<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, 1998
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)
Delaware 33-0475923
(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)
(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 X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock September 30, 1998
--------------------- ------------------
Series A, par value $.01 34,792,732
Series B, restricted voting convertible, par value $.01 17,402,946
- --------------------------------------------------------------------------------
<PAGE> 2
THE PRESLEY COMPANIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997.......................................................3
Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 1998 and 1997.............................................4
Consolidated Statement of Stockholders' Equity (Deficit) - Nine Months
Ended September 30, 1998................................................5
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997.............................................6
Notes to Consolidated Financial Statements..................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................13
PART II. OTHER INFORMATION..............................................................24
SIGNATURES...............................................................................25
</TABLE>
2
<PAGE> 3
THE PRESLEY COMPANIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
(NOTE 2)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,260 $ 4,569
Receivables 10,520 8,652
Real estate inventories 207,219 255,472
Investments in and advances to unconsolidated
joint ventures - Note 3 23,161 7,077
Property and equipment, less accumulated
depreciation of $3,154 and $2,339 at September 30,
1998 and December 31, 1997, respectively 3,303 3,613
Deferred loan costs 4,045 3,266
Other assets 3,678 2,595
--------- ---------
$ 259,186 $ 285,244
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 20,497 $ 12,854
Accrued expenses 17,427 23,136
Notes payable 65,526 74,935
12 1/2% Senior Notes due 2001 - Notes 4 and 5 160,000 180,000
--------- ---------
263,450 290,925
--------- ---------
Stockholders' equity (deficit) - Note 6
Common stock:
Series A common stock, par value $.01 per
share; 100,000,000 shares authorized;
34,792,732 issued and outstanding at
September 30, 1998 and 17,838,535 issued and
outstanding at December 31, 1997,
respectively 348 178
Series B restricted voting convertible common
stock, par value $.01 per share; 50,000,000
shares authorized; 17,402,946 shares issued
and outstanding at September 30, 1998 and
34,357,143 issued and outstanding at
December 31, 1997, respectively 174 344
Additional paid-in capital - Note 1 114,802 114,599
Accumulated deficit from January 1, 1994 - Note 1 (119,588) (120,802)
--------- ---------
(4,264) (5,681)
--------- ---------
$ 259,186 $ 285,244
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
(UNAUDITED)
(NOTE 2)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales
Homes $ 89,319 $ 67,583 $ 225,592 $ 223,234
Lots, land and other - Note 7 190 766 10,925 10,476
--------- --------- --------- ---------
89,509 68,349 236,517 233,710
--------- --------- --------- ---------
Operating costs
Cost of sales - homes (75,197) (59,737) (194,194) (200,679)
Cost of sales - lots, land and other (1,227) (913) (11,378) (9,983)
Impairment loss on real estate assets -- -- -- (74,000)
Sales and marketing (5,385) (5,191) (15,180) (15,826)
General and administrative (3,188) (3,686) (10,144) (12,047)
--------- --------- --------- ---------
(84,997) (69,527) (230,896) (312,535)
--------- --------- --------- ---------
Operating income (loss) 4,512 (1,178) 5,621 (78,825)
Income from unconsolidated joint ventures 501 -- 346 --
Interest expense, net of amounts capitalized (2,180) (2,237) (7,073) (5,001)
Other income, net 669 215 1,638 1,598
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item 3,502 (3,200) 532 (82,228)
Provision (credit) for income taxes - Note 1 (203) -- 160 --
--------- --------- --------- ---------
Income (loss) before extraordinary item 3,299 (3,200) 692 (82,228)
Extraordinary item - gain from retirement
of debt, net of applicable income taxes
of $363 - Note 5 -- -- 522 --
--------- --------- --------- ---------
Net income (loss) $ 3,299 $ (3,200) $ 1,214 $ (82,228)
========= ========= ========= =========
Basic and diluted earnings per common
share - Note 1
Before extraordinary item $ 0.06 $ (0.06) $ 0.01 $ (1.58)
Extraordinary item -- -- 0.01 --
--------- --------- --------- ---------
After extraordinary item $ 0.06 $ (0.06) $ 0.02 $ (1.58)
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
(NOTE 2)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------ Accumulated
Series A Series B Additional Deficit from
----------------- ------------------- Paid-In January 1,
Shares Amount Shares Amount Capital 1994 Total
------ ------ ------ ------ ------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 17,839 $178 34,357 $ 344 $ 114,599 $(120,802) $(5,681)
Net income -- -- -- -- -- 1,214 1,214
Income tax benefit resulting
from utilization of net
operating loss carryforwards -
Note 1 -- -- -- -- 203 -- 203
Conversion of Series B Common
Stock - Note 6 16,954 170 (16,954) (170) -- -- --
------ ---- ------- ----- --------- --------- -------
Balance - September 30, 1998 34,793 $348 17,403 $ 174 $ 114,802 $(119,588) $(4,264)
====== ==== ======= ===== ========= ========= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(NOTE 2)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,214 $ (82,228)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization 811 546
Impairment loss on real estate assets -- 74,000
Equity in earnings of joint ventures (346) --
Gain on repurchase of 12 1/2% Senior Notes (885) --
Provision for income taxes 203 --
Net changes in operating assets and liabilities:
Other receivables (2,576) (1,776)
Real estate inventories 4,377 (12,984)
Deferred loan costs (779) 148
Other assets (1,083) 4,774
Accounts payable 7,643 (7,910)
Accrued expenses (5,709) (5,558)
--------- ---------
Net cash provided by (used in) operating activities 2,870 (30,988)
--------- ---------
INVESTING ACTIVITIES
Investment in unconsolidated joint ventures (11,560) --
Proceeds from contribution of land to joint venture 25,431 --
Principal payments on notes receivable 708 794
Property and equipment, net (501) (1,333)
--------- ---------
Net cash provided by (used in) investing activities 14,078 (539)
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowing on notes payable 92,577 115,418
Principal payments on notes payable (87,719) (83,035)
Repurchase of 12 1/2% Senior Notes (19,115) --
--------- ---------
Net cash provided by (used in) financing activities (14,257) 32,383
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,691 856
CASH AND CASH EQUIVALENTS - beginning of period 4,569 4,550
--------- ---------
CASH AND CASH EQUIVALENTS - end of period $ 7,260 $ 5,406
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of amounts capitalized $ 13,458 $ 10,395
========= =========
Issuance of notes payable for land acquisitions $ 2,748 $ --
========= =========
Assumption or repayment of notes payable by unconsolidated joint ventures $ 17,015 $ --
========= =========
</TABLE>
See accompanying notes.
6
<PAGE> 7
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements 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 for the year ended December 31, 1997.
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 resulting from the
quasi-reorganization, are excluded from the results of operations and credited
to paid-in capital. During the nine months ended September 30, 1998 income tax
benefits of $203,000 were excluded from results of operations and credited to
paid-in capital. Income tax benefits of $378,000 were recognized and included in
the results of operations for the nine months ended September 30, 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, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
The consolidated financial statements include the accounts of the Company and
all majority-owned or controlled subsidiaries and joint ventures. The equity
interests of other partners are reflected as minority partners' interest. All
significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated joint ventures in which the Company has less than
a controlling interest are accounted for using the equity method. The accounting
policies of the joint ventures are substantially the same as those of the
Company.
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, 1998 and December 31, 1997 and revenues and expenses for the
periods presented. Accordingly, actual results could differ from those estimates
in the near-term.
