<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
<TABLE>
<S> <C>
DELAWARE 33-0475923
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
19 CORPORATE PLAZA
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 640-6400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
SERIES A COMMON STOCK, PAR VALUE $.01 PER NEW YORK STOCK EXCHANGE
SHARE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendments to
this Form 10-K/A. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 30, 1999 was $23,341,011. (This calculation
assumes that all officers and directors of the Company are affiliates.)
The number of shares of Series A Common Stock and Series B Common Stock
outstanding as of September 30, 1999 was 34,792,732 and 17,402,946,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for the Annual Meeting of Holders
of Series A Common Stock held on May 10, 1999 are incorporated herein by
reference into Part III.
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<PAGE> 2
THE PRESLEY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of
Operations.................................................. 16
Quantitative and Qualitative Disclosures About Market
Item 7A. Risk........................................................ 29
Item 8. Financial Statements and Supplementary Data................. 29
Changes in and Disagreements with Accountants on Accounting
Item 9. and
Financial Disclosure........................................ 29
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 29
Item 11. Executive Compensation...................................... 29
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 30
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Exhibits, Consolidated Financial Statement Schedules and
Item 14. Reports on Form 8-K......................................... 30
Index to Consolidated Financial Statements.................. 35
</TABLE>
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<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
The Presley Companies and subsidiaries ("Presley" or the "Company") are
primarily engaged in designing, constructing and selling single family detached
and attached homes in California, Arizona, New Mexico and Nevada. Since its
founding in 1956, Presley has sold over 47,000 homes. At December 31, 1998 the
Company conducted its homebuilding operations through six geographic regions
(Southern California, San Diego, Northern California, Arizona, New Mexico and
Nevada) including both wholly-owned projects and projects being developed in
unconsolidated joint ventures. The Company believes that it was one of the
largest homebuilders in California in terms of both sales and homes delivered in
1998. Approximately 55% of the Company's home closings were derived from its
California operations. In 1998, the Company and its unconsolidated joint
ventures had combined revenues of $409.4 million and delivered 1,925 homes.
Beginning in early 1996, the Company's homebuilding operations have been
conducted under the name Presley Homes.
The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets, although it primarily emphasizes
sales to the entry-level and move-up home buyer markets. The Company currently
markets its homes through 46 sales locations in both its wholly-owned projects
and projects being developed in unconsolidated joint ventures. In 1998, the
average sales price for homes delivered was $202,300, with homes priced from
$82,900 to $885,600.
The Company and its unconsolidated joint ventures currently own
approximately 7,658 lots (including 3,158 in unconsolidated joint ventures) and
control an additional 4,141 lots (including 3,300 in unconsolidated joint
ventures) on which to construct homes. Substantially all lots are entitled,
except for approximately 4,900 lots in two unconsolidated joint ventures in
Arizona which are in the preliminary entitlement stage. As used in this Annual
Report on Form 10-K/A, "entitled" land has a Development Agreement and/or
Vesting Tentative Map, or a final recorded plat or map from the appropriate
county or city government. Development Agreements and Vesting Tentative Maps
generally provide for the right to develop the land in accordance with the
provisions of the Development Agreement or Vesting Tentative Map unless an issue
arises concerning health, safety or general welfare. The Company's sources of
supply of developed lots for its homebuilding operations are (1) development of
its master-planned communities and (2) purchase of smaller projects with shorter
life cycles (merchant homebuilding). As of December 31, 1998 approximately 64%
of the total lots owned and controlled by the Company and its unconsolidated
joint ventures are located in the Company's eight master-planned communities.
Development of master-planned communities, which generally takes five to fifteen
years from the date of initial land acquisition to completion, includes
selecting sites and acquiring large parcels of undeveloped land, obtaining all
necessary government approvals to build, and developing land, infrastructure and
finished lots. The Company estimates that its current inventory of land is
adequate to supply its homebuilding operations at current operating levels for
approximately 2 years.
Prior to 1994, the Company had focused on the development of master-planned
communities as a primary source of supply of developed lots for its homebuilding
operations. Beginning in 1994, the Company's land acquisition strategy, to the
extent permitted by the Company's financing arrangements, has been to undertake
projects with shorter life-cycles in order to reduce development and market risk
while maintaining an inventory of lots sufficient for construction of homes over
a two or three year period. As part of this strategy, the Company's current
plans are to: (i) acquire and develop parcels of land with up to approximately
300 lots, (ii) expand its homebuilding operations in the Southwest, particularly
in its long established markets in California and Arizona, and in Nevada, where
the Company entered the market in 1995 and (iii) continue to evaluate
opportunities in land development and master-planned communities with the
intention that any such projects would be funded in significant part by sources
other than the Company.
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. In conjunction with the engagement
of the financial advisor, a Special Committee comprised of independent directors
of the Company's Board of Directors was formed to
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<PAGE> 4
evaluate strategic alternatives. The Company's actions were 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 $89.9 million loss for the year ended
December 31, 1997 included a non-cash charge of $74.0 million 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 $5.7 million at December 31, 1997. As of
December 31, 1998, the Company's stockholders' equity totaled $5.8 million.
On December 31, 1998, the Company announced that, after unanimous approval
by the Special Committee of independent directors, Presley had entered into a
letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting
forth their preliminary understanding with respect to (i) the proposed
acquisition by Presley of substantially all of the assets of William Lyon Homes
for approximately $48.0 million together with the assumption of related
liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to
a tender offer for not less than 40% and not more than 49% of the outstanding
shares of Presley common stock held by stockholders other than William Lyon at a
price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and
his son, William H. Lyon, is a California-based homebuilder and real estate
developer with projects currently under development in Northern and Southern
California. Following the completion of the proposed transactions, William Lyon,
who is the current Chairman of the Board of Presley, would beneficially own
between 55% and 65% (depending on the number of shares tendered) of the
outstanding shares of Presley common stock and the remaining shares would
continue to be publicly traded. The execution of the letter of intent followed a
review over several months by the Special Committee, together with its financial
and legal advisors, of strategic alternatives available to Presley as well as a
review of other proposals received from third parties.
Under the terms of the letter of intent, the proposed transactions are
subject to various conditions, including the successful negotiation and
execution of a definitive agreement, the receipt of opinions of Presley's
advisors with respect to the fairness of the transactions to Presley and its
stockholders as well as the solvency of Presley following consummation of the
transactions, the receipt of real estate appraisals satisfactory to Presley and
William Lyon Homes with respect to the real estate assets of William Lyon Homes,
the approval of a definitive agreement by the respective boards of directors of
Presley and William Lyon Homes by March 31, 1999, receipt of all required
regulatory approvals and third party consents, including any required lender
consents, the receipt of agreements from certain significant stockholders of
Presley to tender their shares pursuant to the tender offer, the receipt of
financing by Presley in an amount sufficient to enable Presley to finance the
transactions, and the absence of any material adverse change in the business or
financial condition of either Presley or William Lyon Homes.
In addition, the letter of intent contemplates that each of the
transactions will be structured so as to be subject to the successful completion
of the other and that the parties will structure the transactions (including, if
necessary, by imposing limitations on certain transfers of shares) so as to
avoid triggering the change of control tax provisions that would result in the
loss of Presley's net operating losses for tax purposes. The letter of intent
also contemplates that Presley's 12 1/2% Senior Notes due 2001 shall remain
outstanding without modification.
The letter of intent provides that, subject to the fiduciary duties of
their respective boards of directors, Presley and William Lyon Homes will
negotiate exclusively with each other toward a definitive agreement until March
31, 1999.
The letter of intent does not constitute a binding agreement to consummate
the transactions and there can be no assurances that the parties ultimately will
enter into a definitive agreement with respect to the transactions or that the
conditions to the transactions will be satisfied.
2
<PAGE> 5
On February 18, 1999 the Company announced that it had received a letter
from William Lyon, Chairman of the Board of William Lyon Homes and also Chairman
of the Board of Presley, proposing a modification to the previously executed
letter of intent with William Lyon Homes. Under the proposed modification,
William Lyon Homes would make a tender offer for not more than 37% of the
outstanding shares of common stock of Presley for a purchase price of $0.62 per
share. In the event that more than 37% of the outstanding shares of common stock
of Presley is tendered, William Lyon Homes will purchase shares from each
tendering stockholder on a pro rata basis. The tender offer will be conditioned
upon there being tendered and not withdrawn, a number of shares which
constitutes at least 37% of the outstanding shares of Presley. The proposed
modification also provides that the transaction will be structured to permit
William Lyon or his affiliates, prior to consummation of the transaction and
consistent with applicable securities laws, to sell shares of Presley common
stock owned by them up to a maximum of 4% of the total number of shares of
Presley common stock presently outstanding. The proposed modification is
currently being considered by the Special Committee of independent directors.
On March 30, 1999, the parties amended the letter of intent to extend its
term and the period of exclusive negotiation to April 30, 1999. The condition
included in the letter of intent that the boards of directors of Presley and
William Lyon Homes must approve a definitive agreement by March 31, 1999 was
also extended to April 30, 1999. The parties have also agreed that William Lyon
Homes may participate in discussions and negotiations with the holders of
Presley's Series B Common Stock regarding the purchase by William Lyon Homes of
such percentage of the Series B holder's shares so as to reduce such Series B
holder's ownership interest in Presley Common Stock to between 4.9% and 5% of
Presley's outstanding Common Stock following consummation of the proposed
transactions. William Lyon Homes may also seek commitments from the Series B
holders to sell additional shares to the extent that the number of shares of
Series A Common Stock tendered in the tender offer are below the minimum
threshold set forth in a definitive agreement. Any such negotiations are to be
conducted exclusively so as to obtain the consent of the Series B holders to the
proposed transactions and to avoid triggering the change of control tax
provisions that would result in the loss of Presley's net operating loss
carryforwards for tax purposes. William Lyon Homes is required to notify the
Special Committee regarding the details of any such discussions and
negotiations. William Lyon Homes may not enter into any agreement with any
Series B Holder prior to receiving the written approval from the Special
Committee or Presley's Board of Directors.
In connection with these events, the Company has incurred costs of
approximately $1.3 million for the year ended December 31, 1998 which are
reflected in the Consolidated Statement of Operations as financial advisory
expenses.
In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due in 2001, if the Company's Consolidated Tangible Net
Worth is less than $60 million for two consecutive fiscal quarters, the Company
is required to offer to purchase $20 million in principal amount of the Senior
Notes. Because the Company's Consolidated Tangible Net Worth has been less than
$60 million beginning with the quarter ended June 30, 1997, the Company would,
effective on December 4, 1997, June 4, 1998 and December 4, 1998, have been
required to make offers to purchase $20 million of the Senior Notes at par plus
accrued interest, less the face amount of Senior Notes acquired by the Company
after September 30, 1997, March 31, 1998 and September 30, 1998, respectively.
The Company acquired Senior Notes with a face amount of $20 million after
September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and
prior to June 4, 1998, and again after September 30, 1998 and prior to December
4, 1998, and therefore was not required to make said offers. As a result of
these transactions, the Company has recognized a net gain of $2.7 million during
the year ended December 31, 1998, after giving effect to income taxes and
amortization of related loan costs.
Each six months thereafter, until such time as the Company's Consolidated
Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the
Company will be required to make similar offers to purchase $20 million of
Senior Notes. At December 31, 1998, the Company's Consolidated Tangible Net
Worth was $2.4 million. The Company's management has previously held
discussions, and may in the future hold discussions, with representatives 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
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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.
On July 6, 1998 the Company completed an agreement with the Agent of its
existing lender group under its Working Capital Facility to (1) extend this loan
facility to May 20, 2001, (2) increase the loan commitment to $100 million and
(3) decrease the fees and costs compared to the prior revolving facility.
Because of the Company's obligation to offer to purchase $20 million of the
Senior Notes each six months so long as the Company's Consolidated Tangible Net
Worth is less than $60 million, the Company is restricted in its ability to
acquire, hold and develop real estate projects. The Company changed its
operating strategy during 1997 to finance certain projects by forming joint
ventures with venture partners that would provide a substantial portion of the
capital necessary to develop these projects. The Company believes that the use
of joint venture partnerships will better enable it to reduce its capital
investment and risk in the highly capital intensive California markets, as well
as to repurchase the Company's Senior Notes as described above. The Company
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.
As of December 31, 1998, the Company and certain of its subsidiaries are
general partners or members in twelve joint ventures involved in the development
and sale of residential projects. Such joint ventures are 50% or less owned and,
accordingly, the financial statements of such joint ventures are not
consolidated with the Company's financial statements. The Company's investments
in unconsolidated joint ventures are accounted for using the equity method. See
Note 6 of "Notes to Consolidated Financial Statements" for condensed combined
financial information for these joint ventures. 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.
The Company will continue to utilize its current inventory of lots and
future land acquisitions to conduct its operating strategy which consists of:
(i) offering a diverse product line at a variety of prices to suit a wide range
of consumer tastes, (ii) limiting completed housing inventory exposure, (iii)
emphasizing well-designed cost-effective products, (iv) utilizing market
research to allow for a quick response to local market conditions, (v)
maintaining budget and control systems to facilitate effective cost controls and
(vi) using extensive marketing and sales efforts.
The Company had total revenues from operations of $368.3 million, $329.9
million and $319.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Homes closed by the Company were 1,925, 1,597 and 1,838 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Presley's operations are dependent to a significant extent on debt
financing and, beginning in the fourth quarter of 1997, on joint venture
financing. The Company's principal credit sources are the 12 1/2% Senior Notes,
a Working Capital Facility, a joint venture facility, and seller-provided
financing. The Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 for the sale of $200.0 million of 12 1/2%
Senior Notes which became effective on June 23, 1994. The offering closed on
June 29, 1994 and was fully subscribed and issued. At December 31, 1998, the
outstanding principal amount of the 12 1/2% Senior Notes was $140.0 million. The
Working Capital Facility is a revolving line of credit facility with a maximum
commitment of $100.0 million. The Working Capital Facility is secured by
substantially all of the Company's assets. At December 31, 1998, the outstanding
principal amount under the Working Capital Facility was $44.0 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition and Liquidity" and Notes 3 and 7 of "Notes to
Consolidated Financial Statements."
