted accounting
principles have been included. Operating results for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries and joint ventures. Investments in joint
ventures in which the Company has a 50% or less ownership interest are accounted
for using the equity method. The accounting policies of the joint ventures are
substantially the same as those of the Company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("Statement No. 131"). Statement No. 131
establishes new standards for segment reporting which are based on the way
management organizes segments within the Company for making operating decisions
and assessing performance. The adoption of Statement No. 131 did not affect the
results of operations or financial position of the Company.
The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets. For internal reporting purposes,
the Company is organized into six geographic home building regions and its
mortgage operations. Because each of the Company's geographic home building
regions has similar economic characteristics, housing products and class of
prospective buyers, the geographic home building regions have been aggregated
into a single home building segment. Mortgage company operations did not meet
the materiality thresholds which would require disclosure under Statement No.
131 for the three and nine months ended September 30, 1999 and 1998, and
accordingly, are not separately reported.
The Company evaluates performance and allocates resources primarily on the
operating income of individual home building projects. Operating income is
defined by the Company as sales of homes, lots and land; less cost of sales,
impairment losses on real estate, selling and marketing, and general and
administrative expenses. Accordingly, operating income excludes certain expenses
included in the determination of net income. Operating income from home building
operations, including income from the Company's investment in unconsolidated
joint ventures, totaled $13.5 million and $5.0 million for the three months
ended September 30, 1999 and 1998, respectively, and $32.2 million and $6.0
million for the nine months ended September 30, 1999 and 1998, respectively. All
other segment measurements are disclosed in the Company's Annual Report on Form
10-K/A for the year ended December 31, 1998.
All revenues are from external customers and no revenues are generated from
transactions with other segments. There were no customers that contributed 10%
or more of the Company's total revenues during the three and nine months ended
September 30, 1999 and 1998.
7
<PAGE> 8
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Earnings per share amounts for all periods presented conform to Financial
Accounting Standards Board Statement No. 128, Earnings Per Share. Basic and
diluted earnings per common share for the three and nine months ended September
30, 1999 and 1998 are based on 10,439,135 shares of common stock outstanding,
after adjustment for the retroactive effect of the merger with a wholly-owned
subsidiary and the conversion of each share of previously outstanding Series A
and Series B common stock into 0.2 common share of the surviving company, as
described in Note 3.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of the assets and liabilities
as of September 30, 1999 and December 31, 1998 and revenues and expenses for the
periods presented. Accordingly, actual results could differ materially from
those estimates in the near-term.
Effective as of January 1, 1994, the Company completed a capital
restructuring and quasi-reorganization. The quasi-reorganization resulted in the
adjustment of assets and liabilities to estimated fair values and the
elimination of an accumulated deficit effective January 1, 1994. Income tax
benefits resulting from the utilization of net operating loss and other
carryforwards existing at January 1, 1994 and temporary differences existing
prior to or resulting from the quasi-reorganization, are excluded from the
results of operations and credited to paid-in capital. During the three and nine
months ended September 30, 1999 income tax benefits of $1,797,000 and
$4,288,000, respectively, were excluded from results of operations and credited
to paid-in capital.
NOTE 2 -- COMPANY ACQUIRES SUBSTANTIALLY ALL OF THE ASSETS OF WILLIAM LYON
HOMES, INC.
On November 5, 1999, the Company acquired substantially all of the assets
of William Lyon Homes, Inc. ("William Lyon Homes") in accordance with a Purchase
Agreement executed on October 7, 1999 for a cash purchase price of approximately
$43,000,000 and the assumption of substantially all of the liabilities of
William Lyon Homes. The acquisition will be accounted for as a purchase and,
accordingly, the purchase price will be allocated based on the fair value of the
assets and liabilities acquired, with the excess of the purchase price over the
net assets acquired reflected as goodwill to be amortized on a straight-line
basis over an estimated useful life of seven years. William Lyon Homes, which is
owned by William Lyon and his son, William H. Lyon, is a California-based
homebuilder and real estate developer with projects currently under development
in Northern and Southern California. William Lyon is Chairman of the Board of
William Lyon Homes and also Chairman of the Board of Presley.
In connection with the purchase by the Company of substantially all of the
assets of William Lyon Homes, as described in the preceding paragraph and prior
to the effectiveness of the merger as described below, William Lyon and his son,
William H. Lyon, acquired (1) 5,741,454 shares of the Company's Series A Common
Stock for $0.655 per share in a tender offer for the purchase of up to
10,678,792 shares of the Company Series A Common Stock which closed on November
5, 1999 and (2) 14,372,150 shares of the Company's Series B Common Stock for
$0.655 per share under agreements with certain holders of the Company's Series B
Common Stock which closed on November 8, 1999. On November 5, 1999 William Lyon
and the Company cancelled all of William Lyon's outstanding options to purchase
750,000 shares of the Company's Series A Common Stock. The completion of these
transactions, together with the previous disposition on August 12, 1999 of
3,000,000 shares by William Lyon and William H. Lyon, resulted in William Lyon
and a trust of which William H. Lyon is a beneficiary owning approximately 49.9%
of the Company's outstanding Common Stock.
A Special Committee of independent directors of the Company's Board of
Directors approved the Purchase Agreement and the transactions contemplated
thereby after receiving an opinion from Warburg Dillon Read LLC to the effect
that after giving effect to the asset acquisition, tender offer, the merger and
the Series B stock purchase agreements, the shares of common stock to be issued
in the merger to the Company's
8
<PAGE> 9
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
stockholders and/or, to the extent that any holders of Series A Common Stock
(other than the Lyons and the Series B stockholders which have entered into
Series B Stock Purchase Agreements) tenders shares, the cash that may be
received by each such tendering holder, subject to the proration provisions of
the tender offer, is fair to the holders of the Series A Common Stock (other
than the Lyons and those holders of Series B Common Stock) from a financial
point of view. The Special Committee's approval was also made after receiving an
opinion from Houlihan Lokey Howard & Zukin Financial Advisors, Inc. as to the
fairness of the consideration to be paid by the Company in connection with the
purchase of assets from William Lyon Homes. The closing of the purchase of
assets under the Purchase Agreement was made after receiving an opinion from
Houlihan Lokey as to the solvency of the Company after consummation of the
transactions contemplated in the Purchase Agreement.
In connection with these events, the Company has incurred costs of
approximately $917,000 and $2,197,000 for the three and nine months ended
September 30, 1999, respectively, which are reflected in the Consolidated
Statement of Operations as financial advisory expenses.
NOTE 3 -- COMPANY MERGES WITH AND INTO WHOLLY-OWNED SUBSIDIARY
On November 5, 1999 at a Special Meeting of Holders of Common Stock, the
Holders of Common Stock approved a proposal to adopt a certificate of ownership
and merger pursuant to which the Company would merge with and into Presley
Merger Sub, Inc., a newly-formed Delaware corporation and wholly owned
subsidiary of the Company, with Presley Merger Sub, Inc. being the surviving
corporation. In the merger, each outstanding share of common stock of the
Company is exchangeable for 0.2 share of common stock of Presley Merger Sub,
Inc. In the merger, the surviving corporation will be named "The Presley
Companies". On November 11, 1999, the certificate of ownership and merger was
filed in the State of Delaware and the merger became effective. Beginning on
November 11, 1999, the shares of the surviving company (now "The Presley
Companies") commenced trading on the New York Stock Exchange under the symbol
"PDC."
The principal purpose of the merger is to help preserve the Company's
substantial net operating loss carryforwards and other tax benefits for use in
offsetting future taxable income or income tax by decreasing, but not
eliminating, the risk of an "ownership change" for federal income tax purposes.
This is being accomplished by imposing certain restrictions on the transfer of
the surviving company's stock.
The Company's future use of tax carryforwards would be severely limited if
there were an "ownership change," as defined by the applicable tax laws and
regulations, over any three-year period. While the Company believes an
"ownership change" has not occurred since 1994, there is a risk that future
shifts in ownership, primarily involving present or future holders of 5% or more
of the Company's shares, could result in an "ownership change" as calculated for
federal income tax purposes.
Generally, the Company had no control over purchases or sales by investors
who acquire 5% or more of its shares. However, the merger is intended to reduce
the risk of an "ownership change" occurring by restricting certain transfers of
the surviving company's stock.
In general, the transfer restrictions prohibit, without prior approval of
the board of directors of the surviving company, the direct or indirect
disposition or acquisition of any stock of the surviving company by or to any
holder who owns or would so own upon the acquisition (either directly or through
the tax attribution rules) 5% or more of the surviving company's stock.
These restrictions are intended to bind all holders of shares of the
Company's common stock outstanding at the effective time of the merger. The
transfer restrictions on the shares of the surviving company will remain in
effect for at least three years unless the surviving company's board determines
that they are no longer needed to preserve the company's tax benefits.
9
<PAGE> 10
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The surviving company has substantially the same financial position as that
of the Company immediately before the merger (the merger took effect after
consummation of the transactions contemplated in the Purchase Agreement with
William Lyon Homes -- see Note 2). Except for the transfer restrictions and the
elimination of provisions dividing the common stock into two series, the new
shares of common stock issued by the surviving company in the merger will have
terms substantially similar to the old shares of common stock.
NOTE 4 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES
The Company and certain of its subsidiaries are general partners or members
in thirteen joint ventures involved in the development and sale of residential
projects. Such joint ventures are 50% or less owned and, accordingly, the
financial statements of such joint ventures are not consolidated with the
Company's financial statements. The Company's investments in unconsolidated
joint ventures are accounted for using the equity method. Condensed combined
financial information of these joint ventures as of September 30, 1999 and
December 31, 1998 and for the three and nine months ended September 30, 1999 and
1998 is summarized as follows:
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 1,821 $ 304
Receivables................................................ 1,083 851
Real estate inventories.................................... 158,131 168,417
Other assets............................................... 504 1,034
-------- --------
$161,539 $170,606
======== ========
LIABILITIES AND OWNERS' CAPITAL
Accounts payable........................................... $ 8,846 $ 6,453
Accrued expenses........................................... 5,245 2,098
Notes payable.............................................. 26,663 29,024
Advances from The Presley Companies and subsidiaries....... 743 655
-------- --------
41,497 38,230
-------- --------
Owners' capital
The Presley Companies and subsidiaries................... 35,889 29,807
Others................................................... 84,153 102,569
-------- --------
120,042 132,376
-------- --------
$161,539 $170,606
======== ========
</TABLE>
10
<PAGE> 11
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales
Homes..................................... $ 52,577 $ 8,976 $123,113 $10,695
Operating costs
Cost of sales -- homes.................. (39,764) (7,437) (97,359) (9,005)
Sales and marketing..................... (1,469) (593) (4,038) (926)
-------- ------- -------- -------
Operating income.......................... 11,344 946 21,716 764
Other income, net......................... 192 51 414 71
-------- ------- -------- -------
Net income (loss)......................... $ 11,536 $ 997 $ 22,130 $ 835
======== ======= ======== =======
Allocation to owners
The Presley Companies and
subsidiaries......................... $ 7,414 $ 501 $ 12,278 $ 346
Others.................................. 4,122 496 9,852 489
-------- ------- -------- -------
$ 11,536 $ 997 $ 22,130 $ 835
======== ======= ======== =======
</TABLE>
Based upon current estimates, substantially all future development and
construction costs will be funded by the Company's venture partners or from the
proceeds of non-recourse construction financing obtained by the joint ventures.