7
<PAGE> 8
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("Statement No. 128") which replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. All earnings per share amounts for all periods presented conform to
Statement No. 128 requirements. Basic and diluted earnings per common share for
the three and nine months ended September 30, 1998 and 1997 are based on
52,195,678 shares of Series A and Series B common stock outstanding.
NOTE 2 - COMPANY ENGAGES FINANCIAL ADVISOR
The Company announced on May 5, 1998 that it had engaged Warburg Dillon Read
Inc. to explore various strategic alternatives including the
refinancing/restructuring of its outstanding debt obligations or the sale of
certain, or substantially all, of its assets. The Company's actions are a direct
result of the severe economic conditions encountered during the past several
years, together with the Company's highly leveraged capital structure.
The declining economic conditions began to affect the Company's primary
home-building markets in California during 1989 and continued on and off since
that time. In view of substantial declines in the value of certain of the
Company's real estate assets since 1992, the Company has been required to write
down the book value of these real estate assets in accordance with generally
accepted accounting principles. The $89,900,000 loss for the year ended December
31, 1997, included a non-cash charge of $74,000,000 as a result of the
recognition of impairment losses on certain of the Company's real estate assets.
As a result of the substantial losses realized by the Company since 1992, the
Company had a stockholders' deficit of $5,700,000 at December 31, 1997 and
$4,300,000 as of September 30, 1998.
The Company announced on July 2, 1998 the receipt of a non-binding proposal from
William Lyon, Chairman of the Board of the Company, to acquire (through a
wholly-owned corporation, William Lyon Homes, Inc.), all of the outstanding
stock of the Company in a series of related transactions for a cash price of
$0.40 per share. The proposal was submitted on June 30, 1998, to a Special
Committee of the Board of Directors formed by the Company to evaluate strategic
alternatives. On July 30, 1998, the Company announced that the Special Committee
had informed the Company that the Special Committee is unable to conclude that
the proposal of William Lyon Homes, Inc. ("WLH") would provide the greatest
benefit for the Company and its stockholders among all likely available
strategic alternatives. Accordingly, the Special Committee did not recommend the
current WLH proposal to the Company's Board of Directors and continues to
explore additional strategic alternatives.
8
<PAGE> 9
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
NOTE 3 - INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES
The Company and certain of its subsidiaries are general partners or members in
eleven joint ventures involved in the development and sale of residential
housing projects. Such joint ventures are not effectively controlled by the
Company and, accordingly, the financial statements of such joint ventures are
not consolidated in the preparation of the Company's consolidated 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, 1998 and December 31, 1997 is
summarized as follows:
CONDENSED COMBINED BALANCE SHEETS
---------------------------------
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,184 $ 18
Receivables 31 293
Real estate inventories 154,065 32,097
Other assets -- 750
-------- --------
$155,280 $ 33,158
======== ========
LIABILITIES AND OWNERS' CAPITAL
Accounts payable $ 4,220 $ 86
Accrued expenses 2,236 701
Notes payable 28,587 --
Advances from The Presley Companies and subsidiaries 305 127
-------- --------
35,348 914
-------- --------
Owners' capital
The Presley Companies and subsidiaries 22,856 6,950
Others 97,076 25,294
-------- --------
119,932 32,244
-------- --------
$155,280 $ 33,158
======== ========
</TABLE>
9
<PAGE> 10
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
-------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1998 1997 1998 1997
-------- ---- -------- ----
<S> <C> <C>
Sales
Homes $ 8,976 - $ 10,695 --
Operating costs
Cost of sales - homes (7,437) - (9,005) --
Sales and marketing (593) - (926) --
-------- --- -------- ---
Operating income 946 - 764 --
Other income, net 51 - 71 --
-------- --- -------- ---
Net income $ 997 - $ 835 --
======== === ======== ===
Allocation to owners
The Presley Companies and subsidiaries $ 501 - $ 346 --
Others 496 - 489 --
-------- --- -------- ---
$ 997 - $ 835 --
======== === ======== ===
</TABLE>
In January 1998, one of these joint ventures aquired land from the Company at
the Company's approximate book value of $23,200,000 (which also approximated the
land's current market value) and assumed the Company's non-recourse note payable
of $12,500,000 relating to the purchase of land acquired from the Company. In
March 1998, one of these joint ventures acquired land from the Company at the
Company's approximate book value of $6,300,000 (which also approximated the
land's current market value) and repaid the Company's non-recourse note payable
of $4,515,000 related to the purchase of this property. In May 1998, the Company
contributed land to one of these joint ventures at the Company's approximate
book value of $29,381,000 (which also approximated the project's current market
value). The majority of these projects are currently in the initial development
stages and, 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.
10
<PAGE> 11
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
NOTE 4 - 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 and again on June 4, 1998, 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 and
March 31, 1998, respectively. The Company acquired Senior Notes with a face
amount of $20,000,000 after September 30, 1997 and prior to December 4, 1997 and
again after March 31, 1998 and prior to June 4, 1998, 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, 1998, the Company would, effective on December 4, 1998, be
required to make similar offers to purchase $20,000,000 in principal amount of
the Senior Notes. In October 1998 the Company acquired Senior Notes with a face
amount of $20,000,000 and therefore will not be required to make such offer
effective on December 4, 1998.
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, 1998 the Company's Consolidated Tangible Net
Worth was a deficit of $8,309,000. 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.
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. The Company's degree of leverage may limit its ability to withstand
adverse business conditions or to capitalize on business opportunities.
NOTE 5 - GAIN FROM RETIREMENT OF DEBT
In June 1998, the Company purchased $20,000,000 principal amount of its
outstanding Senior Notes at a cost of $18,825,000. The net gain resulting from
the purchase, after giving effect to income taxes and amortization of related
deferred loan costs, was $522,000.
11
<PAGE> 12
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
In October 1998, the Company purchased $20,000,000 principal amount of its
outstanding Senior Notes at a cost of $17,435,000. The net gain resulting from
the purchase, after giving effect to income taxes and amortization of related
deferred loan costs was $1,366,000. Such gain will be reflected in the Company's
results of operations for the fourth quarter ending December 31, 1998.
NOTE 6 - CONVERSION OF SERIES B COMMON STOCK
The Company's Series B Common Stock became convertible into the Company's Series
A Common Stock on a share-for-share basis at the option of the holder from and
after May 20, 1997. On January 30, 1998 and June 9, 1998, the Company issued an
aggregate 2,677,836 and 14,276,361 shares, respectively, of its Series A Common
Stock as a result of the conversion of a like number of shares of its Series B
Common Stock. The shares of the Series A Common Stock issued as a result of the
conversion were not required to be registered under the Securities Act of 1933,
as amended (the "Securities Act"), by reason of Section 3(a)(9) of the
Securities Act.
Foothill Capital Corporation held 14,276,361 shares of Series B Common Stock as
managing general partner of Foothill Partners, L.P., a Delaware limited
partnership and Foothill Partners II, L.P., a Delaware limited partnership
(together, the "Partnerships"). The 14,276,361 shares of Series A Common Stock
have been issued in the names of the individual partners of the Partnerships, as
the beneficial owners of such shares.
A sufficient number of shares of Series A Common Stock were listed with the New
York Stock Exchange and reserved for issuance with ChaseMellon Shareholder
Services, Inc., the transfer agent for the Company.
NOTE 7 - RELATED PARTY TRANSACTIONS
Sales of lots, land and other for the nine months ended September 30, 1998
include a $3,710,000 bulk lot sale to William Lyon Homes, Inc., a wholly-owned
corporation of William Lyon, Chairman of the Board and stockholder of the
Company. The Company received the full purchase price in cash and recognized a
gain of $81,000 on this sale. In the opinion of management, this sale was an
arm's length transaction representing fair market value at the time the
transaction was negotiated.