The ability of the Company to meet its obligations on its indebtedness will
depend to a large degree on its future performance which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, weather, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective
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indemnification agreements, availability of labor and homebuilding materials,
changes in governmental laws and regulations, and the availability and cost of
land for future development. At this time, the Company's degree of leverage may
limit its ability to meet its obligations, withstand adverse business or other
conditions and capitalize on business opportunities.
The Company's principal executive offices are located at 19 Corporate
Plaza, Newport Beach, California 92660 and its telephone number is (949)
640-6400. The Company was incorporated in the State of Delaware on August 7,
1991.
THE COMPANY'S MARKETS
The Company is currently operating through six geographic regions: Southern
California, San Diego, Northern California, Arizona, New Mexico, and Nevada.
Each of the regions has responsibility for the management of the Company's
homebuilding and development operations within the geographic boundaries of the
region.
The following table sets forth sales from real estate operations
attributable to each of Presley's homebuilding regions during the preceding
three fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
DOLLAR % OF DOLLAR % OF DOLLAR % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
WHOLLY-OWNED
Southern California(1).................. $ 80,868 20% $120,641 37% $128,153 40%
San Diego(2)............................ 70,390 17% 30,464 9% 40,799 13%
Northern California(3).................. 76,117 19% 83,171 25% 68,100 21%
Arizona(4).............................. 68,803 17% 50,550 15% 57,065 18%
New Mexico(5)........................... 27,067 7% 19,996 6% 16,180 5%
Nevada(6)............................... 44,487 11% 25,120 8% 8,700 3%
Other................................... 550 0% -- 0% -- 0%
-------- --- -------- --- -------- ---
368,282 91% 329,942 100% 318,997 100%
-------- --- -------- --- -------- ---
UNCONSOLIDATED JOINT VENTURES
Southern California(1).................. 871 0% -- 0% -- 0%
San Diego(2)............................ 26,725 6% -- 0% -- 0%
Northern California(3).................. 13,485 3% -- 0% -- 0%
-------- --- -------- --- -------- ---
41,081 9% -- 0% -- 0%
-------- --- -------- --- -------- ---
COMBINED
Southern California(1).................. 81,739 20% 120,641 37% 128,153 40%
San Diego(2)............................ 97,115 23% 30,464 9% 40,799 13%
Northern California(3).................. 89,602 22% 83,171 25% 68,100 21%
Arizona(4).............................. 68,803 17% 50,550 15% 57,065 18%
New Mexico(5)........................... 27,067 7% 19,996 6% 16,180 5%
Nevada(6)............................... 44,487 11% 25,120 8% 8,700 3%
Other................................... 550 0% -- 0% -- 0%
-------- --- -------- --- -------- ---
$409,363 100% $329,942 100% $318,997 100%
======== === ======== === ======== ===
</TABLE>
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(1) The Southern California Region consists of operations in Los Angeles,
Orange, Riverside, San Bernardino and Ventura Counties.
(2) The San Diego Region consists of operations in San Diego and Riverside
Counties.
(3) The Northern California Region consists of operations in Alameda, Contra
Costa, El Dorado, Sacramento, Solano, Yolo and Santa Clara Counties.
(4) The Arizona Region consists of operations in the Phoenix area and, until
January 1999, Tucson, Arizona.
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(5) The New Mexico Region consists of operations in Albuquerque and Santa Fe,
New Mexico.
(6) The Nevada Region consists of operations in the Las Vegas area.
For financial information concerning segments, see the "Consolidated
Financial Statements" and Note 1 of "Notes to Consolidated Financial
Statements."
HOMEBUILDING
The Company currently has a wide variety of product lines which enables it
to meet the specific needs of each of its markets. The Company's products
include entry-level, move-up and luxury homes and lots for custom homes,
although it primarily emphasizes sales to the entry-level and move-up home
markets. The Company believes that this diversified product strategy enables it
to mitigate some of the risks inherent in the homebuilding industry and to meet
a variety of market conditions. In order to reduce exposure to local market
conditions, the Company's sales locations are geographically dispersed. The
Company currently has 46 sales locations.
Because the decision as to which product to develop is based on the
Company's assessment of market conditions and the restrictions imposed by
government regulations, homestyles and sizes vary from project to project. The
Company's attached housing ranges in size from 868 to 1,383 square feet, and the
Company's detached housing ranges from 940 to 4,655 square feet.
Due to Presley's product and geographic diversification strategy, the
prices of Presley's homes also vary substantially. Prices for Presley's attached
housing range from approximately $134,000 to $203,000 and prices for detached
housing range from approximately $81,900 to $885,600. The average sales price of
Presley's homes for the year ended December 31, 1998 was $202,300.
The Company generally standardizes and limits the number of home designs
within any given product line. This standardization permits on-site mass
production techniques and bulk purchasing of materials and components, thus
enabling the Company to better control and sometimes reduce construction costs.
Presley contracts with a number of architects and other consultants who are
involved in the design process of Presley homes. Designs are constrained by
zoning requirements, building codes, energy efficiency laws and local
architectural guidelines, among other factors. Engineering, landscaping,
master-planning and environmental impact analysis work are subcontracted to
independent firms which are familiar with local requirements.
Substantially all construction work is done by subcontractors with Presley
acting as the general contractor. The Company manages subcontractor activities
with on-site supervisory employees and management control systems. The Company
does not have long-term contractual commitments with its subcontractors or
suppliers. However, the Company generally has been able to obtain sufficient
materials and subcontractors during times of material shortages. The Company
believes its relationships with its suppliers and subcontractors are good.
DESCRIPTION OF PROJECTS
During the year ended December 31, 1998 approximately 34% of the homes
closed by the Company were in the Company's master-planned communities.
Presley's master-planned communities usually involve the development of hundreds
of acres of raw land into a large community providing homeowners with the
opportunity for employment, recreation, shopping and education within the
community or in close proximity to it. The homes within these communities
include a wide variety of detached and attached entry-level, move-up and luxury
homes, and may also contain apartments. Within these communities Presley also
may sell individual lots for custom homes, multiple lots for construction of
homes by other builders and parcels for commercial, industrial and apartment
development. These communities may offer a variety of recreational amenities
which may include golf courses, equestrian centers, tennis courts and swimming
pools, among others.
The Company's master-planned communities normally take five to fifteen
years to complete depending on the project's size, economic conditions
prevailing at the time, geological conditions at the site and the
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<PAGE> 9
Company's strategy for the particular project. Presley's other homebuilding
projects usually take two to five years to develop.
The following table presents project information relating to each of the
Company's homebuilding regions.
<TABLE>
<CAPTION>
UNITS LOTS HOMES CLOSED
ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG
YEAR OF NUMBER OF AS OF AS OF ENDED AT
FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4)
------------------------ -------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SOUTHERN CALIFORNIA
WHOLLY-OWNED:
Sun Lakes Country Club
(Riverside County)
Previously Closed
Products............... 1987 1,794 1,794 0 0 0
Villa Duplexes........... 1990 176 172 4 0 0
Veranda.................. 1994 25 23 2 0 0
Executive Series......... 1995 87 85 2 10 0
Promenade................ 1996 439 58 381 29 5
Atrium................... 1996 436 55 381 29 3
Terrace.................. 1996 407 57 350 33 2
------ ------ ----- ----- ---
3,364 2,244 1,120 101 10
------ ------ ----- ----- ---
Horsethief Canyon Ranch
(Riverside County)
Previously Closed
Products................. 1989 847 847 0 0 0
Series "300"............. 1998 327 13 314 13 14
Series "400"............. 1995 415 179 236 83 10
Series "500"............. 1995 375 161 214 83 31
------ ------ ----- ----- ---
1,964 1,200 764 179 55
------ ------ ----- ----- ---
The Highlands (Orange
County)
Previously Closed
Products............... 1989 1,748 1,748 0 0 0
Monaco................... 1995 408 408 0 20 0
Legacy................... 1995 84 84 0 6 0
------ ------ ----- ----- ---
2,240 2,240 0 26 0
------ ------ ----- ----- ---
Beltierra (Los Angeles
County)
Previously Closed
Products............... 1991 458 458 0 0 0
Las Brisas............... 1995 185 185 0 61 0
------ ------ ----- ----- ---
643 643 0 61 0
------ ------ ----- ----- ---
Fontana (San Bernardino
County).................. 1998 275 147 128 7 8
------ ------ ----- ----- ---
North Park -- Valencia (Los
Angeles County).......... 1996 48 48 0 1 0
------ ------ ----- ----- ---
Carey Ranch -- Sylmar (Los
Angeles County).......... 1997 138 105 33 84 29
------ ------ ----- ----- ---
Granada Hills (Los Angeles
County).................. 1999 37 0 37 0 9
------ ------ ----- ----- ---
Oak Park -- Irvine (Orange
County).................. 1998 126 12 114 12 59
------ ------ ----- ----- ---
Total
wholly-owned..... 8,835 6,639 2,196 471 170
====== ====== ===== ===== ===
UNCONSOLIDATED JOINT
VENTURES:
Thousand Oaks (Ventura
County).................. 1998 110 3 107 3 24
------ ------ ----- ----- ---
White Cloud Estates
(Ventura County)......... 1999 78 0 78 0 0
------ ------ ----- ----- ---
Total
unconsolidated
joint ventures... 188 3 185 3 24
------ ------ ----- ----- ---
SOUTHERN CALIFORNIA REGION
TOTAL.................... 9,023 6,642 2,381 474 194
====== ====== ===== ===== ===
<CAPTION>
SALES PRICE
PROJECT (COUNTY) PRODUCT RANGE(3)
------------------------ ------------------
<S> <C>
SOUTHERN
CALIFORNIA
WHOLLY-OWNED:
Sun Lakes Country Club
(Riverside County)
Previously Closed
Products...............
Villa Duplexes........... $ 97,900 - 124,900
Veranda.................. $ 89,990 - 125,990
Executive Series......... $108,900 - 135,900
Promenade................ $117,900 - 125,900
Atrium................... $135,900 - 150,900
Terrace.................. $165,900 - 185,900
Horsethief Canyon Ranch
(Riverside County)
Previously Closed
Products.................
Series "300"............. $122,900 - 135,900
Series "400"............. $146,900 - 172,900
Series "500"............. $173,900 - 191,900
The Highlands (Orange
County)
Previously Closed
Products...............
Monaco................... $ 97,000 - 157,000
Legacy................... $380,000 - 445,000
Beltierra (Los Angeles
County)
Previously Closed
Products...............
Las Brisas............... $105,000 - 143,900
Fontana (San Bernardino
County).................. $137,000 - 145,000
North Park -- Valencia (Los
Angeles County).......... $225,990 - 240,990
Carey Ranch -- Sylmar (Los
Angeles County).......... $210,900 - 246,900
Granada Hills (Los Angeles
County).................. $450,000 - 510,000
Oak Park -- Irvine (Orange
County).................. $134,000 - 203,000
Total
wholly-owned.....
UNCONSOLIDATED JOINT
VENTURES:
Thousand Oaks (Ventura
County).................. $272,000 - 297,000
White Cloud Estates
(Ventura County).........
Total
unconsolidated
joint ventures...
SOUTHERN CALIFORNIA REGION
TOTAL....................
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
UNITS LOTS HOMES CLOSED
ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG
YEAR OF NUMBER OF AS OF AS OF ENDED AT
FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4)
------------------------ -------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NORTHERN CALIFORNIA
WHOLLY-OWNED:
Oakhurst Country Club
(Contra Costa County)
Previously Closed
Products............... 1989 1,063 1,063 0 0 0
Falcon Ridge............. 1996 145 103 42 40 28
Peacock Creek............ 1996 142 87 55 27 17
Town Center.............. 1999 33 0 33 0 0
------ ------ ----- ----- ---
1,383 1,253 130 67 45
------ ------ ----- ----- ---
The Preserve (Alameda)
County).................. 1997 13 13 0 5 0
------ ------ ----- ----- ---
Twin Cities Mill Creek
(Sacramento County)...... 1996 116 97 19 51 17
------ ------ ----- ----- ---
Marina Woods
(El Dorado County)....... 1996 79 79 0 12 0
------ ------ ----- ----- ---
Eagle Ridge
(Solano County).......... 1997 364 215 149 51 32
------ ------ ----- ----- ---
Mace Ranch -- Classics
(Yolo County)............ 1997 94 67 27 49 15
------ ------ ----- ----- ---
Mace Ranch -- Affordables
(Yolo County)............ 1997 28 24 4 19 4
------ ------ ----- ----- ---
Total
wholly-owned..... 2,077 1,748 329 254 113
------ ------ ----- ----- ---
UNCONSOLIDATED JOINT
VENTURES:
Cerro Plata
(Santa Clara County)..... 2000 538 0 538 0 0
------ ------ ----- ----- ---
The Preserve
(Alameda County)......... 1997 87 16 71 16 34
------ ------ ----- ----- ---
Total
unconsolidated
joint ventures... 625 16 609 16 34
------ ------ ----- ----- ---
NORTHERN CALIFORNIA REGION
TOTAL.................... 2,702 1,764 938 270 147
====== ====== ===== ===== ===
SAN DIEGO
WHOLLY-OWNED:
Discovery Hills
(San Diego County)
Previously Closed
Products............... 1991 734 734 0 0 0
Discovery Meadows........ 1997 143 138 5 85 3
------ ------ ----- ----- ---
877 872 5 85 3
------ ------ ----- ----- ---
Carmel Mountain Ranch (San
Diego County)
Previously Closed
Products............... 1986 5,044 5,044 0 0 0
The Summit............... 1997 86 49 37 49 13
The Bluffs............... 1997 114 84 30 78 12
------ ------ ----- ----- ---
5,244 5,177 67 127 25
------ ------ ----- ----- ---
Sycamore Ranch
(Riverside County)....... 1997 195 38 157 32 5
------ ------ ----- ----- ---
Vail Ranch
(San Diego County)....... 1999 154 0 154 0 0
------ ------ ----- ----- ---
Total
wholly-owned..... 6,470 6,087 383 244 33
------ ------ ----- ----- ---
UNCONSOLIDATED JOINT
VENTURES:
Torrey Unit 1 -- The Sands
(San Diego County)....... 1998 107 46 61 46 7
------ ------ ----- ----- ---
Torrey Unit 4 -- The Shores
(San Diego County)....... 1998 59 26 33 26 13
------ ------ ----- ----- ---
Torrey Unit 6
(San Diego County)....... 1999 52 0 52 0 0
------ ------ ----- ----- ---
<CAPTION>
SALES PRICE
PROJECT (COUNTY) PRODUCT RANGE(3)
------------------------ ------------------
<S> <C>
NORTHERN
CALIFORNIA
WHOLLY-OWNED:
Oakhurst Country Club
(Contra Costa County)
Previously Closed
Products...............