NOTE 5 -- 12 1/2% SENIOR NOTES DUE 2001
In accordance with the bond indenture governing the Company's Senior Notes
which are due in 2001, if the Company's Consolidated Tangible Net Worth is less
than $60,000,000 for two consecutive fiscal quarters, the Company is required to
offer to purchase $20,000,000 in principal amount of the Senior Notes. Because
the Company's Consolidated Tangible Net Worth has been less than $60,000,000
beginning with the quarter ended June 30, 1997, the Company would, effective on
December 4, 1997, June 4, 1998, December 4, 1998 and June 4, 1999, have been
required to make offers to purchase $20,000,000 of the Senior Notes at par plus
accrued interest, less the face amount of Senior Notes acquired by the Company
after September 30, 1997, March 31, 1998, September 30, 1998 and March 31, 1999,
respectively. The Company acquired Senior Notes with a face amount of
$20,000,000 after September 30, 1997 and prior to December 4, 1997, again after
March 31, 1998 and prior to June 4, 1998, again after September 30, 1998 and
prior to December 4, 1998 and again after March 31, 1999 and prior to June 4,
1999, and therefore was not required to make said offers.
Because the Company's Consolidated Tangible Net Worth was less than
$60,000,000 as of September 30, 1999, the Company would, effective on December
4, 1999, be required to make similar offers to purchase $20,000,000 in principal
amount of the Senior Notes. In October and November 1999, the Company acquired
Senior Notes with a face amount of $16,857,000 and therefore would be required
to make such offer to purchase additional Senior Notes with a face amount of
$3,143,000 effective on December 4, 1999, unless the Company has acquired such
Senior Notes prior to that date.
Each six months thereafter, until such time as the Company's Consolidated
Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the
Company will be required to make similar offers to purchase $20,000,000 of
Senior Notes. At September 30, 1999, the Company's Consolidated Tangible Net
Worth was $33,501,000. The Company's management has previously held discussions,
and may in the future
11
<PAGE> 12
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
hold discussions, with representatives of certain of the holders of the Senior
Notes with respect to modifying this repurchase provision of the bond indenture
agreement. To date, no agreement has been reached to modify this repurchase
provision. Any such change in the terms or conditions of the bond indenture
agreement requires the affirmative vote of at least a majority in principal
amount of the Senior Notes outstanding. No assurances can be given that any such
change will be made.
Because of the Company's obligation to offer to purchase $20,000,000
principal amount of the Senior Notes each six months so long as the Company's
Consolidated Tangible Net Worth is less than $60,000,000, the Company is
restricted in its ability to acquire, hold and develop real estate projects. The
Company changed its operating strategy during 1997 to finance certain projects
by forming joint ventures with venture partners that would provide a substantial
portion of the capital necessary to develop these projects.
The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a
Delaware corporation ("Delaware Presley"), and are unconditionally guaranteed on
a senior basis by Presley Homes (formerly The Presley Companies), a California
corporation and a wholly owned subsidiary of Delaware Presley. However, Presley
Homes has granted liens on substantially all of its assets as security for its
obligations under the Working Capital Facility and other loans. Because the
Presley Homes guarantee is not secured, holders of the Senior Notes are
effectively junior to borrowings under the Working Capital Facility with respect
to such assets. Delaware Presley and its consolidated subsidiaries are referred
to collectively herein as "Presley" or the "Company." Interest on the Senior
Notes is payable on January 1 and July 1 of each year, commencing January 1,
1995.
12
<PAGE> 13
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Supplemental consolidating financial information of the Company,
specifically including information for Presley Homes, is presented below.
Investments in subsidiaries are presented using the equity method of accounting.
Separate financial statements of Presley Homes are not provided, as the
consolidating financial information contained herein provides a more meaningful
disclosure to allow investors to determine the nature of assets held and the
operations of the combined groups.
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-----------------------------------
DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ -- $ 5,027 $ 2,196 $ -- $ 7,223
Receivables........................... -- 9,701 7,386 -- 17,087
Real estate inventories............... -- 159,620 5,157 -- 164,777
Investments in and advances to
unconsolidated joint ventures....... -- 5,031 31,601 -- 36,632
Property and equipment, net........... -- 1,990 269 -- 2,259
Deferred loan costs................... 986 1,218 -- -- 2,204
Other assets.......................... -- 5,225 100 -- 5,325
Investments in subsidiaries........... 34,658 35,723 -- (70,381) --
Intercompany receivables.............. 126,040 5,979 -- (132,019) --
-------- -------- ------- --------- --------
$161,684 $229,514 $46,709 $(202,400) $235,507
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................... $ -- $ 20,044 $ 648 $ -- $ 20,692
Accrued expenses...................... -- 22,337 1,502 -- 23,839
Notes payable......................... -- 29,809 5,462 -- 35,271
12 1/2% Senior Notes.................. 120,000 -- -- -- 120,000
Intercompany payables................. 5,979 126,040 -- (132,019) --
-------- -------- ------- --------- --------
Total liabilities........... 125,979 198,230 7,612 (132,019) 199,802
Stockholders' equity.................. 35,705 31,284 39,097 (70,381) 35,705
-------- -------- ------- --------- --------
$161,684 $229,514 $46,709 $(202,400) $235,507
======== ======== ======= ========= ========
</TABLE>
13
<PAGE> 14
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-----------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... $ -- $ 22,605 $ 1,350 $ -- $ 23,955
Receivables......................... -- 7,157 1,456 -- 8,613
Real estate inventories............. -- 161,667 12,835 -- 174,502
Investments in and advances to
unconsolidated joint ventures..... -- 3,225 27,237 -- 30,462
Property and equipment, net......... -- 2,614 298 -- 2,912
Deferred loan costs................. 1,643 1,708 30 -- 3,381
Other assets........................ -- 2,440 139 -- 2,579
Investments in subsidiaries......... 4,369 31,553 -- (35,922) --
Intercompany receivables............ 143,740 3,928 -- (147,668) --
-------- -------- ------- --------- --------
$149,752 $236,897 $43,345 $(183,590) $246,404
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................... $ -- $ 15,867 $ 1,497 $ -- $ 17,364
Accrued expenses.................... -- 25,965 1,858 -- 27,823
Notes payable....................... -- 49,736 5,657 -- 55,393
12 1/2% Senior Notes................ 140,000 -- -- -- 140,000
Intercompany payables............... 3,928 143,740 -- (147,668) --
-------- -------- ------- --------- --------
Total liabilities......... 143,928 235,308 9,012 (147,668) 240,580
Stockholders' Equity................ 5,824 1,589 34,333 (35,922) 5,824
-------- -------- ------- --------- --------
$149,752 $236,897 $43,345 $(183,590) $246,404
======== ======== ======= ========= ========
</TABLE>
14
<PAGE> 15
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-----------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales................................ $ -- $ 214,354 $ 52,021 $ -- $ 266,375
------- --------- -------- -------- ---------
Operating costs
Cost of sales...................... -- (180,446) (40,555) -- (221,001)
Sales and marketing................ -- (10,530) (2,128) -- (12,658)
General and administrative......... -- (15,305) 2,488 -- (12,817)
------- --------- -------- -------- ---------
-- (206,281) (40,195) -- (246,476)
------- --------- -------- -------- ---------
Income from unconsolidated joint
ventures........................... -- 1,524 10,754 -- 12,278
------- --------- -------- -------- ---------
Income from subsidiaries............. 26,001 21,898 -- (47,899) --
------- --------- -------- -------- ---------
Operating income..................... 26,001 31,495 22,580 (47,899) 32,177
Interest expense, net of amounts
capitalized........................ -- (2,810) (1,744) -- (4,554)
Financial advisory expenses.......... (2,197) -- -- -- (2,197)
Other income (expense), net.......... -- 931 1,435 -- 2,366
------- --------- -------- -------- ---------
Income before income taxes and
extraordinary item................. 23,804 29,616 22,271 (47,899) 27,792
Provision for income taxes........... -- (3,988) -- -- (3,988)
------- --------- -------- -------- ---------
Income before extraordinary item..... 23,804 25,628 22,271 (47,899) 23,804
Extraordinary item-gain from
retirement of debt, net of
applicable income taxes............ 1,789 -- -- -- 1,789
------- --------- -------- -------- ---------
Net income........................... $25,593 $ 25,628 $ 22,271 $(47,899) $ 25,593
======= ========= ======== ======== =========
</TABLE>
15
<PAGE> 16
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
----------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales................................ $ -- $ 74,828 $ 13,535 $ -- $ 88,363
------- -------- -------- -------- --------
Operating costs
Cost of sales...................... -- (62,239) (10,904) -- (73,143)
Sales and marketing................ -- (3,569) (629) -- (4,198)
General and administrative......... -- (5,872) 928 -- (4,944)
------- -------- -------- -------- --------
-- (71,680) (10,605) -- (82,285)
------- -------- -------- -------- --------
Income from unconsolidated joint
ventures........................... -- 1,127 6,287 -- 7,414
------- -------- -------- -------- --------
Income from subsidiaries............. 11,637 9,113 -- (20,750) --
------- -------- -------- -------- --------
Operating income..................... 11,637 13,388 9,217 (20,750) 13,492
Interest expense, net of amounts
capitalized........................ -- (540) (343) -- (883)
Financial advisory expenses.......... (917) -- -- -- (917)
Other income (expense), net.......... -- 452 373 -- 825
------- -------- -------- -------- --------
Income before income taxes........... 10,720 13,300 9,247 (20,750) 12,517
Provision for income taxes........... -- (1,797) -- -- (1,797)
------- -------- -------- -------- --------
Net income........................... $10,720 $ 11,503 $ 9,247 $(20,750) $ 10,720
======= ======== ======== ======== ========
</TABLE>
16
<PAGE> 17
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
----------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales................................. $ -- $ 162,790 $ 73,727 $ -- $ 236,517
------ --------- -------- -------- ---------
Operating costs
Cost of sales....................... -- (143,381) (62,191) -- (205,572)
Sales and marketing................. -- (11,310) (3,870) -- (15,180)
General and administrative.......... -- (10,975) 831 -- (10,144)
------ --------- -------- -------- ---------
-- (165,666) (65,230) -- (230,896)
------ --------- -------- -------- ---------
Income from unconsolidated joint
ventures............................ -- 4 342 -- 346
------ --------- -------- -------- ---------
Income from subsidiaries.............. 692 9,869 -- (10,561) --
------ --------- -------- -------- ---------
Operating income...................... 692 6,997 8,839 (10,561) 5,967
Interest expense, net of amounts
capitalized......................... -- (6,265) (808) -- (7,073)
Other income (expense), net........... -- (539) 2,177 -- 1,638
------ --------- -------- -------- ---------
Income before income taxes and
extraordinary item.................. 692 193 10,208 (10,561) 532
Provision for income taxes............ -- 160 -- -- 160
------ --------- -------- -------- ---------
Income before extraordinary item...... 692 353 10,208 (10,561) 692
------ --------- -------- -------- ---------
Extraordinary item -- gain from
retirement of debt, net of
applicable income taxes............. 522 -- -- -- 522
------ --------- -------- -------- ---------
Net income............................ $1,214 $ 353 $ 10,208 $(10,561) $ 1,214