12
<PAGE> 13
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 for the year ended December 31, 1997.
GENERAL OVERVIEW
The Company announced on May 5, 1998 that it had engaged Warburg Dillon Read
Inc. to explore various strategic alternatives including the
refinancing/restructuring of its outstanding debt obligations or the sale of
certain, or substantially all, of its assets. The Company's actions are a direct
result of the economic conditions encountered during the past several years,
together with the Company's highly leveraged capital structure.
The declining economic conditions began to affect the Company's primary
home-building markets in California during 1989 and continued on and off since
that time. In view of substantial declines in the value of certain of the
Company's real estate assets since 1992, the Company has been required to write
down the book value of these real estate assets in accordance with generally
accepted accounting principles. The $89,900,000 loss for the year ended December
31, 1997, included a non-cash charge of $74,000,000 as a result of the
recognition of impairment losses on certain of the Company's real estate assets.
As a result of the substantial losses realized by the Company since 1992, the
Company had a stockholders' deficit of $5,700,000 at December 31, 1997 and
$4,300,000 as of September 30, 1998.
The Company announced on July 2, 1998 the receipt of a non-binding proposal from
William Lyon, Chairman of the Board of the Company, to acquire (through a
wholly-owned corporation, William Lyon Homes, Inc.), all of the outstanding
stock of the Company in a series of related transactions for a cash price of
$0.40 per share. The proposal was submitted on June 30, 1998, to a Special
Committee of the Board of Directors formed by the Company to evaluate strategic
alternatives. On July 30, 1998, the Company announced that the Special Committee
had informed the Company that the Special Committee is unable to conclude that
the proposal of William Lyon Homes, Inc. ("WLH") would provide the greatest
benefit for the Company and its stockholders among all likely available
strategic alternatives. Accordingly, the Special Committee did not recommend the
current WLH proposal to the Company's Board of Directors and continues to
explore additional strategic alternatives.
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 and again on June 4, 1998, 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 and
March 31, 1998, respectively. The Company acquired Senior Notes with a face
amount of $20,000,000 after September 30, 1997 and prior to December 4, 1997 and
again after March 31, 1998 and prior to June 4, 1998, and therefore was not
required to make said offers.
13
<PAGE> 14
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Because the Company's Consolidated Tangible Net Worth was less than $60,000,000
as of September 30, 1998, the Company would, effective on December 4, 1998, be
required to make similar offers to purchase $20,000,000 in principal amount of
the Senior Notes. In October 1998 the Company acquired Senior Notes with a face
amount of $20,000,000 at a cost of $17,435,000 and therefore will not be
required to make such offer effective on December 4, 1998. The net gain
resulting from the purchase, after giving effect to income taxes and
amortization of related loan costs was $1,366,000. Such gain will be reflected
in the Company's results of operations for the fourth quarter ending December
31, 1998.
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, 1998 the Company's Consolidated Tangible Net
Worth was a deficit of $8,309,000. 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 $100,000,000, and (3) decrease the fees and
costs compared to the prior revolving facility.
Because of the Company's obligation to offer to purchase $20,000,000 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 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
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.
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. At this time, the Company's degree of leverage may limit its ability
to withstand adverse business conditions or to capitalize on business
opportunities.
14
<PAGE> 15
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Number of homes sold
Company 507 419 1,587 1,296
Unconsolidated joint ventures 42 -- 123 --
----- ----- ----- -----
549 419 1,710 1,296
===== ===== ===== =====
Number of homes closed
Company 474 357 1,206 1,186
Unconsolidated joint ventures 20 -- 22 --
----- ----- ----- -----
494 357 1,228 1,186
===== ===== ===== =====
Backlog of homes sold but not closed at end of period
Company 777 392 777 392
Unconsolidated joint ventures 108 -- 108 --
----- ----- ----- -----
885 392 885 392
===== ===== ===== =====
</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, 1998 was
$222,790,000, as compared to $81,258,000 as of September 30, 1997 and
$204,409,000 as of June 30, 1998. The cancellation rate of buyers who contracted
to buy a home but did not close escrow at the Company's projects was
approximately 18% during 1997 and approximately 17% during the first nine months
of 1998.
Net new home orders for the quarter ended September 30, 1998 increased 31
percent to 549 units from 419 a year ago. For the third quarter of 1998, net new
orders decreased 12 percent to 549 from 622 units in the second quarter of 1998.
The number of homes closed in the third quarter of 1998 increased 38 percent to
494 from 357 in the third quarter of 1997. The backlog of homes sold as of
September 30, 1998 was 885, up 126 percent from 392 units a year earlier, and up
7 percent from 830 units at June 30, 1998. The Company's inventory of completed
and unsold homes as of September 30, 1998 has decreased by 35 percent to 26
units from 40 units as of June 30, 1998.
15
<PAGE> 16
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The increase in net new homes orders, closings and backlog for the third quarter
of 1998 as compared with the third quarter of 1997 is primarily the result of
improved market conditions in substantially all of the Company's markets and
additional sales locations as a result of new land acquisitions. At September
30, 1998, the Company had 47 sales locations as compared to 43 sales locations
at September 30, 1997.
In general, housing demand is adversely affected by increases in interest rates
and housing prices. Even if interest rates and housing prices remain stable,
demand for housing may be adversely affected by general economic conditions both
locally and nationally. The Company expects that continued economic
uncertainties may affect the number of homes sold and closed in 1999 and/or the
sales prices of houses sold. The Company's ability to close home sales is also
dependent upon availability of labor which has been in short supply from time to
time in the regions that the Company operates.
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, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
Sales (which represent recorded revenues from closings) for the three months
ended September 30, 1998 were $89.5 million, an increase of $21.2 million (31%)
from sales of $68.3 million for the three months ended September 30, 1997.
Revenue from sales of homes increased $21.7 million to $89.3 million in the 1998
period from $67.6 million in the 1997 period. This increase was due primarily to
an increase in the number of units closed, offset by a decrease in the average
sales prices of homes to $188,400 in the 1998 period from $189,300 in the 1997
period, which resulted primarily from a change in the mix of product.
Total operating income (loss) changed from a $1.2 million loss in the 1997
period to $4.5 million income in the 1998 period. The excess of revenue from
sales of homes over the related cost of sales increased by $6.3 million, to
$14.1 million in the 1998 period from $7.8 million in the 1997 period. This
increase was primarily due to (1) an increase in the number of units closed, (2)
changes in product mix and (3) an improvement in margins at certain of the
Company's projects as a result of increased sales prices. Sales and marketing
expenses increased by $0.2 million to $5.4 million in the 1998 period from $5.2
million in the 1997 period primarily as a result of increased direct sales
expenses related to the increased sales volume offset by reductions in
advertising and sales office/model operation expenses. General and
administrative expenses decreased by $0.5 million to $3.2 million in the 1998
period from $3.7 million in the 1997 period, primarily as a result of the
consolidation of certain California operations in the third quarter of 1997 and
income from reimbursement of overhead expenses by joint ventures.
16
<PAGE> 17
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Income from unconsolidated joint ventures amounting to $0.5 was recorded in the
1998 period, with no corresponding amount in the comparable period for 1997. The
Company did not begin investing in unconsolidated joint ventures until the
fourth quarter of 1997.
Total interest incurred decreased $0.6 million (7%) from $8.2 million in the
1997 period as a result of a decrease in the average amount of outstanding debt.