Falcon Ridge............. $366,450 - 419,450
Peacock Creek............ $409,000 - 492,000
Town Center..............
The Preserve (Alameda)
County).................. $768,600 - 885,600
Twin Cities Mill Creek
(Sacramento County)...... $109,900 - 124,900
Marina Woods
(El Dorado County)....... $243,900 - 292,900
Eagle Ridge
(Solano County).......... $206,950 - 269,950
Mace Ranch -- Classics
(Yolo County)............ $185,900 - 226,900
Mace Ranch -- Affordables
(Yolo County)............ $118,300 - 135,000
Total
wholly-owned.....
UNCONSOLIDATED JOINT
VENTURES:
Cerro Plata
(Santa Clara County).....
The Preserve
(Alameda County)......... $768,600 - 885,600
Total
unconsolidated
joint ventures...
NORTHERN CALIFORNIA REGION
TOTAL....................
SAN DIEGO
WHOLLY-OWNED:
Discovery Hills
(San Diego County)
Previously Closed
Products...............
Discovery Meadows........ $188,900 - 209,900
Carmel Mountain Ranch (San
Diego County)
Previously Closed
Products...............
The Summit............... $359,900 - 382,900
The Bluffs............... $272,900 - 312,900
Sycamore Ranch
(Riverside County)....... $306,000 - 345,000
Vail Ranch
(San Diego County).......
Total
wholly-owned.....
UNCONSOLIDATED JOINT
VENTURES:
Torrey Unit 1 -- The Sands
(San Diego County)....... $338,900 - 356,900
Torrey Unit 4 -- The Shores
(San Diego County)....... $407,900 - 430,900
Torrey Unit 6
(San Diego County).......
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
UNITS LOTS HOMES CLOSED
ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG
YEAR OF NUMBER OF AS OF AS OF ENDED AT
FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4)
------------------------ -------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Torrey Unit 14 -- The Cove
(San Diego County)....... 1999 108 0 108 0 5
------ ------ ----- ----- ---
Knollwood at Castle Creek
(San Diego County)....... 1999 77 0 77 0 0
------ ------ ----- ----- ---
Stonecrest
(San Diego County)....... 1999 110 0 110 0 19
------ ------ ----- ----- ---
Mercy Road -- Allegra
(San Diego County)....... 1999 113 0 113 0 16
------ ------ ----- ----- ---
Otay Ranch
(San Diego County)....... 1999 213 0 213 0 0
------ ------ ----- ----- ---
Total
unconsolidated
joint ventures... 839 72 767 72 60
------ ------ ----- ----- ---
SAN DIEGO REGION TOTAL..... 7,309 6,159 1,150 316 93
====== ====== ===== ===== ===
ARIZONA
WHOLLY-OWNED:
Settler's Point
(Maricopa County)........ 1995 103 103 0 1 0
------ ------ ----- ----- ---
McDowell Mt. Ranch
(Maricopa County)........ 1995 75 74 1 0 1
------ ------ ----- ----- ---
Estrella (Maricopa
County).................. 1995 107 90 17 29 10
------ ------ ----- ----- ---
Eagle Mountain
(Maricopa County)........ 1996 101 80 21 35 15
------ ------ ----- ----- ---
Continental Ranch
(Pima County)............ 1995 97 97 0 30 0
------ ------ ----- ----- ---
Legend Trail
(Maricopa County)........ 1996 102 68 34 41 7
------ ------ ----- ----- ---
Williams Centre --Haciendas
(Pima County)............ 1996 50 48 2 18 1
------ ------ ----- ----- ---
Williams Centre -- Las
Villas (Pima County)..... 1997 46 45 1 45 1
------ ------ ----- ----- ---
McDowell Mt. Ranch "P"
(Maricopa County)........ 1997 69 59 10 33 9
------ ------ ----- ----- ---
Lone Mountain
(Maricopa County)........ 1997 44 26 18 23 18
------ ------ ----- ----- ---
Manzanita Heights
(Maricopa County)........ 1997 73 67 6 49 3
------ ------ ----- ----- ---
Crystal Gardens
(Maricopa County)........ 1997 157 57 100 50 7
------ ------ ----- ----- ---
Monument Vista
(Pima County)............ 1997 106 103 3 29 2
------ ------ ----- ----- ---
Sage Creek
(Maricopa County)........ 1999 437 0 437 0 0
------ ------ ----- ----- ---
Ironwood
(Maricopa County)........ 2000 220 0 220 0 0
------ ------ ----- ----- ---
Total
wholly-owned..... 1,787 917 870 383 74
------ ------ ----- ----- ---
UNCONSOLIDATED JOINT
VENTURES:
Mountaingate
(Maricopa County)........ 2000 1,597 0 1,597 0 0
------ ------ ----- ----- ---
Total
unconsolidated
joint ventures... 1,597 0 1,597 0 0
------ ------ ----- ----- ---
ARIZONA REGION TOTAL....... 3,384 917 2,467 383 74
====== ====== ===== ===== ===
NEW MEXICO
WHOLLY-OWNED:
Summerfield
(Bernalillo County)...... 1995 195 89 106 69 10
------ ------ ----- ----- ---
Tuscany (Bernalillo
County).................. 1996 87 87 0 36 0
------ ------ ----- ----- ---
Tierra Colinas
(Santa Fe County)........ 1996 21 21 0 0 0
------ ------ ----- ----- ---
<CAPTION>
SALES PRICE
PROJECT (COUNTY) PRODUCT RANGE(3)
------------------------ ------------------
<S> <C>
Torrey Unit 14 -- The Cove
(San Diego County)....... $352,900 - 372,900
Knollwood at Castle Creek
(San Diego County)....... $196,900 - 214,900
Stonecrest
(San Diego County)....... $214,900 - 242,900
Mercy Road -- Allegra
(San Diego County)....... $218,900 - 239,900
Otay Ranch
(San Diego County).......
Total
unconsolidated
joint ventures...
SAN DIEGO REGION TOTAL.....
ARIZONA
WHOLLY-OWNED:
Settler's Point
(Maricopa County)........ $137,400 - 156,900
McDowell Mt. Ranch
(Maricopa County)........ $195,900 - 224,900
Estrella (Maricopa
County).................. $120,900 - 147,900
Eagle Mountain
(Maricopa County)........ $189,900 - 233,900
Continental Ranch
(Pima County)............ $133,900 - 165,900
Legend Trail
(Maricopa County)........ $149,900 - 185,900
Williams Centre --Haciendas
(Pima County)............ $169,900 - 196,900
Williams Centre -- Las
Villas (Pima County)..... $124,400 - 141,400
McDowell Mt. Ranch "P"
(Maricopa County)........ $201,900 - 230,900
Lone Mountain
(Maricopa County)........ $234,900 - 291,900
Manzanita Heights
(Maricopa County)........ $ 82,900 - 93,900
Crystal Gardens
(Maricopa County)........ $ 99,900 - 123,900
Monument Vista
(Pima County)............ $187,900 - 231,900
Sage Creek
(Maricopa County)........
Ironwood
(Maricopa County)........
Total
wholly-owned.....
UNCONSOLIDATED JOINT
VENTURES:
Mountaingate
(Maricopa County)........
Total
unconsolidated
joint ventures...
ARIZONA REGION TOTAL.......
NEW MEXICO
WHOLLY-OWNED:
Summerfield
(Bernalillo County)...... $ 90,400 - 107,750
Tuscany (Bernalillo
County).................. $106,900 - 143,900
Tierra Colinas
(Santa Fe County)........ $146,540 - 262,900
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
UNITS LOTS HOMES CLOSED
ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG
YEAR OF NUMBER OF AS OF AS OF ENDED AT
FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4)
------------------------ -------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Tuscany Hills
(Bernalillo County)...... 1996 30 27 3 10 3
------ ------ ----- ----- ---
Rancho del Sol
(Santa Fe County)........ 1996 195 103 92 41 12
------ ------ ----- ----- ---
The Courtyards at Park West
(Bernalillo County)...... 1996 77 47 30 27 11
------ ------ ----- ----- ---
Ventana (Bernalillo
County).................. 1997 81 24 57 20 3
------ ------ ----- ----- ---
NEW MEXICO REGION TOTAL.... 686 398 288 203 39
====== ====== ===== ===== ===
NEVADA
WHOLLY-OWNED:
Mountainside
(Clark County)........... 1996 158 158 0 21 0
------ ------ ----- ----- ---
Prominence (Clark
County).................. 1996 100 98 2 51 2
------ ------ ----- ----- ---
Camden Park
(Clark County)........... 1997 150 94 56 73 20
------ ------ ----- ----- ---
Monte Nero (Clark
County).................. 1997 98 53 45 29 8
------ ------ ----- ----- ---
Royal Woods
(Clark County)........... 1998 142 40 102 40 14
------ ------ ----- ----- ---
Deer Springs Ranch
(Clark County)........... 1998 117 34 83 34 7
------ ------ ----- ----- ---
Cambridge Court
(Clark County)........... 1998 177 31 146 31 19
------ ------ ----- ----- ---
NEVADA REGION TOTAL........ 942 508 434 279 70
====== ====== ===== ===== ===
GRAND TOTALS:
Wholly-owned............. 20,797 16,297 4,500 1,834 499
Unconsolidated joint
ventures............... 3,249 91 3,158 91 118
------ ------ ----- ----- ---
24,046 16,388 7,658 1,925 617
====== ====== ===== ===== ===
<CAPTION>
SALES PRICE
PROJECT (COUNTY) PRODUCT RANGE(3)
------------------------ ------------------
<S> <C>
Tuscany Hills
(Bernalillo County)...... $128,800 - 154,900
Rancho del Sol
(Santa Fe County)........ $ 94,900 - 156,900
The Courtyards at Park West
(Bernalillo County)...... $125,500 - 150,900
Ventana (Bernalillo
County).................. $131,900 - 149,900
NEW MEXICO REGION TOTAL....
NEVADA
WHOLLY-OWNED:
Mountainside
(Clark County)........... $121,490 - 149,990
Prominence (Clark
County).................. $146,990 - 174,990
Camden Park
(Clark County)........... $156,990 - 201,000
Monte Nero (Clark
County).................. $129,990 - 164,490
Royal Woods
(Clark County)........... $149,000 - 180,500
Deer Springs Ranch
(Clark County)........... $116,490 - 142,490
Cambridge Court
(Clark County)........... $138,500 - 156,500
NEVADA REGION TOTAL........
GRAND TOTALS:
Wholly-owned.............
Unconsolidated joint
ventures...............
</TABLE>
- ---------------
(1) The estimated number of homes to be built at completion is subject to
change, and there can be no assurance that the Company will build these
homes.
(2) Backlog consists of homes sold under sales contracts that have not yet
closed, and there can be no assurance that closings of sold homes will
occur.
(3) Sales price range reflects base price only and excludes any lot premium,
buyer incentive and buyer selected options, which vary from project to
project.
(4) Of the total homes subject to pending sales contracts as of December 31,
1998, 573 represent homes completed or under construction and 44 represent
homes not yet under construction.
SALES AND MARKETING
The management team responsible for a specific project develops marketing
objectives, formulates pricing and sales strategies and develops advertising and
public relations programs for approval of senior management. The Company makes
extensive use of advertising and other promotional activities, including
newspaper advertisements, brochures, television and radio commercials, direct
mail and the placement of strategically located sign boards in the immediate
areas of its developments. In general, the Company's advertising emphasizes
Presley's strengths with respect to the quality and value of its products.
The Company normally builds, decorates, furnishes and landscapes three to
five model homes for each product line and maintains on-site sales offices,
which typically are open seven days a week. Management believes that model homes
play a particularly important role in the Company's marketing efforts.
Consequently, the Company expends a significant amount of effort in creating an
attractive atmosphere at its model homes. Interior decorations vary among the
Company's models and are carefully selected based upon the
10
<PAGE> 13
lifestyles of targeted buyers. Structural changes in design from the model homes
are not generally permitted, but home buyers may select various other optional
construction and design amenities.
Presley employs in-house commissioned sales personnel and, on a limited
basis, outside brokers in the selling of its homes. Presley typically engages
its sales personnel on a long-term, rather than a project-by-project basis,
which it believes results in a more motivated sales force with an extensive
knowledge of the Company's operating policies and products. Sales personnel are
trained by the Company and attend weekly meetings to be updated on the
availability of financing, construction schedules and marketing and advertising
plans.