====== ========= ======== ======== =========
</TABLE>
17
<PAGE> 18
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
----------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales................................. $ -- $ 57,349 $ 32,160 $ -- $ 89,509
------ -------- -------- ------- --------
Operating costs
Cost of sales....................... -- (49,810) (26,614) -- (76,424)
Cost of sales, lots land and
other............................ -- -- -- -- --
Impairment loss on real estate
assets........................... -- -- -- -- --
Sales and marketing................. -- (3,957) (1,428) -- (5,385)
General and administrative.......... -- (3,696) 508 -- (3,188)
------ -------- -------- ------- --------
-- (57,463) (27,534) -- (84,997)
------ -------- -------- ------- --------
Income (loss) from unconsolidated
joint ventures...................... -- (1) 502 -- 501
------ -------- -------- ------- --------
Income from subsidiaries.............. 3,299 5,187 -- (8,486) --
------ -------- -------- ------- --------
Operating income...................... 3,299 5,072 5,128 (8,486) 5,013
Interest expense, net of amounts
capitalized......................... -- (1,470) (710) -- (2,180)
Other income (expense), net........... -- (301) 970 -- 669
------ -------- -------- ------- --------
Income before income taxes............ 3,299 3,301 5,388 (8,486) 3,502
Provision for income taxes............ -- (203) -- -- (203)
------ -------- -------- ------- --------
Net income............................ $3,299 $ 3,098 $ 5,388 $(8,486) $ 3,299
====== ======== ======== ======= ========
</TABLE>
18
<PAGE> 19
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
----------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 25,593 $ 25,628 $ 22,271 $(47,899) $ 25,593
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ -- 809 70 -- 879
Equity in earnings of joint ventures..... -- (1,524) (10,754) -- (12,278)
Equity in earnings of subsidiaries....... (26,001) (21,898) -- 47,899 --
Extraordinary gain on repurchase of
Senior Notes........................... (2,089) -- -- -- (2,089)
Provision for income taxes............... -- 4,288 -- -- 4,288
Net changes in operating assets and
liabilities:
Other receivables...................... -- 3,060 (5,930) -- (2,870)
Intercompany receivables/payables...... 2,051 (2,051) -- -- --
Real estate inventories................ -- 9,262 7,678 -- 16,940
Deferred loan costs.................... 446 490 30 -- 966
Other assets........................... -- (2,785) 39 -- (2,746)
Accounts payable....................... -- 4,177 (849) -- 3,328
Accrued expenses....................... -- (3,628) (356) -- (3,984)
-------- -------- -------- -------- --------
Net cash provided by operating activities... -- 15,828 12,199 -- 28,027
-------- -------- -------- -------- --------
Cash flows from investing activities:
Investment in unconsolidated joint
ventures................................. -- (282) 6,390 -- 6,108
Issuance of/payments on notes receivable.... -- (5,604) -- -- (5,604)
Purchases of property and equipment......... -- (185) (41) -- (226)
Investment in subsidiaries.................. -- 17,728 -- (17,728) --
Advances to affiliates...................... 17,700 -- -- (17,700) --
-------- -------- -------- -------- --------
Net cash provided by investing activities... 17,700 11,657 6,349 (35,428) 278
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings on notes payable... -- 80,307 43,061 -- 123,368
Principal payments on notes payable......... -- (107,449) (43,256) -- (150,705)
Purchase of 12 1/2% Senior Notes............ (17,700) -- -- -- (17,700)
Distributions to/contributions from
shareholders............................. -- (221) (17,507) 17,728 --
Advances from affiliates.................... -- (17,700) -- 17,700 --
-------- -------- -------- -------- --------
Net cash used in financing activities....... (17,700) (45,063) (17,702) 35,428 (45,037)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. -- (17,578) 846 -- (16,732)
Cash and cash equivalents at beginning of
period...................................... -- 22,605 1,350 -- 23,955
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period.... $ -- $ 5,027 $ 2,196 $ -- $ 7,223
======== ======== ======== ======== ========
</TABLE>
19
<PAGE> 20
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
----------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
-------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,214 $ 353 $ 10,208 $(10,561) $ 1,214
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............... -- 765 46 -- 811
Equity in earnings of joint ventures........ -- (4) (342) -- (346)
Equity in earnings of subsidiaries.......... (692) (9,869) -- 10,561 --
Extraordinary gain on repurchase of Senior
Notes..................................... (885) -- -- -- (885)
Provision for income taxes.................. -- 203 -- -- 203
Net changes in operating assets and
liabilities:
Other receivables......................... -- (3,448) 872 -- (2,576)
Intercompany receivables/payables......... (239) 239 -- -- --
Real estate inventories................... -- 555 3,822 -- 4,377
Deferred loan costs....................... 602 (1,614) (57) -- (1,069)
Other assets.............................. -- (1,089) 6 -- (1,083)
Accounts payable.......................... -- 7,350 293 -- 7,643
Accrued expenses.......................... -- (7,226) 1,517 -- (5,709)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................. -- (13,785) 16,365 -- 2,580
-------- -------- -------- -------- --------
Cash flows from investing activities:
Investment in unconsolidated joint ventures... -- 2,475 (14,035) -- (11,560)
Proceeds from contribution of land to joint
venture..................................... -- 25,431 -- -- 25,431
Issuance of/payments on notes receivable...... -- 708 -- -- 708
Purchases of property and equipment........... -- (396) (105) -- (501)
Investment in subsidiaries.................... -- 1,517 -- (1,517) --
Advances to affiliates........................ 18,825 -- -- (18,825) --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................. 18,825 29,735 (14,140) (20,342) 14,078
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings on notes payable..... -- 64,000 28,577 -- 92,577
Principal payments on notes payable........... -- (59,372) (28,347) -- (87,719)
Purchase of 12 1/2% Senior Notes.............. (18,825) -- -- -- (18,825)
Distributions to/contributions from
shareholders................................ -- 219 (1,736) 1,517 --
Advances from affiliates...................... -- (18,825) -- 18,825 --
-------- -------- -------- -------- --------
Net cash used in financing activities......... (18,825) (13,978) (1,506) 20,342 (13,967)
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents....... -- 1,972 719 -- 2,691
Cash and cash equivalents at beginning of
period........................................ -- 4,377 192 -- 4,569
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period...... $ -- $ 6,349 $ 911 $ -- $ 7,260
======== ======== ======== ======== ========
</TABLE>
20
<PAGE> 21
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 -- GAIN FROM RETIREMENT OF DEBT
In April 1999, the Company purchased $20,000,000 principal amount of its
outstanding Senior Notes at a cost of $17,700,000. The net gain from the
purchase was $1,789,000, after giving effect to income taxes of $300,000 and
amortization of related deferred loan costs of $211,000. Such gain is reflected
as an extraordinary item in the Company's results of operations for the nine
months ended September 30, 1999.
In October and November 1999, the Company purchased $16,857,000 principal
amount of its outstanding Senior Notes at a cost of $14,871,000. The net gain
resulting from the purchase was $1,583,000, after giving effect to income taxes
of $265,000 and amortization of related deferred loan costs of $138,000. Such
gain will be reflected as an extraordinary item in the Company's results of
operations for the fourth quarter ending December 31, 1999.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
should be read in conjunction with the consolidated financial statements and
notes thereto included in Item 1, as well as the information presented in the
Annual Report on Form 10-K/A for the year ended December 31, 1998.
GENERAL OVERVIEW
The Company was involved in a series of transactions in early November
1999, including the asset purchase pursuant to the Purchase Agreement, the
tender offer, and the merger with and into its wholly-owned subsidiary Presley
Merger Sub, Inc. On November 11, 1999, the effective time of the merger, Presley
Merger Sub, Inc., as the surviving corporation changed its name to "The Presley
Companies." As a result of the merger and the 1 for 5 exchange ratio, the
52,195,678 outstanding shares of Series A Common and Series B Common Stock of
the Company were converted into 10,439,135 shares of Common Stock of the
surviving company.
On November 5, 1999, the Company acquired substantially all of the assets
of William Lyon Homes, Inc. ("William Lyon Homes") in accordance with a Purchase
Agreement executed on October 7, 1999 for a cash purchase price of approximately
$43,000,000 and the assumption of substantially all of the liabilities of
William Lyon Homes. The acquisition will be accounted for as a purchase and,
accordingly, the purchase price will be allocated based on the fair value of the
assets and liabilities acquired, with the excess of the purchase price over the
net assets acquired reflected as goodwill to be amortized on a straight-line
basis over an estimated useful life of seven years. William Lyon Homes, which is
owned by William Lyon and his son, William H. Lyon, is a California-based
homebuilder and real estate developer with projects currently under development
in Northern and Southern California. William Lyon is Chairman of the Board of
William Lyon Homes and also Chairman of the Board of Presley.
In connection with the purchase by the Company of substantially all of the
assets of William Lyon Homes, as described in the preceding paragraph and prior
to the effectiveness of the merger as described below, William Lyon and his son,
William H. Lyon, acquired (1) 5,741,454 shares of the Company's Series A Common
Stock for $0.655 per share in a tender offer for the purchase of up to
10,678,792 shares of the Company's Series A Common Stock which closed on
November 5, 1999 and (2) 14,372,150 shares of the Company's Series B Common
Stock for $0.655 per share under agreements with certain holders of the
Company's Series B Common Stock which closed on November 8, 1999. On November 5,
1999 William Lyon and the Company cancelled all of William Lyon's outstanding
options to purchase 750,000 shares of the Company's Series A Common Stock. The
completion of these transactions, together with the previous disposition on
August 12, 1999 of 3,000,000 shares by William Lyon and William H. Lyon,
resulted in William Lyon and a trust of which William H. Lyon is a beneficiary
owning approximately 49.9% of the Company's outstanding Common Stock.
A Special Committee of independent directors of the Company's Board of
Directors approved the Purchase Agreement and the transactions contemplated
thereby after receiving an opinion from Warburg Dillon Read LLC to the effect
that after giving effect to the asset acquisition, tender offer, the merger and
the Series B stock purchase agreements, the shares of common stock to be issued
in the merger to the Company's stockholders and/or, to the extent that any
holders of Series A Common Stock (other than the Lyons and the Series B
stockholders which have entered into Series B Stock Purchase Agreements) tenders
shares, the cash that may be received by each such tendering holder, subject to
the proration provisions of the tender offer, is fair to the holders of the
Series A Common Stock (other than the Lyons and those holders of Series B Common
Stock) from a financial point of view. The Special Committee's approval was also
made after receiving an opinion from Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. as to the fairness of the consideration to be paid by the Company
in connection with the purchase of assets from William Lyon
22
<PAGE> 23
Homes. The closing of the purchase of assets under the Purchase Agreement was
made after receiving an opinion from Houlihan Lokey as to the solvency of the
Company after consummation of the transactions contemplated in the Purchase
Agreement.