Net interest expense remained the same at $2.2 million in the 1997 and 1998
periods.
Other income, net increased to $0.7 million in the 1998 period from $0.2 million
in the 1997 period primarily as a result of increased income from mortgage
operations, design center operations and recreational facilities.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Sales (which represent recorded revenues from closings) for the nine months
ended September 30, 1998 were $236.5 million, an increase of $2.8 million (1%),
from sales of $233.7 million for the nine months ended September 30, 1997.
Revenue from sales of homes increased $2.4 million to $225.6 million in the 1998
period from $223.2 million in the 1997 period. This increase was due primarily
to an increase in the number of units closed, offset by a decrease in the
average sales prices of homes to $187,000 in the 1998 period from $188,200 in
the 1997 period, which resulted primarily from a change in the mix of product.
Total operating income (loss), excluding the impairment loss on real estate
assets, changed from a loss of $4.8 million in the 1997 period to an income of
$5.6 million in the 1998 period. The excess of revenue from sales of homes over
the related cost of sales increased by $8.8 million, to $31.4 million in the
1998 period from $22.6 million in the 1997 period. This increase was primarily
due to (1) an increase in the number of units closed, (2) changes in product mix
and (3) an improvement in margins at certain of the Company's projects as a
result of increased sales prices. Impairment losses on real estate assets
amounting to $74.0 million were recorded in the 1997 period, with no
corresponding charge in the comparable period for 1998. Sales and marketing
expenses decreased by $0.6 million from $15.8 million in the 1997 period to
$15.2 million in the 1998 period, primarily due to reductions in advertising and
sales office/model operations expenses. General and administrative expenses
decreased by $1.9 million to $10.1 million in the 1998 period from $12.0 million
in the 1997 period, primarily as a result of the consolidation of certain
California operations in the third quarter of 1997 and income from reimbursement
of overhead expenses by joint ventures.
Total interest incurred remained the same at $24.3 million in the 1997 and 1998
periods. Net interest expense increased to $7.1 million in the 1998 period from
$5.0 million for the 1997 period. This increase was due primarily to a reduction
in real estate assets which qualify for interest capitalization.
17
<PAGE> 18
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Income from unconsolidated joint ventures amounting to $0.3 was recorded in the
1998 period, with no corresponding amount in the comparable period for 1997. The
Company did not begin investing in unconsolidated joint ventures until the
fourth quarter of 1997.
Other income, net remained the same at $1.6 million in the 1997 and 1998
periods.
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 will 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"); a
secured revolving lending facility (the "Working Capital Facility"); and a
revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned
joint venture partnership (the "CMR Facility").
The ability of the Company to meet its obligations on the Senior Notes
(including the repurchase obligation described in General Overview 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 withstand adverse business conditions or to capitalize on business
opportunities.
The Company will in all likelihood be required to refinance the Senior Notes
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 $200,000,000 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.
18
<PAGE> 19
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The 12 1/2% Senior Notes due 2001 (the "Senior Notes") were offered by The
Presley Companies, a Delaware corporation ("Delaware Presley" or the "Company"),
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 ("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 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. Except as set forth in the
Indenture Agreement (the "Indenture"), the Senior Notes were not redeemable by
Presley 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 Presley and rank pari passu in right
of payment to all existing and future unsecured indebtedness of 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, 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 $60,000,000 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, 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 Indenture governing the Senior Notes restricts, among other things: (i) the
payment of dividends on and redemptions of capital stock by Presley, (ii) the
incurrence of indebtedness by Presley or the issuance of preferred stock by
Delaware Presley's subsidiaries, (iii) the creation of certain liens, (iv)
Delaware 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 $100,000,000, and
(3) decrease the fees and costs compared to the prior revolving facility. 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, 1998 was approximately
$140,000,000; however, the maximum loan under the Working Capital Facility, as
stated above, is limited to $100,000,000. The principal outstanding under the
Working Capital Facility at September 30, 1998 was $50,000,000.
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 loan fee of 0.25%
on the average daily unused portion of the loan facility.
19
<PAGE> 20
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Upon completion of the new Working Capital Facility agreement, the Company paid
a one-time, non-refundable Facility Fee of $2,000,000, 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 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
$20,000,000 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, is financed through a revolving line of
credit. The revolving line of credit consists of several components relating to
production units, models and residential lots. At September 30, 1998, the
revolving line of credit had an outstanding balance of $9,670,000. Availability
under the line is subject to a number of limitations, but in any case cannot
exceed $10,000,000. Interest on the outstanding balance is at prime plus 1.00%.
In August 1998, the maturity date of this line was extended to April 16, 1999.
SELLER FINANCING
Another source of financing available to the Company is seller-provided
financing for land acquired by the Company. At September 30, 1998, the Company
had outstanding notes payable related to land acquisitions for which seller
financing was provided in the amount of $5,856,080.
20
<PAGE> 21
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
JOINT VENTURE FINANCING
As of September 30, 1998, the Company had formed eleven joint ventures involved
in the development and sale of residential housing projects. The Company
contributed approximately $22,850,000 to these joint ventures and the Company's
venture partners contributed approximately $97,076,000 to these joint ventures.
In January 1998, one of these joint ventures acquired land from the Company at
the Company's approximate book value of $23,200,000 (which also approximated the
land's current market value) and assumed the Company's non-recourse note payable
of $12,500,000 relating to the purchase of land acquired from the Company. In
March 1998, one of these joint ventures acquired land from the Company at the
Company's approximate book value of $6,300,000 (which also approximated the
land's current market value) and repaid the Company's non-recourse note payable
of $4,515,000 related to the purchase of this property. In May 1998, the Company
contributed land to one of these joint ventures at the Company's approximate
book value of $29,381,000 (which also approximated the project's current market
value). The majority of these projects are currently in the initial development
stages and, 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.
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.
CASH FLOWS - COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Net cash provided by (used in) operating activities changed from a use of $31.0
million in the 1997 period to a source of $2.9 million in the 1998 period
primarily as a result of increased income and reductions in real estate
inventories.
Net cash provided by (used in) investing activities changed from a use of $0.6
million in the 1997 period to a source of $14.0 million in the 1998 period
primarily as a result of investment activity with unconsolidated joint ventures.
Net cash provided by (used in) financing activities changed from a source of
$32.4 million in the 1997 period to a use of $14.3 million in the 1998 period
primarily as a result of the repurchase of $20.0 million of 12 1/2% Senior Notes
and reduced net borrowings from notes payable.
21
<PAGE> 22
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
YEAR 2000 ISSUE
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
by applicable manufacturers without consideration for the upcoming change in the
century. If not corrected, such programs may cause computer systems to fail or
to miscalculate data. Due to the year 2000 issue, the Company has undertaken a
project 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.
To date, 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 primary accounting systems (the "JD Edwards Programs"). The version
of the JD Edwards programs which the Company is currently using is not Year 2000
compliant. However, the Company has acquired and installed a Year 2000 compliant
version of the software and is currently testing such software and developing
programs to convert its current applications to the new version of the software.
Based on current evaluations, the Company believes that this conversion will be
implemented no later than March 31, 1999 and will have minimal effects on its
systems and that the cost incurred in that connection will not be material.
The Company is currently completing an assessment of other internal systems used
by the Company in various of its operations as well as an assessment of third
party suppliers to the Company. These assessments are currently expected to be
substantially completed by the first quarter of 1999. As part of these projects,
the Company's relationships with suppliers, subcontractors, financial
institutions and other third parties will be 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.