The Company strives to provide a high level of customer service during the
sales process and after a home is sold. The participation of the sales
representatives, on-site construction supervisors and the post-closing customer
service personnel, working in a team effort, is intended to foster the Company's
reputation for quality and service, and ultimately lead to enhanced customer
retention and referrals.
In the past, and more so during the recent California recession, Presley
has used a variety of incentives in order to attract buyers. Sales incentives
may include upgrades in interior design features such as carpet or fixtures, or
added amenities such as a fireplace or an outdoor deck. The use of incentives
depends largely on prevailing economic conditions and the Company's success in
marketing its products.
The Company's homes are typically sold before or during construction
through sales contracts which are usually accompanied by a small cash deposit.
Such sales contracts are usually subject to certain contingencies such as the
buyer's ability to qualify for financing. The cancellation rate of buyers who
contracted to buy a home but did not close escrow at Presley's projects was
approximately 19% during 1998. Cancellation rates are subject to a variety of
factors beyond the Company's control such as adverse economic conditions and
increases in mortgage interest rates.
The Company generally provides a one-year limited warranty of workmanship
and materials with each of its homes. From January 1, 1992 through March 31,
1995, the Company provided a five-year limited warranty for certain homes in the
Company's Southern California Region. This five-year warranty exceeded the
warranty offered by competitors and served as a marketing tool for the Company.
The Company normally reserves one percent of the sales price of its homes
against the possibility of future charges relating to its one-year limited
warranty and similar potential claims. The Company's historical experience is
that one-year warranty claims generally fall within the one percent reserve. In
addition, California law provides that consumers can seek redress for patent
defects in new homes within four years from when the defect is discovered, or
should have been discovered, provided that if the defect is latent there is an
outside limit for seeking redress which is ten years from the completion of
construction. In addition, because the Company generally subcontracts its
homebuilding work to qualified subcontractors who generally provide the Company
with an indemnity and a certificate of insurance prior to receiving payment from
the Company for their work, the Company generally has recourse against the
subcontractors or their insurance carriers for claims relating to the
subcontractors' workmanship or materials. However, there can be no assurance
that claims will not arise out of matters such as landslides, soil subsidence or
earthquakes that are uninsurable, not economically insurable or not subject to
effective indemnification agreements.
CUSTOMER FINANCING -- PRESLEY MORTGAGE COMPANY
The Company seeks to assist its home buyers in obtaining financing by
arranging with mortgage lenders to offer qualified buyers a variety of financing
options. Substantially all home buyers utilize long-term mortgage financing to
purchase a home and mortgage lenders will usually make loans only to qualified
borrowers.
Presley Mortgage Company, a wholly owned subsidiary, began operations
effective December 1, 1994 and is in operation to service the Company's
operating regions. The mortgage company operates as a mortgage broker/loan
correspondent and originates conventional, FHA and VA loans.
11
<PAGE> 14
SALE OF LOTS AND LAND
In the ordinary course of business, the Company continually evaluates land
sales and has sold, and expects that it will continue to sell, land as market
and business conditions warrant. Presley also sells both multiple lots to other
builders (bulk sales) and improved individual lots for the construction of
custom homes where the presence of such homes adds to the quality of the
community. In addition, the Company may acquire sites with commercial,
industrial and multi-family parcels which will generally be sold to third-party
developers.
INFORMATION SYSTEMS AND CONTROLS
The Company assigns a high priority to the development and maintenance of
its budget and cost control systems and procedures. The Company's regional and
area offices are connected to corporate headquarters through a fully integrated
accounting, financial and operational management information system. Through
this system, management regularly evaluates the status of its projects in
relation to budgets to determine the cause of any variances and, where
appropriate, adjusts its operations to capitalize on favorable variances or to
limit adverse financial impacts.
COMPETITION
The homebuilding industry is highly competitive, particularly in the low
and medium-price range where the Company currently concentrates its activities.
Although Presley is one of California's largest homebuilders, the Company does
not believe it has a significant market position in any geographic area which it
serves due to the fragmented nature of the market. Due in significant part to
the recent recession and its effect on the housing market, the Company has,
since 1990, had to reduce its sales prices and offer greater incentives to
buyers in order to effectively compete for sales in several of its markets.
Beginning in 1997 the market has generally rebounded allowing the Company to
selectively increase sales prices and reduce incentives while remaining
competitive. A number of Presley's competitors have larger staffs, larger
marketing organizations, and substantially greater financial resources than
those of Presley. However, the Company believes that it competes effectively in
its existing markets as a result of its product and geographic diversity,
substantial development expertise, and its reputation as a low-cost producer of
quality homes. Further, the Company sometimes gains a competitive advantage in
locations where changing regulations make it difficult for competitors to obtain
entitlements and/or government approvals which the Company has already obtained.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
The Company and its competitors are subject to various local, state and
Federal statutes, ordinances, rules and regulations concerning zoning, building
design, construction and similar matters, including local regulation which
imposes restrictive zoning and density requirements in order to limit the number
of homes that can ultimately be built within the boundaries of a particular
project. The Company and its competitors may also be subject to periodic delays
or may be precluded entirely from developing in certain communities due to
building moratoriums or "slow-growth" or "no-growth" initiatives that could be
implemented in the future in the states in which it operates. Because the
Company usually purchases land with entitlements, the Company believes that the
moratoriums would adversely affect the Company only if they arose from
unforeseen health, safety and welfare issues such as insufficient water or
sewage facilities. Local and state governments also have broad discretion
regarding the imposition of development fees for projects in their jurisdiction.
However, these are normally locked-in when the Company receives entitlements.
Presley Mortgage Company is subject to state licensing laws as a mortgage
broker as well as federal and state laws concerning real estate loans.
The Company and its competitors are also subject to a variety of local,
state and Federal statutes, ordinances, rules and regulations concerning
protection of health and the environment. The particular environmental laws
which apply to any given community vary greatly according to the community site,
the site's environmental conditions and the present and former uses of the site.
These environmental laws may result in delays, may cause the Company and its
competitors to incur substantial compliance and other costs,
12
<PAGE> 15
and may prohibit or severely restrict development in certain environmentally
sensitive regions or areas. The Company's projects in California are especially
susceptible to restrictive government regulations and environmental laws.
However, environmental laws have not, to date, had a material adverse impact on
the Company's operations.
CORPORATE ORGANIZATION AND PERSONNEL
Each of the Company's operating regions has responsibility for the
Company's homebuilding and development operations within the geographical
boundaries of that region.
The Company's six executive officers at the corporate level average more
than 20 years of experience in the homebuilding and development industries
within California and the Southwest. The Company combines decentralized
management in those aspects of its business where detailed knowledge of local
market conditions is important (such as governmental processing, construction,
land development and sales and marketing), with centralized management in those
functions where the Company believes central control is required (such as
approval of land acquisitions and financial, personnel and legal matters).
As of December 31, 1998, Presley's real estate development and homebuilding
operations employed approximately 353 full-time and 30 part-time employees,
including corporate staff, supervisory personnel of construction projects,
maintenance crews to service completed projects, as well as persons engaged in
administrative, finance and accounting, engineering, land acquisition, sales and
marketing activities.
Presley believes that its relations with its employees have been good. Some
employees of the subcontractors which Presley utilizes are unionized, but
virtually none of Presley's employees are union members. Although there have
been temporary work stoppages in the building trades in Presley's areas of
operation, to date none has had any material impact upon Presley's overall
operations.
ITEM 2. PROPERTIES
Headquarters
Presley owns a 15,800 square foot building on leased land in Newport Beach,
California which it uses for its corporate headquarters. The Company leases or
owns properties for its area offices, design centers and Presley Mortgage
Company, but none of these properties is material to the operation of Presley's
business.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, most of which relate
to routine litigation and some of which are covered by insurance. In the opinion
of the Company's management, none of the uninsured claims involve claims which
are material and unreserved or will have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders during the fourth
quarter of 1998.
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Series A Common Stock is traded on the New York Stock
Exchange (the "NYSE") under the symbol PDC. Public trading of the Series A
Common Stock commenced on October 11, 1991. Prior to that date, there was no
public market for the Series A Common Stock. There is no established trading
market for the Company's Series B Common Stock. The following table sets forth
the high and low sales prices for the Series A Common Stock as reported on the
NYSE for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997
First Quarter.................................. $1.2500 $0.8750
Second Quarter................................. 1.8750 1.0000
Third Quarter.................................. 1.9375 0.8125
Fourth Quarter................................. 1.0625 0.5625
1998
First Quarter.................................. $1.1250 $0.6250
Second Quarter................................. 1.1250 0.6875
Third Quarter.................................. 1.3125 0.5625
Fourth Quarter................................. 0.7500 0.4375
</TABLE>
As of March 10, 1999, the closing price for the Company's Series A Common
Stock as reported on the NYSE was $0.6250.
As of March 10, 1999, there were 394 and 4 holders of record of the
Company's Series A Common Stock and Series B Common Stock, respectively.
The Company has not paid any cash dividends on its Common Stock during the
last two fiscal years and expects that for the foreseeable future it will follow
a policy of retaining earnings in order to help finance its business. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon the earnings, capital requirements, general economic conditions and
operating and financial condition of the Company, among other factors. In
addition, the effect of the Company's principal financing agreements currently
prohibits the payment of dividends by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition and Liquidity" and Notes 3 and 7 of "Notes to Consolidated Financial
Statements."
14
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company have been
derived from the Consolidated Financial Statements of the Company and other
available information. The summary should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto appearing elsewhere
herein.
As described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 3 of "Notes to Consolidated
Financial Statements," the consolidated financial statements for 1994, 1995,
1996, 1997 and 1998 have been prepared after giving retroactive effect as of
January 1, 1994 to a capital restructuring and quasi-reorganization.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS
AND NUMBER OF HOMES)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales
Homes.................................. $348,352 $307,332 $317,366 $231,204 $262,866
Lots, land and other................... 19,930 22,610 1,631 54,301 7,302
-------- -------- -------- -------- --------
Total sales....................... 368,282 329,942 318,997 285,505 270,168
Income from unconsolidated joint
ventures............................... 3,499 -- -- -- --
Operating income (loss).................. 15,580 (84,534) 163 (41,335) 14,318
Income (loss) before income taxes and
extraordinary item..................... 8,305 (89,894) 152 (41,653) 10,232
Credit (provision) for income taxes...... (1,191) -- -- 1,868 (4,195)
Income (loss) before extraordinary
item................................... 7,114 (89,894) 152 (39,785) 6,037
Extraordinary item-gain from retirement
of debt, net of applicable taxes....... 2,741 -- -- 2,688 --
Net income (loss)........................ $ 9,855 $(89,894) $ 152 $(37,097) $ 6,037
Basic and diluted earnings per common
share:
Before extraordinary item.............. $ 0.14 $ (1.72) $ -- $ (0.76) $ 0.11
Extraordinary item..................... 0.05 -- -- 0.05 --
-------- -------- -------- -------- --------
After extraordinary item............... $ 0.19 $ (1.72) $ -- $ (0.71) $ 0.11
Ratio of earnings to fixed
charges(1)(2).......................... 1.31 (2) (2) (2) (2)
BALANCE SHEET DATA:
Real estate inventories.................. $174,502 $255,472 $306,381 $315,535 $382,055
Total assets............................. 246,404 285,244 331,615 340,933 425,637
Notes payable............................ 195,393 254,935 208,524 224,434 272,717
Stockholders' equity (deficit)........... 5,824 (5,681) 84,213 84,061 121,158
OPERATING DATA (including unconsolidated
joint ventures):
Number of homes sold..................... 2,139 1,718 1,804 1,488 1,423
Number of homes closed................... 1,925 1,597 1,838 1,425 1,442
Number of homes in escrow at end of
period................................. 617 403 282 316 253
Average sales prices of homes closed..... $ 202 $ 192 $ 173 $ 162 $ 182
</TABLE>
- ---------------
(1) Ratio of earnings to fixed charges is calculated by dividing income as
adjusted by fixed charges. For this purpose, "income as adjusted" means
income (loss) before (i) minority partners' interest in consolidated income
(loss) and (ii) income taxes, plus (i) interest expense and (ii)
amortization of capitalized interest included in cost of sales. For this
purpose "fixed charges" means (i) interest expense and (ii) interest
capitalized during the period.
(2) Earnings were not adequate to cover fixed charges by $25.4 million, $21.1
million, $67.1 million and $13.9 million for the years ended December 31,
1997, 1996, 1995, and 1994, respectively. These deficits, as well as the
operating income (loss), include the effect of an impairment loss on real
estate assets of $74 million in 1997, and $16.8 million in 1995 and
reductions of real estate assets to estimated net realizable value of $9.4
million in 1995.
15
<PAGE> 18
ITEM 7. 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 Selected Financial Data and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Annual Report on Form 10-K/A.
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. In conjunction with the engagement
of the financial advisor, a Special Committee comprised of independent directors
of the Company's Board of Directors was formed to evaluate strategic
alternatives. The Company's actions were 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 $89.9 million loss for the year ended
December 31, 1997, included a non-cash charge of $74.0 million 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 $5.7 million at December 31,
1997. As of December 31, 1998, the Company's stockholders' equity totaled $5.8
million.
On December 31, 1998, the Company announced that, after unanimous approval
by the Special Committee of independent directors, Presley had entered into a
letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting
forth their preliminary understanding with respect to (i) the proposed
acquisition by Presley of substantially all of the assets of William Lyon Homes
for approximately $48.0 million together with the assumption of related
liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to
a tender offer for not less than 40% and not more than 49% of the outstanding
shares of Presley common stock held by stockholders other than William Lyon at a
price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and
his son, William H. Lyon, is a California-based homebuilder and real estate
developer with projects currently under development in Northern and Southern
California. Following the completion of the proposed transactions, William Lyon,
who is the current Chairman of the Board of Presley, would beneficially own
between 55% and 65% (depending on the number of shares tendered) of the
outstanding shares of Presley common stock and the remaining shares would
continue to be publicly traded. The execution of the letter of intent followed a
review over several months by the Special Committee, together with its financial
and legal advisors, of strategic alternatives available to Presley as well as a
review of other proposals received from third parties.