In connection with these events, the Company has incurred costs of
approximately $0.9 million and $2.2 million for the three and nine months ended
September 30, 1999, respectively, which are reflected in the Consolidated
Statement of Operations as financial advisory expenses.
In accordance with the bond indenture governing the Company's Senior Notes
which are due in 2001, if the Company's Consolidated Tangible Net Worth is less
than $60 million for two consecutive fiscal quarters, the Company is required to
offer to purchase $20 million in principal amount of the Senior Notes. Because
the Company's Consolidated Tangible Net Worth has been less than $60 million
beginning with the quarter ended June 30, 1997, the Company would, effective on
December 4, 1997, June 4, 1998, December 4, 1998 and June 4, 1999, have been
required to make offers to purchase $20 million of the Senior Notes at par plus
accrued interest, less the face amount of Senior Notes acquired by the Company
after September 30, 1997, March 31, 1998, September 30, 1998 and March 31, 1999,
respectively. The Company acquired Senior Notes with a face amount of $20
million after September 30, 1997 and prior to December 4, 1997, again after
March 31, 1998 and prior to June 4, 1998, again after September 30, 1998 and
prior to December 4, 1998 and again after March 31, 1999 and prior to June 4,
1999, and therefore was not required to make said offers.
Because the Company's Consolidated Tangible Net Worth was less than $60.0
million as of September 30, 1999, the Company would, effective on December 4,
1999, be required to make similar offers to purchase $20.0 million in principal
amount of the Senior Notes. In October and November 1999, the Company acquired
Senior Notes with a face amount of $16.9 million and therefore would be required
to make such offer to purchase additional Senior Notes with a face amount of
$3.1 million effective on December 4, 1999, unless the Company has acquired such
Senior Notes prior to that date.
Each six months thereafter, until such time as the Company's Consolidated
Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the
Company will be required to make similar offers to purchase $20 million of
Senior Notes. At September 30, 1999, the Company's Consolidated Tangible Net
Worth was $33.5 million. The Company's management has previously held
discussions, and may in the future hold discussions, with representatives of
certain of the holders of the Senior Notes with respect to modifying this
repurchase provision of the bond indenture agreement. To date, no agreement has
been reached to modify this repurchase provision. Any such change in the terms
or conditions of the bond indenture agreement requires the affirmative vote of
at least a majority in principal amount of the Senior Notes outstanding. No
assurances can be given that any such change will be made.
As more fully discussed under Working Capital Facility, on July 6, 1998 the
Company completed an agreement with the Agent of its existing lender group under
its Working Capital Facility to (1) extend this loan facility to May 20, 2001,
(2) increase the loan commitment to $100 million, and (3) decrease the fees and
costs compared to the prior revolving facility. In connection with the merger,
the Company amended its Working Capital Facility on October 27, 1999, pursuant
to which the lender consented to the merger and made other modifications to the
provisions of the Working Capital Facility in connection with the Purchase
Agreement.
Because of the Company's obligation to offer to purchase $20 million of the
Senior Notes each six months so long as the Company's Consolidated Tangible Net
Worth is less than $60 million, the Company is restricted in its ability to
acquire, hold and develop real estate projects. The Company changed its
operating strategy during 1997 to finance certain projects by forming joint
ventures with venture partners that would provide a substantial portion of the
capital necessary to develop these projects. The Company believes that the use
of joint venture partnerships will better enable it to reduce its capital
investment and risk in the highly capital intensive California markets, as well
as to repurchase the Company's Senior Notes as described above. The Company does
not contemplate any change in this operating strategy in connection with the
transactions with William Lyon Homes as described above. The Company would
generally receive, after priority returns and capital distributions to its
partners, approximately 50% of the profits and losses, and cash flows from these
joint ventures.
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<PAGE> 24
As of September 30, 1999, the Company and certain of its subsidiaries are
general partners or members in thirteen joint ventures involved in the
development and sale of residential projects. Such joint ventures are 50% or
less owned and, accordingly, the financial statements of such joint ventures are
not consolidated with the Company's financial statements. The Company's
investments in unconsolidated joint ventures are accounted for using the equity
method. See Note 4 of "Notes to Consolidated Financial Statements" for condensed
combined financial information for these joint ventures. Based upon current
estimates, all future development and construction costs will be funded by the
Company's venture partners or from the proceeds of non-recourse construction
financing obtained by the joint ventures.
Based on information currently available to it at December 31, 1998, the
Company had a net operating loss carryforward for Federal tax purposes of
approximately $126.2 million, of which $5.1 million expires in 2007, $17.5
million expires in 2008, $27.4 million expires in 2009, $35.8 million expires in
2010, $13.7 million expires in 2011, $16.4 million expires in 2012 and $10.3
million expires in 2018 (included in the $126.2 million is $33.1 million of net
operating loss carryforward that is limited due to a prior ownership change).
The Company's ability to utilize the tax benefits associated with its net
operating loss carryforward will depend upon the amount of its otherwise taxable
income and may be limited in the event of an "ownership change" under federal
tax laws and regulations. The Company presently cannot prohibit such ownership
changes from occurring and the restrictions on transfer imposed by the merger
will only reduce the possibility of an ownership change from occurring. In
addition, the amount of net operating loss carryforward has not been audited or
otherwise validated by the Internal Revenue Service and may be challenged.
The ability of the Company to meet its obligations on its indebtedness will
depend to a large degree on its future performance which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, competition, construction defect
or other litigation, weather, the occurrence of events such as landslides, soil
subsidence and earthquakes that are uninsurable, not economically insurable or
not subject to effective indemnification agreements, availability of labor and
homebuilding materials, changes in governmental laws and regulations, and the
availability and cost of land for future development. At this time, the
Company's degree of leverage may limit its ability to meet its obligations,
withstand adverse business or other conditions and capitalize on business
opportunities.
The Company has previously announced that it has received notification from
the New York Stock Exchange on July 28, 1999 that the Securities and Exchange
Commission has approved amendments to the NYSE's continued listing standards.
Under these new standards, the Company would be considered "below criteria" if
it has:
- Total market capitalization of less than $50 million and total
stockholders' equity of less than $50 million.
- Average market capitalization of less than $15 million over a consecutive
30-day trading
period; and
- Average closing price of less than $1 over a consecutive 30 trading-day
period.
The NYSE has notified the Company that it is below these new criteria. The
NYSE has further informed the Company that failure to raise its stock price
above $1.00 per share within six months will result in immediate suspension of
trading and application to the SEC for delisting. In addition, the Company would
have 45 days from the date of the NYSE's notification to present a business plan
to the NYSE that would demonstrate compliance with all aspects of the other two
criteria within 12 months of the date of the NYSE's notification. The Company
submitted a business plan to the NYSE within the 45 day period. On September 30,
1999, the NYSE notified the Company that it had accepted the Company's business
plan and would continue the listing of the Company at that time. The NYSE
notification further stated that the NYSE would continue to monitor the Company
quarterly during the twelve months from the July 28, 1999 notification. If the
Company fails to achieve the quarterly milestones or if at the completion of the
12 months it is not in compliance with the new continued listing criteria, the
Company will be suspended from trading on the NYSE and application will be made
to the SEC for delisting. If the Company achieves all quarterly milestones and
meets the NYSE continued listing criteria at the end of the 12 month period, the
Company
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<PAGE> 25
will be considered in "good standing" and no longer subject to business plan
review. However, the Company would be subject to the NYSE's on-going listing
review policies and procedures. There can be no assurance that the Company will
achieve the quarterly milestones included in the plan or that the Company will
comply with the new continued listing criteria at the completion of the 12 month
period.
Failure to achieve any of the above minimum requirements at the appropriate
time will result in the Company being suspended by the NYSE with application
made to the SEC for delisting.
RESULTS OF OPERATIONS
OVERVIEW AND RECENT RESULTS
Homes sold, closed and in backlog for the Company and its unconsolidated
joint ventures as of and for the periods presented are as follows:
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR
THE THREE MONTHS THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Number of homes sold
Company....................................... 337 507 1,275 1,587
Unconsolidated joint ventures............... 110 42 431 123
------ ------ ------ ------
447 549 1,706 1,710
====== ====== ====== ======
Number of homes closed
Company..................................... 441 474 1,280 1,206
Unconsolidated joint ventures............... 144 20 356 22
------ ------ ------ ------
585 494 1,636 1,228
====== ====== ====== ======
Backlog of homes sold but not closed at end of
period
Company..................................... 484 777 484 777
Unconsolidated joint ventures............... 203 108 203 108
------ ------ ------ ------
687 885 687 885
====== ====== ====== ======
Dollar amount of backlog of homes sold but not
closed at end of period (in millions):
Company..................................... $ 97.7 $168.2 $ 97.7 $168.2
Unconsolidated joint ventures............... 81.8 54.6 81.8 54.6
------ ------ ------ ------
$179.5 $222.8 $179.5 $222.8
====== ====== ====== ======
</TABLE>
Homes in backlog are generally closed within three to six months. The
dollar amount of backlog of homes sold but not closed as of September 30, 1999
was $179.5 million, as compared to $222.8 million as of September 30, 1998 and
$215.7 million as of June 30, 1999. The cancellation rate of buyers who
contracted to buy a home but did not close escrow at the Company's projects was
approximately 19% during 1998 and approximately 18% during the first nine months
of 1999.
The number of homes sold for the quarter ended September 30, 1999 decreased
19 percent to 447 units from 549 a year ago. For the third quarter of 1999, the
number of homes sold decreased 26 percent to 447 from 605 units in the second
quarter of 1999. The number of homes closed in the third quarter of 1999
increased 18 percent to 585 from 494 in the third quarter of 1998. The backlog
of homes sold as of September 30, 1999 was 687, down 22 percent from 885 units a
year earlier, and down 17 percent from 825 units at June 30, 1999. The Company's
inventory of completed and unsold homes as of September 30, 1999 has increased
to 29 units from 23 units as of June 30, 1999.
The decrease in net new home orders for the three months ended September
30, 1999 as compared to the three months ended September 30, 1998 is primarily
the result of a decrease in the number of sales locations to 38 at September 30,
1999 from 47 at September 30, 1998. The increase in number of homes closed for
the
25
<PAGE> 26
three and nine month periods of 1999 as compared with 1998 is primarily the
result of improved market conditions in substantially all of the Company's
markets.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires
impairment losses to be recorded on assets to be held and used by the Company
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets (excluding interest) are less than the
carrying amount of the assets. Statement No. 121 also requires that long-lived
assets that are held for disposal be reported at the lower of the assets'
carrying amount or fair value less cost of disposal. Under the new
pronouncement, when an impairment loss is required for assets to be held and
used by the Company, the related assets are adjusted to their estimated fair
value.