22
<PAGE> 23
THE PRESLEY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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 risks 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 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 is expected to significantly reduce the
Company's level of uncertainty and exposure to the year 2000 issue and, in
particular, about the year 2000 compliance of material third parties. 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's
ability to complete the year 2000 modifications outlined above prior to any
anticipated impact on its operating systems is based on numerous assumptions of
future events and is dependent upon numerous factors, including the ability of
third party software and hardware manufacturers to make necessary modifications
to current versions of their products, the availability of resources to install
and test the modified systems and other factors. Accordingly, there can be no
assurance that these modifications will be successful.
The Company currently anticipates that its operating systems will be year 2000
ready well before January 1, 2000, and that the year 2000 issue will not have a
material adverse effect upon the Company's liquidity, financial position or
results of operations.
* * * * *
Certain statements contained herein that are not historical information contain
forward-looking statements. The forward-looking statements involve risks and
uncertainties and actual results may differ materially from those projected or
implied. Further, certain forward-looking statements are based on assumptions of
future events which may not prove to be accurate. Factors that may impact such
forward-looking statements include, among others, changes in general economic
conditions and in the markets in which the Company competes, changes in interest
rates and competition.
23
<PAGE> 24
THE PRESLEY COMPANIES
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
10.1 Modification to Master Credit Agreement, dated as of August
25, 1998, by and between Carmel Mountain Ranch, a California
general partnership (Borrower) and Bank One, Arizona, N.A.,
a national banking association (Bank)
10.2 Form of Severance Agreements dated September 24, 1998
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
JULY 2, 1998. A report on Form 8-K was filed by the Company
in reference to the announcement by the Company of the
receipt of a non-binding proposal by William Lyon to acquire
all of the Company's outstanding stock.
OCTOBER 28, 1998. A report was filed by the Company on Form
8-K related to the Company's purchase of $20,000,000
principal amount of its 12 1/2% Senior Notes.
24
<PAGE> 25
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 12, 1998 By: /s/ David M. Siegel
----------------------------
DAVID M. SIEGEL
Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
Date: November 12, 1998
By: /s/ W. Douglass Harris
------------------------------
W. DOUGLASS HARRIS
Vice President, Corporate Controller
(Principal Accounting Officer)
25
<PAGE> 26
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Modification to Master Credit Agreement, dated as of August
25, 1998, by and between Carmel Mountain Ranch, a California
general partnership (Borrower) and Bank One, Arizona, N.A.,
a national banking association (Bank)
10.2 Form of Severance Agreements dated September 24, 1998
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
MODIFICATION TO
MASTER CREDIT AGREEMENT
DATE: August 25,1998
PARTIES: Borrower: CARMEL MOUNTAIN RANCH, a California
general partnership
Bank: BANK ONE, ARIZONA, NA, a national banking association
RECITALS:
- ---------
A. Bank has extended to Borrower credit ("LOAN") in the principal amount
of $10,000,000.00 pursuant to the Master Credit Agreement, dated February 15,
1995 (as amended, the "AGREEMENT") and evidenced by the Secured Promissory Note,
dated February 15, 1995 ("NOTE"). The unpaid principal of the Loan as of the
date hereof is $4,548,421.24.
B. The Loan is secured by various deeds of trust recorded in the State
of California. The agreements, documents and instruments securing the Loan and
the Note are referred to individually and collectively as the "SECURITY
DOCUMENTS".
C. Bank and Borrower have executed and delivered previously the
following agreements ("AMENDMENTS") modifying the terms of the Loan, the Note,
the Agreement, and/or the Security Documents: First Amendment to Master Credit
Agreement dated October 10, 1995; Second Amendment to Master Credit Agreement
dated October 4, 1996; Amendment No. 3 to Master Credit Agreement dated May 27,
1997; Third Amendment to Master Credit Agreement dated September 25, 1997;
Modification to Master Credit Agreement dated March 17, 1998, June 16,1998. (The
Agreement, the Security Documents, and arbitration resolution, any environmental
certification and indemnity, and all other agreements, modifications,
amendments, documents and instruments evidencing, securing, or otherwise
relating to the loan, as amended in the Amendments, are sometimes referred to
individually and collectively as the "LOAN DOCUMENTS". Hereinafter, "NOTE",
"AGREEMENT", "DEED OF TRUST" and "SECURITY DOCUMENTS", shall mean such documents
are amended in the Amendments.)
D. Borrower has requested that Bank modify the Loan and the Loan
Documents as provided herein. Bank is willing to so modify the Loan and the Loan
Documents, subject to the terms and conditions herein.
<PAGE> 2
AGREEMENT:
- ----------
1. ACCURACY OF RECITALS.
Borrower acknowledges the accuracy of the Recitals.
2. MODIFICATION OF LOAN DOCUMENTS.
2.1.1 The maturity date of the Loan and the Note is changed from August
16, 1998, to April 16, 1999 as such date may be extended pursuant to 2.1.2 of
this Agreement. On the maturity date Borrower shall pay to Bank the unpaid
principal, accrued and unpaid interest, and all other amounts payable by
Borrower under the Loan Documents as modified herein.
2.1.2 At the option of Borrower, the maturity date of the Loan and the
Note may be extended from April 16, 1999 to August 16, 1999 subject to the
following terms and conditions:
(A) At least 30 days but no more than 60 days prior to April 16,
1999, Borrower gives Bank written notice that Borrower desires such extension.
(B) No continuing default or event of default under any of the
Loan Documents as modified herein, nor any event, that with the giving of notice
or the passage of time or both, would be a default or an event of default under
the Loan Documents as modified herein has occurred and is continuing on the date
of Borrower's notice to Bank as provided in 2.1.2.A or on April 16, 1999 .
(C) No material adverse change in borrower's financial condition.
(D) The project remains an approved project under the guidelines
of the Borrowing Base.
(E) Project absorption continues to perform better than 75% of
original appraised absorption.
2.1.3 The term of the Carmel Mountain Ranch Unit Construction Loans for
the projects known as Unit 23A and Unit 23B are hereby extended and shall have a
maturity date of April 16, 1999.
2.1.4 The Infrastructure Loan (Acquisition and Development) for the
projects identified as Unit 23A and Unit 23B of Carmel Mountain Ranch is hereby
canceled.
2.1.5 Section 6 of the Note is hereby deleted in its entirety and
replaced with the following:
If any installment of interest and/or the payment of principal or other
Amounts is not received by Bank within ten (10) days following the due date
thereof, then in addition to the remedies conferred upon Bank pursuant to
Paragraph 9 hereof and the other Loan Documents, a late charge of 5% of the
amount of that payment or $25.00, whichever is greater, up to the maximum amount
of $1,500.00 per late charge to compensate Lender for administrative expenses
<PAGE> 3
and other costs of delinquent payments. Such late charge will be immediately due
and payable and is in addition to any other costs, fees, and expenses that
Borrower may owe as a result of such late payment.
2.1.6 Section 4 of the Master Credit Agreement is hereby amended to add
section 4.4 as follows:
4.4 Borrower represents and warrants as follows to Bank that: (i) as of
the date of any request for an advance under the Loan, (ii) as of the date of
any renewal, extension or modification of the Loan, and (iii) at all times the
Loan or Bank's commitment to make advances under the Loan is outstanding:
(A) All devices, systems, machinery, information technology, computer
software and hardware, and other date sensitive technology (jointly and
severally the "Systems") necessary for Borrower to carry on its business as
presently conducted and as contemplated to be conducted in the future are Year
2000 Compliant or will be Year 2000 Compliant within a period of time calculated
to result in no material disruption of any Borrower's business operations. For
purposes of these provisions, "Year 2000 Compliant" means that such Systems are
designed to be used prior to, during and after the Gregorian calendar year 2000
A.D. and will operate during each such time period without error relating to
date data, specifically including any error relating to, or the product of, date
data which represents or references different centuries or more than one
century.