Under the terms of the letter of intent, the proposed transactions are
subject to various conditions, including the successful negotiation and
execution of a definitive agreement, the receipt of opinions of Presley's
advisors with respect to the fairness of the transactions to Presley and its
stockholders as well as the solvency of Presley following consummation of the
transactions, the receipt of real estate appraisals satisfactory to Presley and
William Lyon Homes with respect to the real estate assets of William Lyon Homes,
the approval of a definitive agreement by the respective boards of directors of
Presley and William Lyon Homes by March 31, 1999, receipt of all required
regulatory approvals and third party consents, including any required lender
consents, the receipt of agreements from certain significant stockholders of
Presley to tender their shares pursuant to the tender offer, the receipt of
financing by Presley in an amount sufficient to enable Presley to finance the
transactions, and the absence of any material adverse change in the business or
financial condition of either Presley or William Lyon Homes.
In addition, the letter of intent contemplates that each of the
transactions will be structured so as to be subject to the successful completion
of the other and that the parties will structure the transactions (including, if
necessary, by imposing limitations on certain transfers of shares) so as to
avoid triggering the change of control tax provisions that would result in the
loss of Presley's net operating losses for tax purposes. The letter
16
<PAGE> 19
of intent also contemplates that Presley's 12 1/2% Senior Notes due 2001 shall
remain outstanding without modification.
The letter of intent provides that, subject to the fiduciary duties of
their respective boards of directors, Presley and William Lyon Homes will
negotiate exclusively with each other toward a definitive agreement until March
31, 1999.
The letter of intent does not constitute a binding agreement to consummate
the transactions and there can be no assurances that the parties ultimately will
enter into a definitive agreement with respect to the transactions or that the
conditions to the transactions will be satisfied.
On February 18, 1999 the Company announced that it had received a letter
from William Lyon, Chairman of the Board of William Lyon Homes and also Chairman
of the Board of Presley, proposing a modification to the previously executed
letter of intent with William Lyon Homes. Under the proposed modification,
William Lyon Homes would make a tender offer for not more than 37% of the
outstanding shares of common stock of Presley for a purchase price of $0.62 per
share. In the event that more than 37% of the outstanding shares of common stock
of Presley is tendered, William Lyon Homes will purchase shares from each
tendering stockholder on a pro rata basis. The tender offer will be conditioned
upon there being tendered and not withdrawn, a number of shares which
constitutes at least 37% of the outstanding shares of Presley. The proposed
modification also provides that the transaction will be structured to permit
William Lyon or his affiliates, prior to consummation of the transaction and
consistent with applicable securities laws, to sell shares of Presley common
stock owned by them up to a maximum of 4% of the total number of shares of
Presley common stock presently outstanding. The proposed modification is
currently being considered by the Special Committee of independent directors.
On March 30, 1999, the parties amended the letter of intent to extend its
term and the period of exclusive negotiation to April 30, 1999. The condition
included in the letter of intent that the boards of directors of Presley and
William Lyon Homes must approve a definitive agreement by March 31, 1999 was
also extended to April 30, 1999. The parties have also agreed that William Lyon
Homes may participate in discussions and negotiations with the holders of
Presley's Series B Common Stock regarding the purchase by William Lyon Homes of
such percentage of the Series B holder's shares so as to reduce such Series B
holder's ownership interest in Presley Common Stock to between 4.9% and 5% of
Presley's outstanding Common Stock following consummation of the proposed
transactions. William Lyon Homes may also seek commitments from the Series B
holders to sell additional shares to the extent that the number of shares of
Series A Common Stock tendered in the tender offer are below the minimum
threshold set forth in a definitive agreement. Any such negotiations are to be
conducted exclusively so as to obtain the consent of the Series B holders to the
proposed transactions and to avoid triggering the change of control tax
provisions that would result in the loss of Presley's net operating loss
carryforwards for tax purposes. William Lyon Homes is required to notify the
Special Committee regarding the details of any such discussions and
negotiations. William Lyon Homes may not enter into any agreement with any
Series B Holder prior to receiving the written approval from the Special
Committee or Presley's Board of Directors.
In connection with these events, the Company has incurred costs of
approximately $1.3 million for the year ended December 31, 1998 which are
reflected in the Consolidated Statement of Operations as financial advisory
expenses.
In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due in 2001, if the Company's Consolidated Tangible Net
Worth is less than $60 million for two consecutive fiscal quarters, the Company
is required to offer to purchase $20 million in principal amount of the Senior
Notes. Because the Company's Consolidated Tangible Net Worth has been less than
$60 million beginning with the quarter ended June 30, 1997, the Company would,
effective on December 4, 1997, June 4, 1998 and December 4, 1998, have been
required to make offers to purchase $20 million of the Senior Notes at par plus
accrued interest, less the face amount of Senior Notes acquired by the Company
after September 30, 1997, March 31, 1998 and September 30, 1998, respectively.
The Company acquired Senior Notes with a face amount of $20 million after
September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and
prior to June 4, 1998, and again after September 30, 1998 and prior to December
4, 1998, and therefore
17
<PAGE> 20
was not required to make said offers. As a result of these transactions, the
Company has recognized a net gain of $2.7 million during the year ended December
31, 1998, after giving effect to income taxes and amortization of related loan
costs.
Each six months thereafter, until such time as the Company's Consolidated
Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the
Company will be required to make similar offers to purchase $20 million of
Senior Notes. At December 31, 1998, the Company's Consolidated Tangible Net
Worth was $2.4 million. The Company's management has previously held
discussions, and may in the future hold discussions, with representatives of the
holders of the Senior Notes with respect to modifying this repurchase provision
of the bond indenture agreement. To date, no agreement has been reached to
modify this repurchase provision. Any such change in the terms or conditions of
the bond indenture agreement requires the affirmative vote of at least a
majority in principal amount of the Senior Notes outstanding. No assurances can
be given that any such change will be made.
As more fully discussed under Working Capital Facility, on July 6, 1998 the
Company completed an agreement with the Agent of its existing lender group under
its Working Capital Facility to (1) extend this loan facility to May 20, 2001,
(2) increase the loan commitment to $100 million and (3) decrease the fees and
costs compared to the prior revolving facility.
Because of the Company's obligation to offer to purchase $20 million of the
Senior Notes each six months so long as the Company's Consolidated Tangible Net
Worth is less than $60 million, the Company is restricted in its ability to
acquire, hold and develop real estate projects. The Company changed its
operating strategy during 1997 to finance certain projects by forming joint
ventures with venture partners that would provide a substantial portion of the
capital necessary to develop these projects. The Company believes that the use
of joint venture partnerships will better enable it to reduce its capital
investment and risk in the highly capital intensive California markets, as well
as to repurchase the Company's Senior Notes as described above. The Company
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.
As of December 31, 1998, the Company and certain of its subsidiaries are
general partners or members in twelve joint ventures involved in the development
and sale of residential 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. See Note 6 of "Notes
to Consolidated Financial Statements" for condensed combined financial
information for these joint ventures. 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.
At December 31, 1998 the Company had net operating loss carryforwards for
Federal tax purposes of approximately $117.9 million, of which $5.1 million
expires in 2007, $17.5 million expires in 2008, $27.4 million expires in 2009,
$35.8 million expires in 2010, $13.7 million expires in 2011, $16.4 million
expires in 2012 and $2.0 million expires in 2013. The Company's ability to
utilize the tax benefits associated with its net operating loss carryforwards
will depend upon the amount of its otherwise taxable income and may be limited
in the event of an "ownership change" under federal tax laws and regulations.
The Company presently cannot prohibit such ownership changes from occurring.
The ability of the Company to meet its obligations on its indebtedness will
depend to a large degree on its future performance which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, weather, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective indemnification agreements,
availability of labor and homebuilding materials, changes in governmental laws
and regulations, and the availability and cost of lands for future development.
At this time, the Company's degree of leverage may limit its ability to meet its
obligations, withstand adverse business or other conditions and capitalize on
business opportunities.
18
<PAGE> 21
RESULTS OF OPERATIONS
Homes sold, closed and in backlog as of and for the periods presented are
as follows:
<TABLE>
<CAPTION>
AS OF AND FOR YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Number of homes sold
Company........................................ 1,937 1,718 1,804
Unconsolidated joint ventures.................. 202 -- --
------ ------ ------
2,139 1,718 1,804
====== ====== ======
Number of homes closed
Company........................................ 1,834 1,597 1,838
Unconsolidated joint ventures.................. 91 -- --
------ ------ ------
1,925 1,597 1,838
====== ====== ======
Backlog of homes sold but not closed at end of
period
Company........................................ 499 403 282
Unconsolidated joint ventures.................. 118 -- --
------ ------ ------
617 403 282
====== ====== ======
Dollar amount of backlog of homes sold but not
closed at end of period (in millions)
Company........................................ $111.8 $ 84.6 $ 52.7
Unconsolidated joint ventures.................. 53.3 -- --
------ ------ ------
$165.1 $ 84.6 $ 52.7
====== ====== ======
</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 December 31, 1998
was $165.1 million as compared to $84.6 million as of December 31, 1997 and
$222.8 million as of September 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 19% during 1998.
The number of homes closed in the fourth quarter of 1998 increased 69.6
percent to 697 from 411 in the fourth quarter of 1997. Net new home orders for
the quarter ended December 31, 1998 increased 1.7 percent to 429 units from 422
for the quarter ended December 31, 1997. For the fourth quarter of 1998, net new
orders decreased 21.9 percent to 429 from 549 units in the third quarter of
1998. The backlog of homes sold as of December 31, 1998 was 617, up 53.1 percent
from 403 units as of December 31, 1997, and down 30.3 percent from 885 units at
September 30, 1998. The Company's inventory of completed and unsold homes as of
December 31, 1998 decreased to 50 units from 111 units as of December 31, 1997.
The improvement in net new home orders, closings and backlog for the fourth
quarter of 1998 as compared with the fourth 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
December 31, 1998, the Company had 46 sales locations as compared to 40 sales
locations at December 31, 1997.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires
impairment losses to be recorded on assets to be held and used by the Company
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets (excluding interest) are less than the
carrying amount of the assets. Statement No. 121 also requires that long-lived
assets that are held for disposal be reported at the lower of the assets'
carrying amount or fair value less cost of disposal. Under the new
pronouncement, when an impairment loss is required for assets to be held and
used by the Company, the related assets are adjusted to their estimated fair
value.
19
<PAGE> 22
The net loss for the year ended December 31, 1997 included a non-cash
charge of $74,000,000 during the second quarter of 1997 to record impairment
losses on certain real estate assets held and used by the Company. The
impairment losses related to three of the Company's master-planned communities.
The impairment losses related to two communities, which are located in the
Inland Empire area of Southern California, arose primarily from declines in home
sales prices due to continued weak economic conditions and competitive pressures
in that area of Southern California. The impairment loss relating to the other
community, which is located in Contra Costa County in the East San Francisco Bay
area of Northern California, was primarily attributable to lower than expected
cash flow relating to one of the high end residential products in this community
and to a deterioration in the value of the non-residential portion of the
project. The significant deteriorations in the market conditions associated with
these communities resulted in the undiscounted cash flows (excluding interest)
estimated to be generated by these communities being less than their historical
book values. Accordingly, the master-planned communities were written-down to
their estimated fair value.
The following represents the sales and excess of revenue from sales over
related cost of sales (i.e., gross profit) of the three master-planned
communities since the recordation of impairment losses on June 30, 1997:
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Sales.................................... $17,662,000 $54,828,000
Gross profit............................. $ 1,202,000 $ 5,850,000
Gross profit %........................... 6.8% 10.7%
</TABLE>
The gross profits recognized on the three master-planned communities
subsequent to the recordation of the impairment losses has increased due to
better than projected sales price increases beginning in 1998.
The Company periodically evaluates its real estate assets to determine
whether such assets have been impaired and therefore would be required to be
adjusted to fair value. Fair value represents the amount at which an asset could
be bought or sold in a current transaction between willing parties, that is,
other than in a forced or liquidation sale. The estimation process involved in
determining if assets have been impaired and in the determination of fair value
is inherently uncertain since it requires estimates of current market yields as
well as future events and conditions. Such future events and conditions include
economic and market conditions, as well as the availability of suitable
financing to fund development and construction activities. The realization of
the Company's real estate projects is dependent upon future uncertain events and
conditions and, accordingly, the actual timing and amounts realized by the
Company may be materially different from the estimated fair values as described
herein.
This Annual Report on Form 10-K/A does not attempt to discuss or describe
all of the factors that influence or impact the evaluation of an impairment of
the Company's real estate assets.
Interest incurred during the period in which real estate projects are not
under development or during the period subsequent to the completion of product
available for sale is expensed in the period incurred. Economic conditions in
the real estate industry can cause a delay in the development of certain real
estate projects and, as a result, can lengthen the periods when such projects
are not under development and, accordingly, have a significant impact on
profitability as a result of expensed interest. Interest expense during 1998,
1997, and 1996 was approximately $9.2 million, $7.8 million and $2.3 million,
respectively.
In general, housing demand is adversely affected by increases in interest
rates and housing prices. Interest rates, the length of time that assets remain
in inventory, and the proportion of inventory that is financed affect the
Company's interest cost. If the Company is unable to raise sales prices
sufficiently to compensate for higher costs or if mortgage interest rates
increase significantly, affecting prospective buyers' ability to adequately
finance home purchases, the Company's sales, gross margins and net results may
be adversely impacted. To a limited extent, the Company hedges against increases
in interest costs by acquiring interest
20
<PAGE> 23
rate protection that locks in or caps interest rates for limited periods of time
for mortgage financing for prospective homebuyers.