The net loss for the year ended December 31, 1997 included a non-cash
charge of $74,000,000 during the second quarter of 1997 to record impairment
losses on certain real estate assets held and used by the Company. The
impairment losses related to three of the Company's master-planned communities.
The impairment losses related to two communities, which are located in the
Inland Empire area of Southern California, arose primarily from declines in home
sales prices due to continued weak economic conditions and competitive pressures
in that area of Southern California. The impairment loss relating to the other
community, which is located in Contra Costa County in the East San Francisco Bay
area of Northern California, was primarily attributable to lower than expected
cash flow relating to one of the high end residential products in this community
and to a deterioration in the value of the non-residential portion of the
project. The significant deteriorations in the market conditions associated with
these communities resulted in the undiscounted cash flows (excluding interest)
estimated to be generated by these communities being less than their historical
book values. Accordingly, the master-planned communities were written-down to
their estimated fair value.
The following represents the sales and excess of revenue from sales over
related cost of sales (i.e., gross profit) of the three master-planned
communities since the recordation of impairment losses on June 30, 1997:
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE NINE MONTHS
SIX MONTHS ENDED YEAR ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------ ------------------
<S> <C> <C> <C>
Sales............................ $17,662,000 $54,828,000 $45,286,000
Gross profit..................... $ 1,202,000 $ 5,850,000 $ 6,745,000
Gross profit %................... 6.8% 10.7% 14.9%
</TABLE>
The gross profits recognized on the three master-planned communities
subsequent to the recordation of the impairment losses has increased due to
better than projected sales price increases beginning in 1998.
In general, housing demand is adversely affected by increases in interest
rates and housing prices. Interest rates, the length of time that assets remain
in inventory, and the proportion of inventory that is financed affect the
Company's interest cost. If the Company is unable to raise sales prices
sufficiently to compensate for higher costs or if mortgage interest rates
increase significantly, affecting prospective buyers' ability to adequately
finance home purchases, the Company's sales, gross margins and net results may
be adversely impacted. To a limited extent, the Company hedges against increases
in interest costs by acquiring interest rate protection that locks in or caps
interest rates for limited periods of time for mortgage financing for
prospective homebuyers.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Total sales (which represent recorded revenues from closings) for the three
months ended September 30, 1999 were $88.4 million, a decrease of $1.1 million
(1.2%) from sales of $89.5 million for the three months ended September 30,
1998. Revenue from sales of homes decreased $1.7 million to $87.6 million in the
1999 period from $89.3 million in the 1998 period. This decrease was due
primarily to a decrease in the number of
26
<PAGE> 27
wholly-owned units closed to 441 in the 1999 period from 474 in the 1998 period
offset by an increase in the average sales prices of homes to $199,000 in the
1999 period from $188,000 in the 1998 period.
Total operating income increased from $5.0 million in the 1998 period to
$13.5 million in the 1999 period. The excess of revenue from sales of homes over
the related cost of sales increased by $1.5 million to $15.6 million in the 1999
period from $14.1 million in the 1998 period. This increase was primarily due to
an increase in the average sales price to $199,000 in the 1999 period from
$188,000 in the 1998 period, offset by a decrease in the number of wholly-owned
units closed to 441 units in the 1999 period from 474 units in the 1998 period.
Sales and marketing expenses decreased by $1.2 million to $4.2 million in the
1999 period from $5.4 million in the 1998 period primarily as a result of
reductions in advertising and sales office/model operation expenses. General and
administrative expenses increased by $1.7 million to $4.9 million in the 1999
period from $3.2 million in the 1998 period, primarily as a result of additional
accruals for increased employee bonuses based upon the improved operating
results of the Company, offset by increased reimbursement of overhead expenses
from joint ventures. Equity in income of unconsolidated joint ventures amounting
to $7.4 million was recognized in the 1999 period, compared to $0.5 million in
the comparable period for 1998. The Company did not begin investing in
unconsolidated joint ventures until the fourth quarter of 1997 and limited
operating results were realized in the third quarter of 1998.
Total interest incurred decreased $1.8 million (23%) from $7.7 million in
the 1998 period to $5.9 million in the 1999 period primarily as a result of a
decrease in the average amount of outstanding debt. Net interest expense
decreased to $0.9 million in the 1999 period from $2.2 million in the 1998
period as a result of the decrease in the average amount of outstanding debt.
However, the Company's indebtedness is expected to increase in the three months
ending December 31, 1999 primarily as a result of the incurrence of additional
indebtedness in connection with the purchase of assets pursuant to the Purchase
Agreement.
As a result of the Company's engagement of a financial advisor in May 1998
as described previously, the Company has incurred costs of approximately $0.9
million for the three months ended September 30, 1999.
Other income (expense), net increased to $0.8 million in the 1999 period
from $0.7 million in the 1998 period primarily as a result of increased income
from design center operations.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Total sales (which represent recorded revenues from closings) for the nine
months ended September 30, 1999 were $266.4 million, an increase of $29.9
million (13%) from sales of $236.5 million for the nine months ended September
30, 1998. Revenue from sales of homes increased $36.1 million to $261.7 million
in the 1999 period from $225.6 million in the 1998 period. This increase was due
primarily to an increase in the number of units closed to 1,280 in the 1999
period from 1,206 in the 1998 period and an increase in the average sales prices
of homes to $204,000 in the 1999 period from $187,000 in the 1998 period.
Total operating income increased from $6.0 million in the 1998 period to
$32.2 million in the 1999 period. The excess of revenue from sales of homes over
the related cost of sales increased by $14.1 million, to $45.5 million in the
1999 period from $31.4 million in the 1998 period. This increase was primarily
due to (1) an increase in the number of units closed to 1,280 units in the 1999
period from 1,206 units in the 1998 period and (2) an increase in the average
sales price to $204,000 in the 1999 period from $187,000 in the 1998 period.
Sales and marketing expenses decreased by $2.5 million to $12.7 million in the
1999 period from $15.2 million in the 1998 period primarily as a result of
reductions in advertising and sales office/model operation expenses, offset by
increased direct sales expenses related to the increased sales volume. General
and administrative expenses increased by $2.7 million to $12.8 million in the
1999 period from $10.1 million in the 1998 period, primarily as a result of
additional accruals for increased employee bonuses based upon the improved
operating results of the Company, offset by increased reimbursement of overhead
expenses from joint ventures. Equity in income of unconsolidated joint ventures
amounting to $12.3 million was recognized in the 1999 period, compared to $0.3
million in the comparable period for 1998. The Company did not begin investing
in unconsolidated joint ventures until the fourth quarter of 1997 and limited
operating results were realized in the first nine months of 1998.
27
<PAGE> 28
Total interest incurred decreased $6.7 million (28%) from $24.3 million in
the 1998 period to $17.6 million in the 1999 period as a result of a decrease in
the average amount of outstanding debt. Net interest expense decreased to $4.6
million in the 1999 period from $7.1 million in the 1998 period as a result of
the decrease in the average amount of outstanding debt.
As a result of the Company's engagement of a financial advisor in May 1998
as described previously, the Company has incurred costs of approximately $2.2
million for the nine months ended September 30, 1999.
Other income (expense), net increased to $2.4 million in the 1999 period
from $1.6 million in the 1998 period primarily as a result of increased income
from mortgage operations and design center operations.
FINANCIAL CONDITION AND LIQUIDITY
The Company provides for its ongoing cash requirements principally from
internally generated funds from the sales of real estate and from outside
borrowings and, beginning in 1997, by joint venture financing from newly formed
joint ventures with venture partners that provide a substantial portion of the
capital required for certain projects. The Company currently maintains the
following major credit facilities: 12 1/2% Senior Notes (the "Senior Notes") and
a secured revolving lending facility (the "Working Capital Facility"). A
revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned
joint venture partnership (the "CMR Facility"), was repaid in full in September
1999.
The acquisition by Presley of substantially all of the assets of William
Lyon Homes for a cash purchase price of approximately $43 million and the
assumption of substantially all of the liabilities of William Lyon Homes as
described above was financed through additional borrowings under its Working
Capital Facility and the assumption of existing indebtedness on certain real
estate projects which were acquired. The Company's strategy of financing other
projects through the use of joint ventures will not change.
The ability of the Company to meet its obligations on the Senior Notes
(including the repurchase obligation described above) and its other indebtedness
will depend to a large degree on its future performance, which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions. The Company's degree of leverage may limit its ability to meet its
obligations, withstand adverse business conditions and capitalize on business
opportunities.
The Company will in all likelihood be required to refinance the Senior
Notes and the Working Capital Facility when they mature, and no assurances can
be given that the Company will be successful in that regard.
SENIOR NOTES
The Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 for the sale of $200.0 million of 12 1/2%
Senior Notes which became effective on June 23, 1994. The offering closed on
June 29, 1994 and was fully subscribed and issued. The following discussion of
the Senior Notes should be read in conjunction with the Registration Statement
as filed with the Securities and Exchange Commission.
The 12 1/2% Senior Notes due 2001 (the "Senior Notes") are unconditionally
guaranteed on a senior basis by Presley Homes (formerly The Presley Companies),
a California corporation and a wholly-owned subsidiary of The Presley Companies
("California Presley"). However, California Presley has granted liens on
substantially all of its assets as security for its obligations under the
Working Capital Facility and other loans. Because the California Presley
guarantee is not secured, holders of the Senior Notes are effectively junior to
borrowings under the Working Capital Facility with respect to such assets.
Interest on the Senior Notes is payable on January 1 and July 1 of each year,
commencing January 1, 1995.
As described above, The Presley Companies, a Delaware corporation, merged
with and into another wholly-owned subsidiary effective November 11, 1999. In
connection with the merger, the surviving corporation changed its name to "The
Presley Companies" and assumed the obligations under the Senior Notes ("Delaware
Presley").
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<PAGE> 29
Except as set forth in the Indenture Agreement (the "Indenture"), the
Senior Notes were not redeemable prior to July 1, 1998. Thereafter, the Senior
Notes are redeemable at the option of Delaware Presley, in whole or in part, at
the redemption prices set forth in the Indenture.
The Senior Notes are senior obligations of Delaware Presley and rank pari
passu in right of payment to all existing and future unsecured indebtedness of
Delaware Presley, and senior in right of payment to all future indebtedness of
the Company which by its terms is subordinated to the Senior Notes.
As described above in General Overview, Delaware Presley is required to
offer to repurchase certain Senior Notes at a price equal to 100% of the
principal amount plus any accrued and unpaid interest to the date of repurchase
if Delaware Presley's Consolidated Tangible Net Worth is less than $60.0 million
for any two consecutive fiscal quarters, as well as from the proceeds of certain
asset sales.