(B) Borrower has: (1) undertaken a detailed inventory, review, and
assessment of all areas within its business and operations that could be
adversely affected by the failure of Borrower to be Year 2000 Compliant on a
timely basis. (2) developed a detailed plan and time line for becoming Year 2000
Compliant on a timely basis, and (3) to date, implemented that plan in
accordance with that timetable in all material respects.
(C) Borrower has made written inquiry of each of its key suppliers,
vendors, and customers, and has obtained in writing confirmations from all such
persons, as to whether such persons have initiated programs to become Year 2000
Compliant and on the basis of such confirmations, Borrower reasonably believes
that all such persons will be or become so compliant. For purposes hereof, "key
suppliers, vendors, and customers" refers to those suppliers, vendors, and
customers of Borrower whose business failure would, with reasonable probability,
result in a material adverse change in the business, properties, condition
(financial or otherwise), or prospects of obligor. For purposes of this
paragraph, Bank , as a lender of funds under the terms of the Loan, confirms to
Borrower that Bank has initiated its own corporate-wide Year 2000 program with
respect to its lending activities.
(D) The fair market value of all real and personal property, if any,
pledged to Bank as Collateral to secure the Loan is not and shall not be less
than currently anticipated or subject to substantial deterioration in value
because of the failure of such Collateral to be Year 2000 Compliant.
<PAGE> 4
2.1.7 Section 5 of the Master Credit Agreement is hereby amended to add
section 5.26 as follows:
5.26 Borrower covenants and agrees with Bank that, while any Loan is in
effect, Borrower will:
(A) Furnish such additional information, statements and other reports
with respect to Borrower activities, course of action and progress towards
becoming Year 2000 Compliant as Bank may request from time to time.
(B) In the event of any change in circumstances that causes or will
likely cause any of Borrower's representations and warranties with respect to
its being or becoming Year 2000 Compliant to no longer be true (hereinafter,
referred to as a "Change in Circumstances") then Borrower shall promptly, and in
any event within ten (10) days of receipt of information regarding a Change in
Circumstances, provide Bank with written notice (the "Notice") that describes in
reasonable detail the Change in Circumstances and how such Change in
Circumstances caused or will likely cause Borrower's representations and
warranties with respect to being or becoming Year 2000 Compliant to no longer be
true. Borrower shall, within ten (10) days of a request, also provide Bank with
any additional information Bank requests of Borrower in connection with the
Notice and/or a Change in Circumstances.
(C) Promptly upon its becoming available, furnish to Bank one copy of
each financial statement, report, notice, or proxy statement sent by Borrower to
stockholders generally and of each regular or periodic report, registration
statement or prospectus filed by Borrower with any securities exchange or the
Securities and Exchange Commission or any successor agency, and of any order
issued by any Governmental Authority in any proceeding to which Borrower is a
party. For purposes of these provisions, "Governmental Authority" shall mean any
government (or any political subdivision or jurisdiction thereof), court,
bureau, agency or other government entity having or asserting jurisdiction over
Borrower or any of its business, operations or properties.
(D) Give any representative of Bank access during all business hours to,
and permit such representative to examine, copy or make excerpts from, any and
all books, records and documents in the possession of Borrower and relating to
its affairs, and to inspect any of the properties and Systems of Borrower, and
to project test the Systems to determine if they are Year 2000 Compliant in an
integrated environment, all at the sole cost and expense of Bank.
2.2 Each of the Loan Documents is modified to provide that it shall be a
default or an event of default thereunder if Borrower shall fail to comply with
any of the covenants of Borrower herein or if any representation or warranty by
Borrower herein or by any guarantor in any related Consent and Agreement of
Guarantor(s) is materially incomplete, incorrect, or misleading as of the date
hereof.
2.3 Each reference in the Loan Documents to any of the Loan Documents
shall be a
<PAGE> 5
reference to such document as modified herein.
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.
The Loan Documents are ratified and affirmed by Borrower and shall remain in
full force and effect as modified herein. Any property or rights to or interests
in property granted as security in the Loan Documents shall remain as security
for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents as
Modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial condition
of Borrower or any other person whose financial statement has been delivered to
Bank in connection with the Loan from the most recent financial statement
received by Bank.
4.3 Each and all representations and warranties of Borrower in the Loan
Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and
binding obligation of Borrower, enforceable against Borrower in accordance with
their terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Loan Documents as modified herein.
The execution and delivery of this Agreement and the performance of the Loan
Documents as modified herein have been duly authorized by all requisite action
by or on behalf of Borrower. This Agreement has been duly executed and delivered
on behalf of Borrower.
5. BORROWER COVENANTS.
Borrower covenants with Bank:
5.1 Borrower shall execute, deliver, and provide to Bank such additional
agreements,
<PAGE> 6
documents, and instruments as reasonably required by Bank to effectuate the
intent of this Agreement.
5.2 Borrower fully, finally, and forever releases and discharges Bank
and its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits, of whatever kind or nature, in law
or equity of Borrower, whether now known or unknown to Borrower, (i) in respect
of the Loan, the Loan Documents, or the actions or omissions of Bank in respect
of the Loan or the Loan Documents and (ii) arising from events occurring prior
to the date of this Agreement.
5.3 Contemporaneously with the execution and delivery of this Agreement,
Borrower has paid to Bank:
5.3.1 All accrued and unpaid interest under the Note and all
amounts, other than interest and principal, due and payable by Borrower under
the Loan Documents as of the date hereof.
5.3.2 All the internal and external costs and expenses incurred
by Bank in connection with this Agreement (including, without limitation, inside
and outside attorneys, appraisal, appraisal review, processing, title, filing,
and recording costs, expenses, and fees).
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
Bank shall not be bound by this Agreement until (i) Bank has executed and
delivered this Agreement, (ii) Borrower has performed all of the obligations of
Borrower under this Agreement to be performed contemporaneously with the
execution and delivery of this Agreement, (iii) each guarantor(s) of the Loan,
if any, has executed and delivered to Bank a Consent and Agreement of
Guarantor(s), and (iv) if required by Bank, Borrower and any guarantor(s) have
executed and delivered to Bank an arbitration resolution, an environmental
questionnaire, and an environmental certification and indemnity agreement.
7. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION OR WAIVER.
The Loan Documents as modified herein contain the entire understanding and
agreement of Borrower and Bank in respect of the Loan and supersede all prior
representations, warranties, agreements, arrangements, and understandings. No
provision of the Loan Documents as modified herein may be changed, discharged,
supplemented, terminated, or waived except in a writing signed by Bank and
Borrower.
<PAGE> 7
8. BINDING EFFECT.
The Loan Documents as modified herein shall be binding upon, and inure to the
benefit of, Borrower and Bank and their respective successors and assigns.
9. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with the laws of
the State of California, without giving effect to conflicts of law principles.
10. COUNTERPART EXECUTION.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original and all of which together shall constitute one and the
same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
<PAGE> 8
DATED as of the date first above stated.