Comparison of Years Ended December 31, 1998 and 1997. Total sales (which
represent recorded revenues from closings) for the year ended December 31, 1998
were $368.3 million, an increase of $38.4 million (11.6%), from sales of $329.9
million for the year ended December 31, 1997. Revenue from sales of homes
increased $41.1 million to $348.4 million in 1998 from $307.3 million in 1997.
This increase was due primarily to an increase in the number of homes closed to
1,834 in 1998 from 1,597 in 1997, partially offset by a decrease in the average
sales prices of homes to $189,900 in 1998 from $192,000 in 1997 which resulted
primarily from a change in product mix.
Total operating income (loss) changed from a loss of $84.5 million in 1997
to an income of $12.1 million in 1998. The excess of revenue from sales of homes
over the related cost of sales increased by $21.6 million, to $50.6 million in
1998 from $29.0 million in 1997. This increase was primarily due to (1) an
increase of 14.8% in the number of units closed from 1,597 units in 1997 to
1,834 units in 1998, (2) changes in product delivered in 1998 compared to 1997
comprised of 10 new products introduced in 1998 with average gross margins of
18.5% on sales of $64.7 million compared with 27 old products closed out in 1997
with average gross margins of 13.4% on sales of $107.5 million, and (3)
increases for continuing products delivered in both 1998 and 1997 in average
sales prices to $187,300 from $179,600 (a 4.3% increase) and in average gross
margins to 8.6% from 5.3% (a 61.6% increase) on sales of $283.3 million and
$199.9 million, respectively. Impairment losses on real estate assets amounting
to $74.0 million were recorded in 1997 compared to no impairment losses in 1998.
Sales and marketing expenses decreased by $0.8 million (3.6%) to $21.5 million
in 1998 from $22.3 million in 1997 primarily as a result of reductions in
advertising and sales office/model operation expenses, offset by increased
direct sales expenses related to the increased sales volume. General and
administrative expenses decreased slightly in the 1998 period from the 1997
period, primarily as a result of the consolidation of certain California
operations in the third quarter of 1997 and reimbursement of overhead expenses
from joint ventures.
Income from unconsolidated joint ventures amounting to $3.5 million 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 during 1998 decreased $1.5 million to $31.5 million
from $33.0 million in 1997 as a result of a decrease in the average amount of
outstanding debt resulting from a reduction in real estate inventories. Net
interest expense increased to $9.2 million in 1998 from $7.8 million for 1997.
This increase was due primarily to a reduction in real estate assets which
qualify for interest capitalization.
As a result of the Company's engagement of a financial advisor in May 1998
as described previously in "General Overview", the Company has incurred costs of
approximately $1.3 million for the year ended December 31, 1998.
Other (income) expense, net increased $0.7 million to a net income of $3.2
million in 1998 from a net income of $2.5 million in 1997 primarily as a result
of increased income from design center operations, mortgage company operations
and interest income.
As a result of the retirement of certain debt as described previously in
"General Overview", the Company has recognized a net gain of $2.7 million during
the year ended December 31, 1998, after giving effect to income taxes and
amortization of related loan costs.
Comparison of Years Ended December 31, 1997 and 1996. Total sales (which
represent recorded revenues from closings) for the year ended December 31, 1997
were $329.9 million, an increase of $10.9 million (3.4%), from sales of $319.0
million for the year ended December 31, 1996. Revenue from sales of homes
decreased $10.1 million to $307.3 million in 1997 from $317.4 million in 1996.
This decrease was due primarily to a decrease in the number of homes closed to
1,597 in 1997 from 1,838 in 1996, partially offset by an increase in the average
sales prices of homes to $192,000 in 1997 from $173,000 in 1996 which resulted
primarily from increased sales prices, decreased buyer incentives and a change
in the mix of product. Revenue from lots, land and other increased $21.0 million
to $22.6 million in 1997 from $1.6 million in 1996, primarily
21
<PAGE> 24
as a result of sales of land to be used for commercial purposes, as well as the
sale of a golf course formerly owned and operated by the Company.
Total operating income (loss) changed from an income of $0.2 million in
1996 to a loss of $84.5 million in 1997. The excess of revenue from sales of
homes over the related cost of sales decreased by $8.4 million, to $29.0 million
in 1997 from $37.4 million in 1996. These decreases were primarily due to a
decrease in the number of homes closed as described above and increases in costs
such as interest and development. The excess of revenue from sales of lots, land
and other over the related cost of sales decreased by $0.9 million to a loss of
$1.3 million in 1997 from a loss of $0.4 million in 1996. Impairment losses on
real estate assets amounting to $74.0 million were recorded in 1997 as compared
to none in 1996. Sales and marketing expenses decreased by $0.6 million (2.6%)
to $22.3 million in 1997 from $22.9 million in 1996 primarily as a result of a
decrease in sales commissions directly attributable to a decrease in closed
units, partially offset by an increase in advertising and other selling expenses
in 1997 compared to 1996. General and administrative expenses increased by $2.0
million (14.3%) to $16.0 million in 1997 from $14.0 million in 1996, primarily
as the result of additional staffing in expanding operating units in Arizona and
Nevada.
Total interest incurred of $33.0 million during 1997 increased $1.4 million
(4.4%) from 1996 as a result of increased interest rates and higher debt levels
in 1997. Net interest expense increased to $7.8 million in 1997 from $2.3
million for 1996. This increase was due primarily to a reduction in real estate
assets which qualify for interest capitalization.
Other (income) expense, net increased $0.3 million to a net income of $2.5
million in 1997 from a net income of $2.2 million in 1996 primarily as a result
of increased income from design center operations.
FINANCIAL CONDITION AND LIQUIDITY
The Company provides for its ongoing cash requirements principally from
internally generated funds from the sales of real estate and from outside
borrowings and, beginning in the fourth quarter of 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 letter of intent with William Lyon Homes includes the proposed
acquisition by Presley of substantially all of the assets of William Lyon Homes
for approximately $48 million. The letter of intent is conditioned upon, among
other things, the receipt of financing by Presley in an amount sufficient to
finance the transaction.
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 meet its obligations, withstand adverse business conditions and
capitalize on business opportunities.
The Company will in all likelihood be required to refinance the Senior
Notes and the Working Capital Facility when they mature, and no assurances can
be given that the Company will be successful in that regard.
CAPITAL RESTRUCTURING AND QUASI-REORGANIZATION
On March 28, 1994 the Company's Board of Directors approved a Plan for
Capital Restructuring, which was approved by the Company's Stockholders at the
Annual Meeting of Stockholders held on May 20, 1994.
In accordance with the Plan for Capital Restructuring, on March 29, 1994
the Company executed a definitive agreement with its lenders to restructure the
Company's $340 million revolving line of credit (the "Revolving Facility"). The
Plan was approved at the Company's Annual Meeting held on May 20, 1994 and on
that date the lender group under the Company's Revolving Facility converted $95
million of outstanding
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<PAGE> 25
debt under the Revolving Facility to equity through the issuance of 43,166,667
shares of a new series of common stock representing initially 70% of the
outstanding shares of all series of common stock of the Company. As provided in
the agreement with its lenders, when the Company completed its Senior Notes
Offering of $200 million on June 29, 1994, as described below, the lending group
returned to the Company a total of 8,809,524 shares of the new series of common
stock, reducing their aggregate equity interest in the Company to 65% from 70%.
In order to implement the Plan for Capital Restructuring, the Company's
Certificate of Incorporation was amended to redesignate existing common stock as
Series A Common Stock (the "Series A Common"), to establish a second series of
common stock which was issued to the lender group (the "Series B Common"), and
to increase the number of directors of the Company to nine, of which six are
elected by holders of outstanding shares of Series A Common, and the remaining
three are elected by the holders of outstanding shares of Series B Common. As a
result of the conversion of a portion of the Series B Common in 1998, the number
of directors elected by the holders of the Series B Common will be reduced to
two at the Company's next Annual Meeting of Stockholders at which Series B
Common directors are to be elected and the total number of directors will be
reduced to eight.
Concurrent with the conversion of debt to equity, under the Plan for
Capital Restructuring, the Revolving Facility was reduced by $95 million to a
total of $245 million comprised of a $150 million term facility ("the Term
Facility") and a $95 million working capital facility ("the Working Capital
Facility") (collectively, "the Debt Facilities"). In addition the lender group
increased the Working Capital Facility by $20 million to a total of $115
million. Revolving credit loans under the Working Capital Facility may be
borrowed, repaid and reborrowed from time to time prior to the termination date
of the Working Capital Facility. The lender group had therefore provided Debt
Facilities totaling $265 million to the Company. The terms of the Working
Capital Facility are described more fully below.
As described more fully below, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-1 for the sale of $200
million of Senior Notes which became effective on June 23, 1994. The offering
closed on June 29, 1994 and was fully subscribed and issued. The Term Facility
was repaid in full and the Working Capital Facility was reduced by $43 million
from a portion of the proceeds from the issuance of the Senior Notes.
The Series B Common ranks pari passu with the Series A Common in any
liquidation of the Company. The Company may not declare or pay any dividends on
the Series A Common unless equal dividends are declared and paid on the Series B
Common.
The Series B Common became convertible into Series A Common on a
share-for-share basis at the option of the holder from and after May 20, 1997.
On January 30, 1998 and June 30, 1998, the Company issued an aggregate of
2,677,836 and 14,276,361 shares, respectively, of its Series A Common as a
result of the conversion of a like number of shares of its Series B Common. The
shares of the Series A Common 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 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 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 were listed with the New
York Stock Exchange and reserved for issuance with ChaseMellon Shareholder
Services, Inc., the transfer agent for the Company.
As part of the Plan for Capital Restructuring, the Company's Board of
Directors also approved a Plan for Quasi-Reorganization retroactive to January
1, 1994. The Company implemented the quasi-reorganization at that time because
it was implementing a substantial change in its capital structure in accordance
with the Plan for Capital Restructuring. A quasi-reorganization allows certain
companies which are undergoing a substantial change in capital structure to
utilize "fresh start accounting."
Under the Plan for Quasi-Reorganization, the Company implemented an overall
accounting readjustment effective January 1, 1994, which resulted in the
adjustment of assets and liabilities to estimated fair
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<PAGE> 26
values, and the elimination of the accumulated deficit. The net amount of such
revaluation adjustments and costs related to the capital restructuring, together
with the accumulated deficit as of the date thereof, was transferred to paid-in
capital in accordance with the accounting principles applicable to
quasi-reorganizations.
The estimation process involved in the determination of the fair value of
those assets as to which an adjustment was made is inherently uncertain since it
required estimates and assumptions as to future events and conditions. Such
future events and conditions include economic and market conditions, the
availability and cost of governmental entitlements necessary to develop and
build product, the cost of financing to fund development and construction
activities, and the availability and cost of labor and materials necessary to
develop, build and sell product.
Because the amount and timing of the realization of the investments by the
Company and its subsidiaries in their respective real estate projects are
dependent upon such future uncertain events and conditions, the actual timing
and amounts may be materially different from the estimates and assumptions used
in determining fair value estimates utilized for purposes of the Plan for
Quasi-Reorganization.
The quasi-reorganization affects the comparability of operating statements
for periods beginning after December 31, 1993 with those for periods beginning
on or before December 31, 1993. Moreover, any 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.
SENIOR NOTES
The 12 1/2% Senior Notes due 2001 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. However, Presley Homes has granted liens on substantially all
of its assets as security for its obligations under the Working Capital Facility
and other loans. Because the Presley Homes guarantee is not secured, holders of
the Senior Notes are effectively junior to borrowings under the Working Capital
Facility with respect to such assets. Delaware Presley and its consolidated
subsidiaries are referred to collectively herein as "Presley" or the "Company."
Interest on the Senior Notes is payable on January 1 and July 1 of each year,
commencing January 1, 1995.
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 million for any two
consecutive fiscal quarters, as well as from the proceeds of certain asset
sales.
Upon certain changes of control as described in the Indenture, 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
letter of intent with William Lyon Homes described above contemplates that the
transaction would be structured so as to not constitute a change of control as
described in the Indenture.
The Indenture governing the Senior Notes restricts, among other things: (i)
the payment of dividends on and redemptions of capital stock by 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,
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<PAGE> 27
and (v) transactions with affiliates. These restrictions are subject to a number
of important qualifications and exceptions.
The net proceeds of this offering were used to repay amounts outstanding
under the Term Facility and to reduce the outstanding debt and commitment level
under the Working Capital Facility in connection with the Plan for Capital
Restructuring as more fully described above.
In April 1995, the Company purchased $10,000,000 principal amount of its
outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of
$724,000 after giving effect to related deferred loan costs and income taxes. In
November 1997, the Company resold these Senior Notes held by the Company in
treasury in a private placement.
As of December 31, 1998, the outstanding 12 1/2% Senior Notes with a face
value of $140 million were valued at a range from $120 million to $122 million,
based on quotes from industry sources.
WORKING CAPITAL FACILITY
On July 6, 1998, the Company completed an agreement with the Agent of its
existing lender group under its Working Capital Facility to (1) extend this loan
facility to May 20, 2001, (2) increase the loan commitment to $100 million and
(3) decrease the fees and costs compared to the prior revolving facility.
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 the 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 December
31, 1998 was approximately $116 million; however, the maximum loan under the
Working Capital Facility is limited to $100 million. The principal outstanding
under the Working Capital Facility at December 31, 1998 was $44 million. In
addition, $2 million of available loan capacity is restricted for letters of
credit outstanding under the Working Capital Facility.