Upon certain changes of control as described in the Indenture, Delaware
Presley must offer to repurchase Senior Notes at a price equal to 101% of the
principal amount plus accrued and unpaid interest, if any, to the date of
repurchase. The transactions with William Lyon Homes described above were
structured so as to not constitute a change of control as described in the
Indenture.
The Indenture governing the Senior Notes restricts, among other things: (i)
the payment of dividends on and redemptions of capital stock by Delaware Presley
and its subsidiaries, (ii) the incurrence of indebtedness by Presley or its
guarantor subsidiaries or the issuance of preferred stock by Delaware Presley's
guarantor subsidiaries, (iii) the creation of certain liens, (iv) Delaware
Presley's or California Presley's ability to consolidate or merge with or into,
or to transfer all or substantially all of its assets to, another person, and
(v) transactions with affiliates. These restrictions are subject to a number of
important qualifications and exceptions.
WORKING CAPITAL FACILITY
On July 6, 1998 California Presley completed an agreement with the Agent of
its existing lender group under its Working Capital Facility to (1) extend this
loan facility to May 20, 2001, (2) increase the loan commitment to $100.0
million, and (3) decrease the fees and costs compared to the prior revolving
facility. In connection with the merger, the Company amended its Working Capital
Facility on October 27, 1999, pursuant to which the lender consented to the
merger and made other modifications to the provisions of the Working Capital
Facility in connection with the Purchase Agreement.
The collateral for the loans provided by the Working Capital Facility
continues to include substantially all real estate and other assets of the
Company (excluding assets of partnerships and the portion of the partnership
interests in Carmel Mountain Ranch partnership which are currently pledged to
other lenders). The borrowing base is calculated based on specified percentages
of book values of real estate assets. The borrowing base at September 30, 1999
was approximately $109.0 million; however, the maximum loan under the Working
Capital Facility, as stated above, is limited to $100.0 million. The principal
outstanding under the Working Capital Facility at September 30, 1999 was $20.0
million. The principal outstanding under the Working Capital Facility as of
November 5, 1999 after completion of the acquisition of the William Lyon Homes
as described above was $75 million. In addition, $0.6 million of available loan
capacity is restricted for letters of credit outstanding under the Working
Capital Facility.
Pursuant to the terms of the Working Capital Facility, outstanding advances
bear interest at the "reference rate" of Chase Manhattan Bank plus 2%. An
alternate option provides for interest based on a specified overseas base rate
plus 4.44%, but not less than 8%. In addition, the Company pays a monthly fee of
0.25% on the average daily unused portion of the loan facility.
Upon completion of the new Working Capital Facility agreement on July 6,
1998, the Company paid a one-time, non-refundable Facility Fee of $2.0 million,
as well as a yearly non-refundable Administrative Fee of $100,000.
The Working Capital Facility requires certain minimum cash flow and pre-tax
and pre-interest tests. The Working Capital Facility also includes negative
covenants which, among other things, place limitations on the
29
<PAGE> 30
payment of cash dividends, merger transactions, transactions with affiliates,
the incurrence of additional debt and the acquisition of new land as described
in the following paragraph.
Under the terms of the Working Capital Facility, the Company may acquire
new improved land for development of housing units of no more than 300 lots in
any one location without approval from the lenders if certain conditions are
satisfied. The Company may, however, acquire any new raw land or improved land
provided the Company has obtained the prior written approval of lenders holding
two-thirds of the obligations under the Working Capital Facility.
The Working Capital Facility requires that mandatory prepayments be made to
reduce the outstanding balance of loans to the extent of all funds in excess of
$20.0 million in the principal operating accounts of the Company.
CMR FACILITY
Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel
Mountain Ranch master-planned community, is a California general partnership and
is 100% owned by the Company. Effective in March 1995, the development and
construction of CMR, a consolidated joint venture, was financed through a
revolving line of credit. This facility was repaid in full in September 1999.
SELLER FINANCING
Another source of financing available to the Company is seller-provided
financing for land acquired by the Company. At September 30, 1999, the Company
had various notes payable outstanding related to land acquisitions for which
seller financing was provided in the amount of $9.8 million within the Company's
Arizona, New Mexico and Nevada regions.
OTHER NOTES PAYABLE
Other notes payable of $5.5 million are comprised of collateralized
mortgage obligations secured by first mortgage notes receivable.
JOINT VENTURE FINANCING
As of September 30, 1999, the Company and certain of its subsidiaries are
general partners or members in thirteen joint ventures involved in the
development and sale of residential projects. Such joint ventures are 50% or
less owned and, accordingly, the financial statements of such joint ventures are
not consolidated with the Company's financial statements. The Company's
investments in unconsolidated joint ventures are accounted for using the equity
method. See Note 4 of "Notes to Consolidated Financial Statements" for condensed
combined financial information for these joint ventures. Based upon current
estimates, all future development and construction costs will be funded by the
Company's venture partners or from the proceeds of non-recourse construction
financing obtained by the joint ventures.
As of September 30, 1999, the Company's investment in such joint ventures
was approximately $35.9 million and the Company's venture partners' investment
in such joint ventures was approximately $84.2 million. In addition, certain
joint ventures have obtained financing from land sellers or construction lenders
which amounted to approximately $26.7 million at September 30, 1999.
ASSESSMENT DISTRICT BONDS
In some locations in which the Company develops its projects, assessment
district bonds are issued by municipalities to finance major infrastructure
improvements and fees. Such financing has been an important part of financing
master-planned communities due to the long-term nature of the financing,
favorable interest rates when compared to the Company's other sources of funds
and the fact that the bonds are sold, administered and collected by the relevant
government entity. As a landowner benefited by the improvements, the Company is
responsible for the assessments on its land. When Presley's homes or other
properties are sold, the assessments are either prepaid or the buyers assume the
responsibility for the related assessments.
30
<PAGE> 31
CASH FLOWS -- COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE
MONTHS ENDED SEPTEMBER 30, 1998
Net cash provided by operating activities increased from $2.6 million in
the 1998 period to $28.0 million in the 1999 period primarily as a result of
increased income and reductions in real estate inventories.
Net cash provided by investing activities decreased from $14.1 million in
the 1998 period to $0.3 million in the 1999 period primarily as a result of
decreased proceeds received from investments in and advances to unconsolidated
joint ventures and net increases in notes receivable.
Net cash used in financing activities increased from $14.0 million in the
1998 period to $45.0 million in the 1999 period primarily as a result of
increased principal payments on notes payable.
IMPACT OF YEAR 2000
The term "year 2000 issue" is a general term used to describe the
complications that may be caused by existing computer hardware and software that
were designed without consideration for the upcoming change in the century. If
not corrected, such programs may cause computer systems and equipment to fail or
to miscalculate data. Due to the year 2000 issue, the Company has undertaken
initiatives to modify or replace portions of its existing computer operating
systems so that they will function properly with respect to dates in the year
2000 and thereafter.
The Company's year 2000 compliance effort has been focused on its core
business computer applications (i.e., those systems that the Company is
dependent upon for the conduct of day-to-day business operations). The Company
determined that the highest priority project based on greatest business risk and
greatest technical effort should be the conversion and upgrade of the Company's
JD Edwards accounting systems (the "JD Edwards Programs"). The Company acquired
and installed a year 2000 compliant version of the software in October 1998 and
completed extensive testing of such software and developed programs to convert
its current applications to the new version of the software. The Company
completed this conversion effective on June 30, 1999. The conversion had minimal
effects on the Company's systems and the cost incurred in that connection was
not material. As such, the Company's efforts are 100% complete with respect to
this primary system.
The Company has undertaken an assessment of other internal systems used by
the Company in various of its operations. Internal systems used by the Company
in its mortgage company operations, payroll processing and banking interfaces
were all converted during 1998 to systems which are year 2000 compliant and as
such, the Company's efforts are 100% complete with respect to these systems. The
implementation had minimal effect on its systems and the costs incurred in that
connection were not material. Internal systems used by the Company in its design
center operations were converted to a system which is year 2000 compliant
effective on August 31, 1999 and the cost incurred in that connection was not
material.
As part of these projects, the Company's relationships with suppliers,
subcontractors, financial institutions and other third parties were examined to
determine the status of their year 2000 issue efforts as related to the Company.
As a general matter, the Company is vulnerable to significant suppliers'
inability to remedy their own year 2000 issues. Furthermore, the Company relies
on financial institutions, government agencies (particularly for zoning,
building permits and related matters), utility companies, telecommunication
service companies and other service providers outside of its control. There is
no assurance that such third parties will not suffer a year 2000 business
disruption and it is conceivable that such failures could, in turn, have a
material adverse effect on the Company's liquidity, financial condition and
results of operations.
The Company acknowledges that its failure to resolve a material year 2000
issue could result in the interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Company's results of operations. Although the Company considers its
exposure to the year 2000 issue from third party suppliers as generally low, due
to the uncertainty of the year 2000 readiness of third party suppliers, the
Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. In addition, the Company could be
materially impacted by the widespread economic or financial market
31
<PAGE> 32
disruption by year 2000 computer system failures at government agencies on which
the Company is dependent for zoning, building permits and related matters.
Possible risks of year 2000 failure could include, among other things, delays or
errors with respect to payments, third party delivery of materials and
government approvals. The Company's year 2000 project was intended to
significantly reduce the Company's level of uncertainty and exposure to the year
2000 issue. To date, the Company has not identified any operating systems,
either of its own or of a material third party supplier, that present a material
risk of not being year 2000 ready or for which a suitable alternative cannot be
implemented. Management will consider the necessity of implementing a
contingency plan to mitigate any adverse effects associated with the year 2000
issue.
The Company has incurred approximately $300,000 in connection with its year
2000 initiatives. The Company currently believes that all of its operating
system are year 2000 ready and that the year 2000 issue will not have a material
adverse effect upon the Company's liquidity, financial position or results of
operations.
INFLATION
Although inflation rates have been low in recent years, the Company's
revenues and profitability may be affected by increased inflation rates and
other general economic conditions. In periods of high inflation, demand for the
Company's homes may be reduced by increases in mortgage interest rates. Further,
the Company's profits will be affected by its ability to recover through higher
sales prices increases in the costs of land, construction, labor and
administrative expenses. The Company's ability to raise prices at such times
will depend upon demand and other competitive factors.