BORROWER: CARMEL MOUNTAIN RANCH, a California
general partnership
BY: Presley Homes, a California corporation,
formerly known as The Presley Companies,
general partner
By: \s\ David M. Siegel
-----------------------------------
Title: Sr. Vice President
-----------------------------------
By: \s\ W. Douglass Harris
-----------------------------------
Title: Vice President/Controller
-----------------------------------
BY: Presley CMR, Inc., a California corporation,
general partner
By: \s\ David M. Siegel
-----------------------------------
Title: Sr. Vice President
-----------------------------------
By: \s\ W. Douglass Harris
-----------------------------------
Title: Vice President/Controller
-----------------------------------
BANK: BANK ONE, ARIZONA, NA, a national banking
association
By: \s\ Rudy Cramer
-----------------------------------
Title: Vice President
-----------------------------------
<PAGE> 1
EXHIBIT 10.2
SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of September __ , 1998, is made by and
between The Presley Companies, a Delaware corporation (the "Company"), and
_______________ (the "Employee").
WHEREAS, the Board of Directors (the "Board") of the Company
considers it in the best interests of its stockholders to foster the continued
employment of key management personnel of the Company; and
WHEREAS, the Board recognizes that the possibility of a change of
control with respect to the Company exists and that such possibility, and the
uncertainty and questions which such event may raise among management, may
result in the departure or distraction of management personnel to the detriment
of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should
be taken to reinforce and encourage the continued dedication of members of the
Company's management, including the Employee, to their assigned duties without
distraction arising from the possibility of a change of control with respect to
the Company;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Employee hereby agree as
follows:
1. Defined Terms.
Unless otherwise defined herein, the definitions of capitalized
terms used in this Agreement are provided in the last Section hereof.
2. Term of Agreement.
The term of this Agreement shall commence on the date hereof and
shall continue in effect through December 31, 1999, unless a Change of Control
shall have occurred on or prior to such date (the "Term").
3. Severance Payments.
Subject to Section 4 hereof, if the Employee's employment is
terminated within twelve months following a Change of Control and during the
Term, other than (A) by the Company for Cause, (B) by reason of death or
Disability of the Employee, or (C) by the Employee without Good Reason, then the
Company shall pay the Employee in lieu of any further salary payments to the
Employee for periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Employee, a lump sum severance
payment, in cash, equal to the amount set forth on Schedule A attached hereto
(the "Severance Payment") plus any accrued but unused vacation or sick pay as of
the Date of Termination.
<PAGE> 2
4. 280G Cap.
Notwithstanding any other provisions of this Agreement, in the
event that any payment or benefit ("Total Payments") received or to be received
by the Employee in connection with a Change of Control or the termination of the
Executive's employment would not be deductible (in whole or part) by the Company
as a result of section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), then, to the extent necessary to make such portion of the Total
Payments deductible by the Company (and after taking into account any reduction
in the Total Payments provided by reason of section 280G of the Code in such
other plan, arrangement or agreement), the Severance Payment shall be reduced to
the extent necessary to make such payment deductible to the Company.
5. Timing of Payments.
The Severance Payment shall be made not later than the fifth
business day following the Date of Termination; provided, however, that if the
amount of such payment, and the limitation on such payments set forth in Section
4 hereof, cannot be finally determined on or before such day, the Company shall
pay to the Employee on such day an estimate, as determined in good faith by the
Company, of the minimum amount of such payments to which the Employee is clearly
entitled and shall pay the remainder of such payments as soon as the amount
thereof can be determined but in no event later than the 30th day after the Date
of Termination. The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Employee's existing rights, or rights which would accrue solely as
a result of the passage of time, under any stock option, stock appreciation or
other securities incentive plan, incentive or bonus plan, or group life,
medical, dental, or accident and disability plan.
6. Termination Procedures.
a. Notice of Termination. Within twelve months following a Change of
Control and during the Term, any termination of the Employee's employment (other
than by reason of death) shall be communicated by written notice of termination
from one party hereto to the other party hereto in accordance with Section 14
hereof ("Notice of Termination"). For purposes of this Agreement, a Notice of
Termination shall mean a notice which shall indicate with respect to a
termination by Employee for Good Reason the specific provision in this Agreement
relied upon and the Date of Termination. Notwithstanding the foregoing, the
failure by the Company to deliver a Notice of Termination shall not relieve the
Company from its obligations to pay to Employee the Severance Payment.
b. Date of Termination. "Date of Termination," with respect to any
termination of the Employee's employment within twelve months following a Change
of Control and during the Term, shall mean the date on which the Employee's
employment with the Company is terminated by the Company or the Employee.
Notwithstanding the foregoing, if the Date of Termination relates to a
termination by Employee for Good Reason as a result of any act or failure to act
by the Company described in paragraph (1), (5), or (6) of Section 15.d. below,
then the Date of Termination shall be no less than 15 days from the date such
Notice of Termination is given.
2
<PAGE> 3
7. No Mitigation.
The Company agrees that, if the Employee's employment with the
Company terminates during the Term, the Employee is not required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Employee by the Company. Further, the amount of any payment or benefit provided
for in this Agreement shall not be reduced by any compensation earned by the
Employee as the result of employment by another employer, by retirement
benefits, by offset against any amount claimed to be owed by the Employee to the
Company, or otherwise.
8. Arbitration as the Exclusive Remedy.
Any controversy or claim arising out of or relating to this
Agreement shall be settled by arbitration in Orange County, California, in
accordance with the employment dispute arbitration rules of the American
Arbitration Association (the "Association") then in effect. Any claim arising
out of or relating to this Agreement must be presented by the Employee within
three months of the Date of Termination. Unless the party against whom any claim
is asserted waives the time limits set forth above, any claim not brought within
the time period specified shall be waived and forever barred.
The Employee and the Company shall each appoint one arbitrator
from a list provided by the Association (the "List") within 15 days after the
List is delivered to Employee or the Company. If, within such 15 day period,
either the Company or the Employee has failed to appoint an arbitrator, the
arbitration shall be conducted by the arbitrator appointed by the other of them.
Within ten days after each of the Employee and the Company has timely appointed
an arbitrator, the two arbitrators together shall appoint a third arbitrator
from the List. In the event that the arbitrator selected by the Company and the
arbitrator selected by the Employee are unable to agree upon a third arbitrator,
then the third arbitrator shall be selected from the List, with the Company and
Employee striking names in order and the party striking first to be determined
by the flip of a coin. In consideration of each party's agreement to submit to
arbitration all disputes with regard to this Agreement, and in consideration of
the anticipated expedition and the minimizing of expense of this arbitration
remedy, each agrees that the arbitration provisions of this Agreement shall
provide it with its exclusive remedy and each party expressly waives any right
it might have to seek redress in any other forum except as provided herein. The
expenses of the neutral arbitrator (or of the one arbitrator if only one party
timely appoints an arbitrator) and of a transcript of any arbitration proceeding
shall be divided equally between the Company and the Employee. Each party shall
bear the expense of the arbitrator selected by it (if the arbitration is
conducted by three arbitrators) and of any witnesses it calls.
Any decision or order of the majority of the arbitrator(s) shall
be binding upon the parties hereto and judgment thereon may be entered in the
Superior Court of the State of California or any other court having
jurisdiction.
3
<PAGE> 4
9. Attorneys' Fees.
In the event that any party to this Agreement institutes an
arbitration action under Section 8 of this Agreement, the prevailing party in
such arbitration action shall be entitled to recover from the non-prevailing
party its reasonable attorneys' fees, costs and expenses.
10. Assignment.
The rights and obligations under this Agreement shall inure to
and be binding upon the parties hereto and their respective heirs, successors
and assigns.
11. Entire Agreement.
This Agreement shall supersede any and all prior written or oral
agreements and discussions between the Employee and the Company and contains the
entire understanding of the parties hereto with respect to the matters contained
herein.