Pursuant to the terms of the Working Capital Facility, outstanding advances
bear interest at the "reference rate" of Chase Manhattan Bank plus 2%. An
alternate option provides for interest based on a specified overseas base rate
plus 4.44%, but not less than 8%. In addition, the Company pays a monthly fee of
0.25% on the average daily unused portion of the loan facility.
Upon completion of the new Working Capital Facility agreement, the Company
paid a one-time, non-refundable Facility Fee of $2 million as well as a yearly
non-refundable Administrative Fee of $100,000.
The Working Capital Facility requires certain minimum cash flow and pre-tax
and pre-interest tests. The Working Capital Facility also includes negative
covenants which, among other things, place limitations on the 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 million in the principal operating accounts of the Company.
CMR FACILITY
Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel
Mountain Ranch master-planned community, is a California general partnership and
is 100% owned by the Company. Effective in March 1995, the development and
construction of CMR, a consolidated joint venture, is financed through a
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<PAGE> 28
revolving line of credit. The revolving line of credit consists of several
components relating to production units, models and residential lots. At
December 31, 1998, the revolving line of credit had an outstanding balance of
$5.7 million. 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. At the option of the borrower, the maturity date of
this line may be extended from April 16, 1999 to August 16, 1999, subject to
certain specified terms and conditions. The Company currently intends to
exercise the option to extend the maturity date of this loan to August 16, 1999,
and may, if necessary, seek to extend the maturity date beyond August 16, 1999.
SELLER FINANCING
Another source of financing available to the Company is seller-provided
financing for land acquired by the Company. At December 31, 1998, the Company
had various notes payable outstanding related to land acquisitions for which
seller financing was provided in the amount of $5.7 million within the Company's
Arizona, New Mexico and Nevada regions.
JOINT VENTURE FINANCING
As of December 31, 1998, the Company and certain of its subsidiaries are
general partners or members in twelve joint ventures involved in the development
and sale of residential projects. Such joint ventures are 50% or less owned and,
accordingly, such joint ventures are not consolidated with the Company's
financial statements. The Company's investments in unconsolidated joint ventures
are accounted for using the equity method. See Note 6 of "Notes to Consolidated
Financial Statements" for condensed combined financial information for these
joint ventures. 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.
As of December 31, 1998, the Company's investment in such joint ventures
was approximately $29.8 million and the Company's venture partners' investment
in such joint ventures was approximately $102.6 million. In addition, certain
joint ventures have obtained financing from land sellers or construction lenders
which amounted to approximately $29.0 million at December 31, 1998.
In January 1998, one of these joint ventures acquired land from the Company
at the Company's book value of approximately $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 secured by the land. The Company
received cash of approximately $5,600,000 and was credited with a capital
contribution of approximately $5,100,000 upon the formation of this joint
venture. In March 1998, one of these joint ventures acquired land from the
Company at the Company's book value of approximately $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 secured by the land. The Company
received cash of approximately $1,260,000 and was credited with a capital
contribution of approximately $525,000 upon the formation of this joint venture.
In May 1998, the Company contributed land to one of these joint ventures at the
Company's book value of approximately $29,381,000 (which also approximated the
project's current market value). The Company received cash of approximately
$25,431,000 and was credited with a capital contribution of approximately
$3,950,000 upon the formation of this joint venture. 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 AND SELLER FINANCING
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,
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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 YEARS ENDED DECEMBER 31, 1998 AND 1997
Net cash provided by (used in) operating activities changed from a use of
$14.1 million in 1997 to a source of $55.1 million in 1998. The change was
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
$8.7 million in 1997 to a source of $5.8 million in 1998 primarily as a result
of investment activity with unconsolidated joint ventures.
Net cash provided by (used in) financing activities changed from a source
of $22.9 million in 1997 to a use of $41.5 million in 1998 primarily as a result
of the repurchase of $40.0 million principal amount of 12 1/2% Senior Notes and
reduced net borrowings from notes payable.
CASH FLOWS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net cash provided by (used in) operating activities changed from a source
of 15.6 million in 1996 at a use of $14.1 million in 1997. The change was
primarily due to the incurrence of the net loss in 1997 compared to income in
1996.
Net cash provided by (used in) investing activities changed from a source
of $0.7 million in 1996 to a use of $8.7 million in 1997. The change was due
primarily to an increase in investments in joint ventures, an increase in the
amount of new notes receivable issued, a decrease in principal payments received
on notes receivable and an increase in purchases of property and equipment.
Net cash provided by (used in) financing activities changed from a use of
$15.9 million in 1996 to a source of $22.9 million in 1997. The change was
primarily due to a $139.1 million repayment of debt and a $20.0 million
retirement of Senior Notes, offset by borrowings on notes payable totaling
$172.0 million.
IMPACT OF YEAR 2000
The term "year 2000 issue" is a general term used to describe the
complications that may be caused by existing computer hardware and software that
were designed without consideration for the upcoming change in the century. If
not corrected, such programs may cause computer systems and equipment to fail or
to miscalculate data. Due to the year 2000 issue, the Company has undertaken
initiatives to modify or replace portions of its existing computer operating
systems so that they will function properly with respect to dates in the year
2000 and thereafter.
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 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 June 30, 1999 and will have minimal effects on its
systems, and that the cost incurred in that connection will not be material.
The Company has undertaken an assessment of other internal systems used by
the Company in various of its operations. Internal systems used by the Company
in its mortgage company operations, payroll processing and banking interfaces
were all converted during 1998 to systems which are Year 2000 compliant and as
such, the Company's efforts are 100% complete with respect to these systems. The
implementation had minimal effect on its systems and the costs incurred in that
connection were not material. Internal systems used by the
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<PAGE> 30
Company in its design center operations are currently being converted to a
system which is Year 2000 compliant. This implementation is expected to be
completed no later than June 30, 1999 and the cost incurred in that connection
will not be material.
As part of these projects, the Company's relationships with suppliers,
subcontractors, financial institutions and other third parties are being
examined to determine the status of their year 2000 issue efforts as related to
the Company. As a general matter, the Company is vulnerable to significant
suppliers' inability to remedy their own year 2000 issues. Furthermore, the
Company relies on financial institutions, government agencies (particularly for
zoning, building permits and related matters), utility companies,
telecommunication service companies and other service providers outside of its
control. There is no assurance that such third parties will not suffer a year
2000 business disruption and it is conceivable that such failures could, in
turn, have a material adverse effect on the Company's liquidity, financial
condition and results of operations.
The Company acknowledges that its failure to resolve a material year 2000
issue could result in the interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Company's results of operations. Although the Company considers its
exposure to the year 2000 issue from third party suppliers as generally low, due
to the uncertainty of the year 2000 readiness of third party suppliers, the
Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. In addition, the Company could be
materially impacted by the widespread economic or financial market 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. 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 suppliers and 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 has incurred less than $50,000 in connection with its Year 2000
initiatives. The Company estimates its future costs related to its Year 2000
initiatives to be less than $200,000. 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.
INFLATION
Although inflation rates have been low in recent years, the Company's
revenues and profitability may be affected by increased inflation rates and
other general economic conditions. In periods of high inflation, demand for the
Company's homes may be reduced by increases in mortgage interest rates. Further,
the Company's profits will be affected by its ability to recover through higher
sales prices increases in the costs of land, construction, labor and
administrative expenses. The Company's ability to raise prices at such times
will depend upon demand and other competitive factors.
FORWARD LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this Annual
Report on Form 10-K, as well as some statements by the Company in periodic press
releases and some oral statements by Company officials to securities analysts
and stockholders during presentations about the Company are "forward-looking
state-
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ments" within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Act"). Statements which are predictive in nature, which depend upon
or refer to future events or conditions, or which include words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates", "hopes",
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions, which may be provided by management are also
forward-looking statements as defined in the Act. Forward-looking statements are
based upon expectations and projections about future events and are subject to
assumptions, risks and uncertainties about, among other things, the Company,
economic and market factors and the homebuilding industry.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements due to a number of factors. The
principal factors that could cause the Company's actual performance and future
events and actions to differ materially from such forward-looking statements
include, but are not limited to, changes in general economic conditions either
nationally or in regions in which the Company operates, whether an ownership
change occurs which results in the limitation of the Company's ability to
utilize the tax benefits associated with its net operating loss carryforwards,
changes in home mortgage interest rates, changes in prices of homebuilding
materials, labor shortages, adverse weather conditions, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective indemnification agreements,
changes in governmental laws and regulations, whether a definitive agreement
with William Lyon Homes is executed and consummated, whether the Company is able
to refinance the outstanding balances of Senior Notes and Working Capital
Facility at their respective maturities, and the availability and cost of land
for future growth.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's revolving lines of credit with a total outstanding
balance at December 31, 1998 of $49.7 million where the interest rate is
variable based upon certain bank reference or prime rates. If interest rates
were to increase by 10%, the estimated impact on the Company's consolidated
financial statements would be to reduce income before taxes by approximately
$200,000 based on amounts outstanding and rates in effect at December 31, 1998,
as well as to increase capitalized interest by approximately $490,000 which
would be amortized to cost of sales as unit closings occur.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Presley and the financial
statements of the Significant Subsidiaries of Presley, together with the reports
of the independent auditors, listed under Item 14, are submitted as a separate
section of this report beginning on page 35 and are incorporated herein by
reference.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A
Common Stock to be held on May 10, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A
Common Stock to be held on May 10, 1999.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A
Common Stock to be held on May 10, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A
Common Stock to be held on May 10, 1999.
PART IV
ITEM 14.EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(A)(1) FINANCIAL STATEMENTS
The following financial statements of the Company are included in a
separate section of this Annual Report on Form 10-K/A commencing on the page
numbers specified below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE PRESLEY COMPANIES
Report of Independent Auditors.............................. 36
Consolidated Balance Sheets................................. 37
Consolidated Statements of Operations....................... 38
Consolidated Statements of Stockholders' Equity (Deficit)... 39
Consolidated Statements of Cash Flows....................... 40
Notes to Consolidated Financial Statements.................. 41
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
Report of Independent Auditors.............................. 68
Combined Balance Sheets..................................... 69
Combined Statements of Operations........................... 70
Combined Statements of Members' Capital..................... 71
Combined Statements of Cash Flows........................... 72
Notes to Combined Financial Statements...................... 73
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
Schedules are omitted as the required information is not present, is not
present in sufficient amounts, or is included in the Consolidated Financial
Statements or Notes thereto.
(3) LISTING OF EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1(1) Certificate of Incorporation of the Company.
3.3(1) Bylaws of the Company.
4.1(1) Specimen certificate of Common Stock.
10.1(1) Form of Indemnity Agreement, dated October 18, 1991, between
the Company and Messrs. Lyon and Cable as Directors, and
dated December 12, 1991 as to the other Directors.
10.2(1) Form of Registration Rights Agreement, dated October 7,
1991, between the Company and William Lyon.
10.3(1) Form of Registration Rights Agreement, dated October 7,
1991, between the Company and each of the existing
stockholders other than William Lyon.
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.4(1) 1991 Stock Option Plan.
10.5(2) Agreement for Redemption of Partnership Interest dated
December 30, 1992 between Carmel Mountain Ranch, a
California general partnership, The Presley Companies, a
California corporation, Presley CMR, Inc., a California
corporation, Home Capital Corporation, a California
corporation and Humboldt Financial Services Corp., a
California corporation.
10.6(2) Amended Statement of Partnership of Carmel Mountain Ranch
dated December 30, 1992.
10.7(2) Amendment to Amended and Restated Partnership Agreement of
Carmel Mountain Ranch dated December 29, 1992.
10.8(3) Agreement to Issue and Purchase Stock as dated for reference
purposes the 25th day of March, 1994 by and among The
Presley Companies, a Delaware corporation, and Foothill
Capital Corporation, Continental Illinois Commercial
Corporation, First Plaza Group Trust (Mellon Bank, N.A.,
acting as trustee as directed by General Motors Investment
Management Corporation), Pearl Street, L.P., International
Nederlanden (U.S.) Capital Corporation, and
Whippoorwill/Presley Obligations Trust -- 1994 (Continental
Stock Transfer & Trust Company, as trustee under that
certain trust agreement dated as of January 11, 1994).
10.9(4) First Amendment to the Agreement to Issue and Purchase Stock
dated as of April 8, 1994 by and among The Presley
Companies, a Delaware corporation, and Foothill Capital
Corporation, Continental Illinois Commercial Corporation,
First Plaza Group Trust (Mellon Bank, N.A., acting as
trustee as directed by General Motors Investment Management
Corporation), Pearl Street, L.P., International Nederlanden
(U.S.) Capital Corporation, and Whippoorwill/Presley
Obligations Trust -- 1994 (Continental Stock Transfer &
Trust Company, as trustee under that certain trust agreement
dated as of January 11, 1994).
10.10(4) Form of Registration Rights Agreement dated as of May 20,
1994, by and among The Presley Companies, a Delaware
corporation and each of the holders of shares of the Series
B Common Stock.
10.11(4) Amended and Restated 1991 Stock Option Plan of The Presley
Companies, a Delaware corporation.
10.12(5) Forms of Stock Option Agreements, dated as of May 20, 1994,
between the Company and Wade H. Cable.
10.13(5) Forms of Stock Option Agreements, dated as of May 20, 1994,
between the Company and David M. Siegel.
10.14(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and Nancy M. Harlan.
10.15(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and Linda L. Foster.
10.16(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and W. Douglass Harris.
10.17(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and C. Dean Stewart.
10.18(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and Alan Uman.
10.19(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and William Lyon.
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.20(6) Agreement and Assignment; Mutual Releases, as of August 23,
1994, by and between Gateway Highlands, a California limited
partnership, HSP Inc., a California corporation and The
Presley Companies, a California corporation.