FORWARD LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this Quarterly
Report on Form 10-Q, as well as some statements by the Company in periodic press
releases and some oral statements by Company officials to securities analysts
and stockholders during presentations about the Company are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). Statements which are predictive in nature, which depend
upon or refer to future events or conditions, or which include words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates", "hopes",
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions, which may be provided by management are also
foward-looking statements as defined in the Act. Forward-looking statements are
based upon expectations and projections about future events and are subject to
assumptions, risks and uncertainties about, among other things, the Company,
economic and market factors and the homebuilding industry. Forward-looking
statements are not guarantees of future performance or results. The Company has
no specific intention to update these statements and does not undertake any
obligation to update any forward-looking statements in this Quarterly Report on
Form 10-Q or elsewhere.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements due to a number of factors. The
principal factors that could cause the Company's actual performance and future
events and actions to differ materially from such forward-looking statements
include, but are not limited to, changes in general economic conditions either
nationally or in regions in which the Company operates, whether an ownership
change occurs which results in the limitation of the Company's ability to
utilize the tax benefits associated with its net operating loss carryforward,
IRS challenges to its net operating loss carryforward, changes in home mortgage
interest rates, changes in prices of homebuilding materials, labor shortages,
adverse weather conditions, the occurrence of events such as landslides, soil
subsidence and earthquakes that are uninsurable, not economically insurable or
not subject to effective indemnification agreements, changes in governmental
laws and regulations or the Company's ability to obtain entitlements to develop
property, competitive pressures, whether the Company is able to refinance the
outstanding balances of Senior Notes and Working Capital Facility at their
respective maturities, the availability and cost of land for future growth, and
construction defect or other building related litigation.
32
<PAGE> 33
THE PRESLEY COMPANIES
PART II. OTHER INFORMATION
ITEMS 1, 3 AND 5.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On November 11, 1999, at the effective time of the merger, all of the
outstanding shares of the Series A Common Stock and the Series B Common Stock,
became converted into 10,439,135 shares of Common Stock of the surviving company
based on a 1 for 5 exchange ratio. The shares of Common Stock of the surviving
company were registered under the Securities Act of 1933, on Form S-4, as
amended on October 7, 1999.
Prior to the effective time of the merger, the common stock of the Company
was divided into two series, designated "Series A" and "Series B." Upon
consummation of the merger, each share of Series A Common Stock and each share
of Series B Common Stock was converted into 0.2 share of Common Stock which is
not divided into series. Consequently, the surviving corporation's certificate
of incorporation does not include those provisions in Article Four of Old
Presley's certificate of incorporation relating to the separate powers, rights
and privileges of the Series A Common Stock and Series B Common Stock, including
the following:
- Paragraph A relating to a stock split, reverse stock split, or similar
event or dividend or distribution;
- Paragraph B relating to the number, classification, filing of vacancies
and election of each class of directors and quorum for meetings of
directors;
- Paragraph C relating to conversion of the Series B Common Stock; and
- Paragraph D relating to amendment of Article Four.
The new shares of Common Stock issued in the merger are subject to certain
transfer restrictions. These restrictions are similar to those adopted by
several other public companies and are intended to help preserve the Company's
substantial net operating loss carryforwards for use in offsetting future
taxable income. In general, these restrictions will prohibit, without the prior
approval of the board of directors, the direct or indirect disposition or
acquisition of any stock of the surviving corporation by or to any holder who
owns or would so own upon the acquisition (either directly or through the tax
attribution rules) 5% or more of the surviving corporation stock. The transfer
restrictions are contained in Article VIII of the Certificate of Incorporation
and all stock certificates issued by the Company in the merger will contain a
legend that summarizes the transfer restrictions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Holders of Common Stock was held on November 5, 1999.
At this meeting the Holders of Common Stock approved a proposal to adopt a
certificate of ownership and merger pursuant to which The Presley Companies
would merge with and into Presley Merger Sub, Inc., a newly-formed Delaware
corporation and wholly owned subsidiary of The Presley Companies, with Presley
Merger Sub, Inc. being the surviving corporation. In the merger, each
outstanding share of common stock of The Presley Companies would become
exchangeable for 0.2 share of common stock of Presley Merger Sub, Inc. Upon
completion of the merger, the surviving corporation would be named "The Presley
Companies." With respect to this proposal, 36,541,820 votes were cast for,
847,693 votes were cast against, and 44,975 votes abstained (including broker
non-votes).
33
<PAGE> 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<S> <C>
2.1 Certificate of Ownership and Merger(1)
10.35 Amendment No. 1 to Fifth Amended and Restated Loan Agreement
and Consent and Waiver Under Amended and Restated Guaranty
among Presley Homes (f/k/a The Presley Companies), a
California corporation (the "Borrower"), the lenders listed
on Schedule 1.1(g) thereto (the "Lenders") and Foothill
Capital Corporation, in its capacity as agent (the "Agent").
27 Financial Data Schedule
</TABLE>
- -------------------------
(1) Previously filed as Appendix A to the Company's Proxy Statement/Prospectus
included in its Registration Statement on Form S-4 (SEC Registration Number
333-88569) and incorporated herein by this reference.
(b) REPORTS ON FORM 8-K.
JULY 20, 1999. A Report on Form 8-K was filed by the Company in reference
to the announcement by the Company of an extension of a letter of intent with
William Lyon Homes, Inc. and the approval, subject to stockholder approval, by
the Company's Board of Directors of a merger of the Company with a wholly-owned
subsidiary.
OCTOBER 22, 1999. A Report on Form 8-K was filed by the Company in
reference to the announcement by the Company that it had entered into a Purchase
Agreement with William Lyon Homes, Inc., William Lyon, and William H. Lyon on
October 7, 1999.
34
<PAGE> 35
THE PRESLEY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999 By: /s/ DAVID M. SIEGEL
------------------------------------
DAVID M. SIEGEL
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Date: November 15, 1999 By: /s/ W. DOUGLASS HARRIS
------------------------------------
W. DOUGLASS HARRIS
Vice President, Corporate Controller
(Principal Accounting Officer)
35
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Certificate of Ownership and Merger(1)
10.35 Amendment No. 1 to Fifth Amended and Restated Loan Agreement
and Consent and Waiver Under Amended and Restated Guaranty
among Presley Homes (f/k/a The Presley Companies), a
California corporation (the "Borrower"), the lenders listed
on Schedule 1.1(g) thereto (the "Lenders") and Foothill
Capital Corporation, in its capacity as agent (the "Agent").
27 Financial Data Schedule
</TABLE>
- -------------------------
(1) Previously filed as Appendix A to the Company's Proxy Statement/Prospectus
included in its Registration Statement on Form S-4 (SEC Registration Number
333-88569) and incorporated herein by this reference.
<PAGE> 1
EXHIBIT 10.35
AMENDMENT NO. 1 TO FIFTH AMENDED AND RESTATED LOAN AGREEMENT AND
CONSENT AND WAIVER UNDER AMENDED AND RESTATED GUARANTY
AMENDMENT AGREEMENT, dated as of October 27, 1999, to the Fifth
Amended and Restated Loan Agreement, dated as of July 6, 1998 (as same has been
or may be further amended, supplemented, modified or restated in accordance with
its terms, the "Loan Agreement") among PRESLEY HOMES (f/k/a The Presley
Companies), a California corporation (the "Borrower"), the lenders listed on
Schedule 1.1(g) thereto (the "Lenders") and FOOTHILL CAPITAL CORPORATION, in its
capacity as agent (the "Agent"). Capitalized terms used herein and not otherwise
defined shall have the meanings attributed to them in the Loan Agreement.
WHEREAS, the Borrower has informed the Agent that Presley
Delaware, the Borrower, William Lyon Homes, Inc., a California corporation
("Homes"), William Lyon, an individual, and William H. Lyon, an individual, have
entered into a Purchase Agreement and Escrow Instructions (the "Acquisition
Agreement"), dated as of October 7, 1999 pursuant to which, among other things,
the Borrower has agreed to purchase substantially all of the assets of Homes for
a purchase price of $48,000,000 and the assumption of substantially all of the
liabilities of Homes (the "Consideration" and collectively, the "Acquisition");
the form of the Acquisition Agreement is included as an exhibit to the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission by Presley Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of Presley Delaware ("Merger Sub"); and
WHEREAS, the Borrower has informed the Agent that Presley
Delaware intends to merge with and into Merger Sub, with Merger Sub as the
surviving corporation; and Merger Sub will, at the effective time of such
merger, change its name to "The Presley Companies" (collectively, the "Merger");
and
WHEREAS, the Borrower has requested that the Lenders agree to
amend certain provisions of the Credit Agreement in connection with the
Acquisition and waive certain provisions of the Amended and Restated Guaranty
and the Lenders have so agreed, upon the terms and conditions set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and subject to the fulfillment of
the conditions set forth below, the parties hereto agree as follows:
<PAGE> 2
SECTION I. AMENDMENTS TO LOAN AGREEMENT
1. Section 8.8 of the Loan Agreement is hereby amended by (i)
deleting the word "and" at the end of paragraph (p) thereof, (ii) adding "and"
at the end of paragraph (q) and (iii) adding a new paragraph (r) which reads as
follows:
"(r) Recourse indebtedness incurred or guaranteed by the Borrower
in connection with the acquisition by a wholly-owned Subsidiary of the
Borrower of certain real estate projects of William Lyon Homes, Inc.,
not to exceed the respective amounts set forth below for the fiscal
quarter indicated:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C> <C>
Fiscal quarter ending on or
about December 31, 1999 $25,000,000
Fiscal quarter ending on or
about March 31, 2000 $20,000,000
Fiscal quarter ending on or
about June 30, 2000 $20,000,000
Fiscal quarter ending on or
about September 30, 2000 $10,000,000
Fiscal quarter ending on or
about December 31, 2000 and each
fiscal quarter thereafter $ 0"
</TABLE>
SECTION II. CONSENT AND WAIVER UNDER AMENDED AND
RESTATED GUARANTY
1. The Lenders hereby consent to the Merger pursuant to the
Certificate of Ownership and Merger dated July 15, 1999 (the "Merger
Certificate").
2. The Lenders hereby waive the applicable provisions of the
Amended and Restated Guaranty solely to permit the Merger pursuant to and in
accordance with the Merger Certificate.
SECTION III. CONDITIONS PRECEDENT
This Amendment Agreement shall become effective on the date (the
"Effective Date") on which counterparts hereof are executed and delivered by the
Borrower, Presley Delaware, Merger Sub, the Agent and the Lenders and the
following conditions are fulfilled:
2
<PAGE> 3
1. No unwaived event has occurred and is continuing which
constitutes a Default or an Event of Default.
2. All representations and warranties made by the Borrower,
Presley Delaware and Merger Sub in this Amendment Agreement shall be true and
correct.
3. All required corporate actions in connection with the
execution and delivery of this Amendment Agreement shall have been taken, and
each shall be satisfactory in form and substance to the Agent, and the Agent
shall have received all information and copies of all documents, including,
without limitation, records of requisite corporate action that the Agent may
reasonably request, to be certified by the appropriate corporate person or
government authorities.
4. The Agent shall have received (i) a copy of the articles of
incorporation of Merger Sub, certified as of a recent date by the Secretary of
State or other appropriate official of the state of its organization, (ii) a
certificate as to its good standing from such Secretary of State or other
official, (iii) a certificate of good standing from the appropriate official of
each state in which it is qualified to do business, in each case dated as of a
recent date, (iv) a certificate of the Secretary of Merger Sub, dated the date
hereof, and certifying as to the incumbency and specimen signature of each of
Merger Sub's officers executing this Amendment Agreement or any other Loan
Document delivered in connection herewith, (v) a certificate of another of
Merger Sub's officers as to incumbency and signature of its Secretary, and (vi)
such other documents as the Agent or any Lender may reasonably request.