12. Severability.
In the event that any portion of this Agreement should be held to
be void, voidable, unlawful, or, for any reason, unenforceable, the remaining
portions hereto shall remain in full force and effect.
13. Governing Law.
This Agreement is executed and delivered in the State of
California and shall be construed and enforced in accordance with the internal
laws of the State of California without regard to the principles of conflict of
laws.
14. Notices.
All notices and other communications provided for hereunder must
be in writing and must be mailed or delivered, if to Employee to the address set
forth on the records of the Company, and if to the Company, at 19 Corporate
Plaza, Newport Beach, California 92660 or at any other address (other than a
post office box) as may be designated by the Employee or the Company in a
written notice sent to the other party. If any notice or other communication
required or permitted by this Agreement is given by mail it will be effective on
the earlier of receipt or the third business day after deposit in the United
States mail with first class postage prepaid; or if given by personal delivery,
when delivered.
15. Definitions.
For purposes of this Agreement, the following terms shall have
the meanings indicated below:
4
<PAGE> 5
a. "Cause" means (i) Employee's commission of a material act of
dishonesty or fraud against the Company or The Presley Companies, a California
corporation ("California Presley"), (ii) Employee's commission of a criminal
felony, (iii) Employee's rendering of services to another entity other than as
an incident to Employee's employment by the Company or Presley California, as
the case may be, or (iv) the failure of Employee to be available to the Company
or Presley California, as the case may be, for the number of hours during the
normal business day of such entity (subject to such entity's customary policies
regarding vacation time) comparable to the number of hours Employee spent during
the course of employment preceding the date of this Agreement, if such failure
continues for ten consecutive days or for a total of 20 days, unless such
failure is due to disability, ill health, death or termination by Employee for
Good Reason.
b. A "Change of Control" means the occurrence of any of the following:
(i) the Company shall cease to own the number of outstanding shares of the
California Presley's capital stock necessary to elect a majority of the Board of
Directors of California Presley; (ii) the sale, lease, exchange or transfer, in
one or a series of transactions (any such sale, lease, exchange or transfer
herein a "Disposition") of all or substantially all of the Company's or
California Presley's assets to any "person" or "group" of persons (as such terms
are used for the purposes of Section 13(d) and Section 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the regulations
thereunder) such that any person or group (other than a group of which 70% or
more of the voting power of the voting stock referred to below held by such
group is owned beneficially by one or more Permitted Holders or their Related
Parties if the person or persons to which the Disposition is made assume this
Agreement) owns, controls or acquires a direct or indirect interest in more than
50% of the voting power of the voting stock of the person or persons that
acquire such assets by a Disposition, (iii) the acquisition by any person or
group (as defined above) (other than a group of which 70% or more of the voting
power of the voting stock of the Company held by such group is owned
beneficially by one or more Permitted Holders of their Related Parties) of a
direct or indirect beneficial interest in more than 50% of the voting power of
the voting stock of the Company by way of merger or consolidation or otherwise,
(iv) the consummation of any transaction the result of which is that any person
or group (as defined above) (other than a group of which 70% or more of the
voting power of the voting stock of the Company held by such group is owned
beneficially by one or more Permitted Holders or their Related Parties) owns,
directly or indirectly, more than 50% of the voting power of the voting stock of
the Company, or (v) if at any time during he Term of this Agreement, individuals
who on the date hereof were directors of the Company cease for any reason to
constitute a majority of the Board of Directors of the Company unless the
persons replacing such individuals were nominated by a majority of the Board of
Directors of the Company.
"Permitted Holders" means either of (a) William Lyon, or (b) any
of Foothill Capital Corporation, Pearl Street, L.P., International Nederlanden
(U.S.) Capital Corporation, First Plaza Group Trust, and Whippoorwill/Presley
Obligation Trust - 1994.
5
<PAGE> 6
"Related Party" means with respect to any Permitted Holder (A)
any person (as defined above in Change of Control) which owns, directly or
indirectly, more than 80% of the securities entitled to elect a majority of the
board of directors, or other comparable governing group, of the Permitted
Holder; any corporation, association or other business entity of which more than
80% of the securities entitled to elect a majority of the board of directors, or
other comparable governing group of such entity, is owned, directly or
indirectly, by a Permitted Holder; or in the case of an individual, any spouse
or immediate family member of such Permitted Holder; or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partner, owners or persons beneficially holding 80% or more controlling interest
of which consist of such Permitted Holder and/or such other persons referred to
in the immediately preceding clause (A).
c. "Disability" means the inability of Employee because of ill health
or physical or mental condition to perform the duties and responsibilities in
the ordinary and usual manner required of a person in Employee's position for 90
consecutive days.
d. "Good Reason" for termination by the Employee of the Employee's
employment shall mean the occurrence within twelve months (without the
Employee's express written consent) after any Change of Control, of any one of
the following acts by the Company, or failures by the Company to act, unless, in
the case of any act or failure to act described in paragraph (1), (5), or (6)
below, such act or failure to act is corrected prior to the Date of Termination
specified in the Notice of Termination given in respect thereof:
(1) the assignment to the Employee of any duties
inconsistent with the Employee's position with the Company prior
to the Change of Control or a substantial adverse alteration in
the nature or status of the Employee's responsibilities from
those in effect immediately prior to the Change of Control,
except in either case as a result of the Company no longer being
a publicly held or reporting company;
(2) a reduction by the Company in the Employee's annual
base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all similarly situated employees
of the Company;
(3) the relocation of the Employee's principal place of
employment to a location more than 50 miles from the Employee's
principal place of employment immediately prior to the Change of
Control or the Company's requiring the Employee to be based
anywhere other than such principal place of employment (or
permitted relocation thereof) except for required travel on the
Company's business to an extent substantially consistent with the
Employee's business travel obligations immediately prior to the
Change of Control;
(4) the failure by the Company to pay to the Employee
any portion of the Employee's current compensation except
pursuant to an across-the-board compensation deferral similarly
affecting all similarly situated employees of the Company;
6
<PAGE> 7
(5) the failure by the Company to continue in effect
any compensation plan in which the Employee participates
immediately prior to the Change of Control which is material to
the Employee's total compensation, including but not limited to
the Company's stock option, bonus and other plans or any
substitute plans adopted prior to the Change of Control, unless
an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the
failure by the Company to continue the Employee's participation
therein (or in such substitute or alternative plan) on a basis
not materially less favorable, both in terms of the amount or
timing of payment of benefits provided and the level of the
Employee's participation relative to other participants, as
existed immediately prior to the Change of Control;
(6) the failure by the Company to continue to provide
the Employee with benefits substantially similar to those enjoyed
by the Employee under any of the Company's pension, savings, life
insurance, medical, health and accident, or disability plans in
which the Employee was participating immediately prior to the
Change of Control (except for across-the-board changes similarly
affecting all similarly situated employees of the Company and all
similarly situated employees of any person or entity in control
of the Company);
(7) the failure by the Company to obtain the written
assumption of this Agreement by any successor or assign of the
Company; or
(8) the failure by the Company to provide the Employee
with the number of paid vacation days to which Employee is
entitled at the time of the Change of Control.
THE PRESLEY COMPANIES
By:_____________________________
Name:
Title:
________________________________
Address:
________________________________
________________________________
________________________________
(Please print carefully)
7
<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 nine months ended September 30, 1998 and is
qualified in its entirety by reference to such Quarterly Report on Form 10-Q for
the nine months ended September 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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0
0
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