5. The Agent shall have received evidence in the form of an
officer's certificate signed by a Responsible Official that the Acquisition has
been consummated.
6. The Agent shall have received a duly executed copy of the
Acquisition Agreement, including all amendments and schedules thereto, as in
effect on the date of consummation of the Acquisition, each certified by a
Responsible Official of the Borrower.
7. The Agent shall have received such other documents as the
Lenders or the Agent or the Agent's counsel shall reasonably deem necessary.
SECTION IV. CONDITIONS SUBSEQUENT
The Borrower hereby agrees and covenants to satisfy the following
additional condition within 10 days of the Effective Date:
1. The Agent shall have received a copy of the Merger
Certificate, certified by the Secretary of State of the State of Delaware.
3
<PAGE> 4
SECTION V. MISCELLANEOUS
1. By its signature below, the Borrower reaffirms and restates
the representations and warranties set forth in Article VI of the Loan
Agreement, and all such representations and warranties are true and correct on
the Effective Date with the same force and effect as if made on such date
(except to the extent that they relate expressly to an earlier date). Presley
Delaware and Merger Sub jointly and severally represent and warrant that, both
before and after giving effect to the consummation of the Merger, each of the
representations and warranties set forth in Section 7 of the Amended and
Restated Guaranty, are and shall be true and correct (except to the extent that
they relate expressly to the Closing Date). In addition, the Borrower, Presley
Delaware and Merger Sub each represents and warrants (which representations and
warranties shall survive the execution and delivery hereof) to the Agent and the
Lenders that:
(a) it has the power and authority to execute, deliver and carry
out the terms and provisions of this Amendment Agreement and the transactions
contemplated hereby, and has taken or caused to be taken all necessary actions
to authorize the execution, delivery and performance of this Amendment Agreement
and the transactions contemplated hereby;
(b) no consent of any other Person (including, without
limitation, shareholders or creditors of the Borrower, Presley Delaware or
Merger Sub) and no action of, or filing with any governmental or public body or
authority is required to authorize, or is otherwise required in connection with
the execution, delivery and performance of this Amendment Agreement, or
consummation of the transactions contemplated hereby;
(c) this Amendment Agreement has been duly executed and delivered
by or on behalf of the Borrower, Presley Delaware and Merger Sub and constitutes
a legal, valid and binding obligation of each of the Borrower, Presley Delaware
and Merger Sub enforceable in accordance with its terms, subject as to
enforceability to bankruptcy, reorganization, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally and the
exercise of judicial discretion in accordance with general principles of equity;
(d) the execution, delivery and performance of this Amendment
Agreement will not violate any law, statute or regulation, or any order or
decree of any court or governmental instrumentality, or conflict with, or result
in the breach of, or constitute a default under any contractual obligation of
the Borrower, Presley Delaware or Merger Sub; and
(e) Both before and after giving effect to the consummation of
each of the Acquisition, the Merger and the transactions contemplated hereunder
and thereunder (collectively, the "Transactions") there exists no Default or
Event of Default.
4
<PAGE> 5
2. The Borrower and Presley Delaware each further represents and
warrants as of the Effective Date (which representations and warranties shall
survive the execution and delivery hereof) to the Agent and the Lenders that:
(a) Both before and immediately after the consummation of the
Acquisition, the fair salable value of the assets of the Borrower and its
consolidated Subsidiaries is not less than the amount that will be required to
be paid on or in respect of the probable liability on the existing debts and
other liabilities (including contingent liabilities) of the Borrower and its
consolidated Subsidiaries, as they become absolute and mature.
(b) Both before and immediately after the consummation of the
Acquisition, the assets of the Borrower and its consolidated Subsidiaries do not
constitute unreasonably small capital for the Borrower and its consolidated
Subsidiaries to carry out their business as now conducted and as proposed to be
conducted including the capital needs of the Borrower and its consolidated
Subsidiaries, taking into account the particular capital requirements of the
business conducted by the Borrower and its consolidated Subsidiaries and
projected capital requirements and capital availability thereof.
(c) Neither the Borrower nor any of its Subsidiaries intends to
incur debts beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be received by the Borrower and any of
its Subsidiaries, and of amounts to be payable on or in respect of debt of the
Borrower and any of its subsidiaries). The cash flow of the Borrower and its
consolidated Subsidiaries, after taking into account all anticipated uses of the
cash of the Borrower and its consolidated Subsidiaries, will at all times be
sufficient to pay all such amounts on or in respect of debt of the Borrower and
its consolidated Subsidiaries when such amounts are required to be paid.
(d) Neither the Borrower nor any of its Subsidiaries believes
that final judgments against them in actions for money damages presently pending
will be rendered at a time when, or in an amount such that, they will be unable
to satisfy any such judgments promptly in accordance with their terms (taking
into account the maximum reasonable amount of such judgments in any such actions
and the earliest reasonable time at which such judgments might be rendered). The
cash flow of the Borrower and its consolidated Subsidiaries, after taking into
account all other anticipated uses of the cash of the Borrower and its
consolidated Subsidiaries (including the payments on or in respect of debt
referred to in paragraph (c) above), will at all times be sufficient to pay all
such judgments promptly in accordance with their terms.
(e) (i) The execution, delivery and performance by Presley
Delaware, the Borrower and Homes of the Acquisition Agreement and the other
documents, agreements and instruments executed and delivered pursuant thereto or
in connection therewith (collectively, the "Acquisition Documents") have been
duly authorized by all necessary action on the part of Presley Delaware, the
Borrower and Homes, (ii) the
5
<PAGE> 6
Acquisition Documents constitute the valid, binding and enforceable obligation
of each party thereto, subject to the effect of any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, and are in full force and effect without default or waiver of
any of the conditions thereunder and (iii) there are no governmental consents,
filings, approvals or notices required to be made or obtained in connection with
the execution, delivery and performance of the Acquisition Documents except such
as have been duly made, obtained or delivered.
(f) To the best of Borrower's knowledge, each of the
representations and warranties made by Homes in the Acquisition Documents was
true and correct in all material respects both as of the time such
representation and warranty was made and as of the Effective Date as if such
representation and warranty was made on and as of such date (except to the
extent that they relate expressly to an earlier date).
(g) There are not any actions, suits or proceedings at law or in
equity or by or before any governmental instrumentality or other agency or
regulatory authority now pending or, to the knowledge of any Responsible
Official of Presley Delaware or the Borrower, threatened against or affecting
the Borrower, any of its Subsidiaries or Presley Delaware or the businesses,
assets or rights of the Borrower, any of its Subsidiaries or Presley Delaware
which involve any of the Transactions.
(h) The Consideration to be paid by the Borrower in connection
with the Acquisition is fair to the Borrower from a financial point of view, and
the Borrower will receive a reasonably equivalent value in exchange for such
Consideration.
By its signature below, the Borrower, Presley Delaware and Merger Sub
each agrees that it shall constitute an Event of Default if any representation
or warranty made above should be false or misleading in any material respect.
3. Merger Sub hereby irrevocably and unconditionally affirms and
agrees that, immediately upon consummation of the Merger, it shall have assumed
all obligations and liabilities of Presley Delaware under the Amended and
Restated Guaranty and each other Loan Document to which Presley Delaware is a
party and that each Loan Document shall continue in full force and effect.
4. The Loan Agreement, and each other Loan Document is hereby
ratified and confirmed in all respects and, except as expressly amended or
waived or consented to hereby, all of the representations, warranties, terms,
covenants and conditions of the Loan Agreement and the other Loan Documents
shall remain unamended, unwaived and in effect in accordance with their
respective terms. The amendments, waivers and consents set forth herein shall be
limited precisely as provided for herein and shall not be deemed to be
amendments or consents to, or waivers of modifications of, any term or provision
of the Loan Documents or any other document or instrument referred to herein or
therein or of any transaction or further or future action on the part of the
Borrower, Presley Delaware or Merger Sub requiring the
6
<PAGE> 7
consent of the Agent or any Lender, except to the extent specifically provided
for herein.
5. The Borrower, Presley Delaware and Merger Sub each confirms in
favor of the Agent and each Lender that it agrees that it has no defense,
offset, claim, counterclaim or recoupment with respect to any of its obligations
or liabilities under the Loan Agreement or any other Loan Document and that,
except as herein provided, all terms of the Loan Agreement and the other Loan
Documents shall continue in full force and effect.
6. This Amendment Agreement may be executed by the parties hereto
individually or in combination, in one or more counterparts, each of which shall
be an original and all of which shall constitute one and the same agreement.
7. Delivery of an executed counterpart of a signature page by
telecopier shall be effective as delivery of a manually executed counterpart.
8. THIS AMENDMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, THE LOCAL LAWS OF CALIFORNIA.
PRESLEY HOMES (f/k/a The Presley
Companies), a California corporation
By /s/ David M. Siegel
-----------------------------------------
Name: David M. Siegel
Title: Senior Vice President -
Chief Financial Officer
By /s/ W. Douglass Harris
-----------------------------------------
Name: W. Douglass Harris
Title: Vice President - Corporate
Controller
7
<PAGE> 8
THE PRESLEY COMPANIES, a Delaware
Corporation
By /s/ David M. Siegel
-----------------------------------------
Name: David M. Siegel
Title: Senior Vice President -
Chief Financial Officer
By /s/ W. Douglass Harris
-----------------------------------------
Name: W. Douglass Harris
Title: Vice President - Corporate
Controller
PRESLEY MERGER SUB, INC., a
Delaware corporation
By /s/ David M. Siegel
-----------------------------------------
Name: David M. Siegel
Title: Senior Vice President -
Chief Financial Officer
By /s/ W. Douglass Harris
-----------------------------------------
Name: W. Douglass Harris
Title: Vice President - Corporate
Controller
FOOTHILL CAPITAL CORPORATION,
Individually and as Agent
By /s/ Karen S. Sandler
------------------------------------------
Name: Karen S. Sandler
Title: Senior Vice President
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,223
<SECURITIES> 0
<RECEIVABLES> 17,087
<ALLOWANCES> 0
<INVENTORY> 164,777
<CURRENT-ASSETS> 0
<PP&E> 6,282
<DEPRECIATION> 4,023
<TOTAL-ASSETS> 235,507
<CURRENT-LIABILITIES> 0
<BONDS> 155,271
0
0
<COMMON> 104
<OTHER-SE> 35,601
<TOTAL-LIABILITY-AND-EQUITY> 235,507
<SALES> 266,375
<TOTAL-REVENUES> 266,375
<CGS> 221,001
<TOTAL-COSTS> 221,001
<OTHER-EXPENSES> 13,028
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,554
<INCOME-PRETAX> 27,792
<INCOME-TAX> 3,988
<INCOME-CONTINUING> 23,804
<DISCONTINUED> 0
<EXTRAORDINARY> 1,789
<CHANGES> 0
<NET-INCOME> 25,593
<EPS-BASIC> 2.45
<EPS-DILUTED> 2.45
</TABLE>