10.21(7) Master Credit Agreement by and between Carmel Mountain
Ranch, a California general partnership and Bank One,
Arizona, N.A., a national banking association dated as of
February 15, 1995.
10.22(8) First Amendment to Master Credit Agreement by and between
Carmel Mountain Ranch, a California general partnership and
Bank One, Arizona, NA dated as of October 10, 1995.
10.23(9) Second Amendment to Master Credit Agreement and Secured
Promissory Note by and between Carmel Mountain Ranch, a
California general partnership ("Borrower"), and Bank One,
Arizona, NA, a national banking association ("Bank"), dated
as of October 4, 1996.
10.24(10) Third Amendment to Master Credit Agreement, dated as of
September 25, 1997, by and between Carmel Mountain Ranch, a
California general partnership ("Borrower"), and Bank One,
Arizona, NA, a national banking association ("Bank").
10.25(11) Fifth Amended and Restated Loan Agreement, dated as of July
6, 1998, between Presley Homes (formerly The Presley
Companies), a California corporation, as the Borrower, and
Foothill Capital Corporation, as the Lender.
10.26(11) Modification to Master Credit Agreement dated as of March
17, 1998, between Carmel Mountain Ranch, a California
general partnership, as Borrower, and Bank One, Arizona, NA,
a national banking association, as Bank.
10.27(11) Modification to Master Credit Agreement dated as of June 16,
1998, between Carmel Mountain Ranch, a California general
partnership, as Borrower, and Bank One, Arizona, NA, a
national banking association, as Bank.
10.28(12) Modification to Master Credit Agreement dated as of August
25, 1998, between Carmel Mountain Ranch, a California
general partnership, as Borrower, and Bank One, Arizona, NA,
a national banking association, as Bank.
10.29(12) Form of Severance Agreements dated September 24, 1998.
10.30(14) Presley Homes 1998 Bonus Plan.
10.31(13) Letter of Intent dated December 31, 1998 by and among
William Lyon Homes, Inc., a California corporation, The
Presley Companies, a Delaware corporation and The Presley
Companies, a California corporation.
10.32(14) Amendment to Letter of Intent dated March 30, 1999 by and
among William Lyon Homes, Inc., a California corporation,
The Presley Companies, a Delaware corporation and Presley
Homes, a California corporation.
21.1(14) List of Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
27(14) Financial Data Schedule.
</TABLE>
- ---------------
(1) Previously filed in connection with the Company's Registration Statement on
Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and
incorporated herein by this reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by this
reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by this
reference.
32
<PAGE> 35
(4) Previously filed as an exhibit to the Company's Proxy Statement for Annual
Meeting of Stockholders held on May 20, 1994 and incorporated herein by
this reference.
(5) Previously filed in connection with the Company's Registration Statement on
Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and
incorporated herein by this reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994 and incorporated
herein by this reference.
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995 and incorporated herein
by this reference.
(8) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995 and incorporated
herein by this reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1996 and incorporated
herein by this reference.
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997.
(11) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998.
(13) Previously filed as an exhibit to the Company's Report on Form 8-K dated
December 31, 1998.
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by this
reference.
(b) Reports on Form 8-K
OCTOBER 28, 1998. A Report on Form 8-K (Item 5) was filed by the Company
related to the Company's purchase of $20,000,000 principal amount of its 12 1/2%
Senior Notes.
DECEMBER 31, 1998. A Report on Form 8-K (Item 5) was filed by the Company
in reference to the announcement that the Company entered into a letter of
intent with William Lyon Homes, Inc. ("William Lyon Homes") setting forth their
preliminary understanding with respect to (i) the proposed acquisition by
Presley of substantially all of the assets of William Lyon Homes for
approximately $48,000,000 together with the assumption of related liabilities,
and (ii) the concurrent purchase by William Lyon Homes pursuant to a tender
offer for not less than 40% and not more than 49% of the outstanding shares of
Presley common stock held by stockholders other than William Lyon at a price of
$0.62 per share.
33
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE PRESLEY COMPANIES
By: /s/ DAVID M. SIEGEL
------------------------------------
David M. Siegel
Senior Vice President,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM LYON Chairman of the Board and October 4, 1999
- ----------------------------------------------------- Director
William Lyon
/s/ WADE H. CABLE Director, Chief Executive October 4, 1999
- ----------------------------------------------------- Officer and President
Wade H. Cable (Principal Executive
Officer)
/s/ JAMES E. DALTON Director October 4, 1999
- -----------------------------------------------------
James E. Dalton
/s/ GREGORY P. FLYNN Director October 4, 1999
- -----------------------------------------------------
Gregory P. Flynn
Director October , 1999
- -----------------------------------------------------
Steven B. Sample
/s/ KAREN SANDLER Director October 4, 1999
- -----------------------------------------------------
Karen Sandler
/s/ MARSHALL E. STEARNS Director October 4, 1999
- -----------------------------------------------------
Marshall E. Stearns
/s/ RAY A. WATT Director October 4, 1999
- -----------------------------------------------------
Ray A. Watt
/s/ DAVID M. SIEGEL Senior Vice President, Chief October 4, 1999
- ----------------------------------------------------- Financial Officer and
David M. Siegel Treasurer (Principal
Financial Officer)
/s/ W. DOUGLASS HARRIS Vice President and Corporate October 4, 1999
- ----------------------------------------------------- Controller (Principal
W. Douglass Harris Accounting Officer)
</TABLE>
34
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE PRESLEY COMPANIES
Report of Independent Auditors.............................. 36
Consolidated Balance Sheets................................. 37
Consolidated Statements of Operations....................... 38
Consolidated Statements of Stockholders' Equity (Deficit)... 39
Consolidated Statements of Cash Flows....................... 40
Notes to Consolidated Financial Statements.................. 41
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
Report of Independent Auditors.............................. 68
Combined Balance Sheets..................................... 69
Combined Statements of Operations........................... 70
Combined Statements of Members' Capital..................... 71
Combined Statements of Cash Flows........................... 72
Notes to Combined Financial Statements...................... 73
</TABLE>
REQUIRED SCHEDULES
Schedules are omitted as the required information is not present, is not
present in sufficient amounts, or is included in the Consolidated Financial
Statements or Notes thereto.
35
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
The Presley Companies
We have audited the accompanying consolidated balance sheets of The Presley
Companies as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Presley
Companies at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Newport Beach, California
February 16, 1999
36
<PAGE> 39
THE PRESLEY COMPANIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
(NOTE 2)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 23,955 $ 4,569
Receivables -- Note 4....................................... 8,613 8,652
Real estate inventories -- Notes 1 and 5.................... 174,502 255,472
Investments in and advances to unconsolidated joint
ventures -- Note 6........................................ 30,462 7,077
Property and equipment, less accumulated depreciation of
$3,156 and $2,339 at December 31, 1998 and 1997,
respectively.............................................. 2,912 3,613
Deferred loan costs -- Note 1............................... 3,381 3,266
Other assets................................................ 2,579 2,595
-------- --------
$246,404 $285,244
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 17,364 $ 12,854
Accrued expenses............................................ 27,823 23,136
Notes payable -- Note 7..................................... 55,393 74,935
12 1/2% Senior Notes Due 2001 -- Note 7..................... 140,000 180,000
-------- --------
240,580 290,925
-------- --------
Commitments and contingencies -- Note 12
Stockholders' equity (deficit) -- Notes 3 and 9
Common stock:
Series A common stock, par value $.01 per share;
100,000,000 shares authorized; 34,792,732 and
17,838,535 shares issued and outstanding at December
31, 1998 and 1997, respectively....................... 348 178
Series B restricted voting convertible common stock,
par value $.01 per share; 50,000,000 shares
authorized; 17,402,946 and 34,357,143 shares issued
and outstanding at December 31, 1998 and 1997,
respectively.......................................... 174 344
Additional paid-in capital................................ 116,249 114,599
Accumulated deficit from January 1, 1994.................. (110,947) (120,802)
-------- --------
5,824 (5,681)
-------- --------
$246,404 $285,244
======== ========
</TABLE>
See accompanying notes.
37
<PAGE> 40
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
(NOTE 2)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Sales
Homes................................................. $ 348,352 $ 307,332 $ 317,366
Lots, land and other -- Note 11....................... 19,930 22,610 1,631
--------- --------- ---------
368,282 329,942 318,997
--------- --------- ---------
Operating costs
Cost of sales -- homes................................ (297,781) (278,299) (279,988)
Cost of sales -- lots, land and other................. (20,992) (23,902) (1,991)
Impairment loss on real estate assets -- Note 1....... -- (74,000) --
Sales and marketing................................... (21,463) (22,279) (22,877)
General and administrative............................ (15,965) (15,996) (13,978)
--------- --------- ---------
(356,201) (414,476) (318,834)
--------- --------- ---------
Income from unconsolidated joint ventures -- Note 6..... 3,499 -- --
--------- --------- ---------
Operating income (loss)................................. 15,580 (84,534) 163
Interest expense, net of amounts capitalized -- Note
7..................................................... (9,214) (7,812) (2,256)
Financial advisory expenses -- Note 2................... (1,286) -- --
Other income (expense), net............................. 3,225 2,452 2,245
--------- --------- ---------
Income (loss) before income taxes and extraordinary
item.................................................. 8,305 (89,894) 152
Provision for income taxes -- Notes 3 and 9............. (1,191) -- --
--------- --------- ---------
Income (loss) before extraordinary item................. 7,114 (89,894) 152
Extraordinary item -- gain from retirement of debt, net
of applicable income taxes of $459 -- Notes 3, 9 and
10.................................................... 2,741 -- --
--------- --------- ---------
Net income (loss)....................................... $ 9,855 $ (89,894) $ 152
========= ========= =========
Basic and diluted earnings per common share: -- Note 1
Before extraordinary item............................. $ 0.14 $ (1.72) $ --
Extraordinary item.................................... $ 0.05 -- --
--------- --------- ---------
After extraordinary item.............................. $ 0.19 $ (1.72) $ --
========= ========= =========
</TABLE>
See accompanying notes.
38
<PAGE> 41
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
(NOTE 2)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
---------------------------------- (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, 1995............ 17,839 $178 34,357 $ 344 $114,599 $ (31,060) $ 84,061
Net income.............................. -- -- -- -- -- 152 152
------ ---- ------- ----- -------- --------- --------
Balance -- December 31, 1996............ 17,839 178 34,357 344 114,599 (30,908) 84,213
Net loss................................ -- -- -- -- -- (89,894) (89,894)
------ ---- ------- ----- -------- --------- --------
Balance -- December 31, 1997............ 17,839 178 34,357 344 114,599 (120,802) (5,681)
Net income.............................. -- -- -- -- -- 9,855 9,855
Income tax benefits related to temporary
differences existing prior to the
quasi-reorganization -- Notes 3 and
9..................................... -- -- -- -- 1,650 -- 1,650
Conversion of Series B Common Stock to
Series A Common Stock -- Note 3....... 16,954 170 (16,954) (170) -- -- --
------ ---- ------- ----- -------- --------- --------
Balance -- December 31, 1998............ 34,793 $348 17,403 $ 174 $116,249 $(110,947) $ 5,824
====== ==== ======= ===== ======== ========= ========
</TABLE>
See accompanying notes.
39
<PAGE> 42
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(NOTE 2)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss)......................................... $ 9,855 $ (89,894) $ 152
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,059 907 585
Impairment loss on real estate assets.................. -- 74,000 --
Equity in earnings of joint ventures................... (3,499) -- --
Extraordinary gain on repurchase of Senior Notes....... (3,200) -- --
Provision for uncollectible notes receivable........... -- -- 145
Provision for income taxes............................. 1,650 -- --
Net changes in operating assets and liabilities:
Other receivables.................................... (556) (4,273) (778)
Real estate inventories.............................. 41,272 (680) 11,409
Deferred loan costs.................................. (655) 1,081 1,019
Other assets......................................... 17 6,470 (3,386)
Accounts payable..................................... 4,510 (5,574) 7,877
Accrued expenses..................................... 4,687 3,819 (1,437)
--------- --------- ---------
Net cash provided by (used in) operating activities....... 55,140 (14,144) 15,586
--------- --------- ---------
Investing activities
Investment in unconsolidated joint ventures............... (19,886) (7,077) --
Proceeds from contribution of land to joint venture....... 25,431 -- --
Issuance of notes receivable.............................. (234) (637) --
Principal payments on notes receivable.................... 828 483 1,712
Purchases of property and equipment....................... (358) (1,473) (1,055)
--------- --------- ---------
Net cash provided by (used in) investing activities....... 5,781 (8,704) 657
--------- --------- ---------
Financing activities
Proceeds from borrowings on notes payable................. 132,953 171,964 107,891
Principal payments on notes payable....................... (138,228) (139,097) (123,801)
Repurchase of 12 1/2% Senior Notes........................ (36,260) (20,000) --
Sale of 12 1/2% Senior Notes held in treasury............. -- 10,000 --
--------- --------- ---------
Net cash provided by (used in) financing activities....... (41,535) 22,867 (15,910)
--------- --------- ---------
Net increase in cash and cash equivalents................... 19,386 19 333
Cash and cash equivalents -- beginning of period............ 4,569 4,550 4,217
--------- --------- ---------
Cash and cash equivalents -- end of period.................. $ 23,955 $ 4,569 $ 4,550
========= ========= =========
Supplemental disclosures of cash flow and non-cash financing
activities
Cash paid during the period for interest, net of amounts
capitalized............................................ $ 12,025 $ 7,277 $ 2,517
========= ========= =========
Issuance of notes payable for land acquisitions........... $ 2,748 $ 22,411 $ --
========= ========= =========
</TABLE>
See accompanying notes.
40
<PAGE> 43
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
The Presley Companies (the "Company" or "Presley") is primarily engaged in
designing, constructing and selling single family detached and attached homes in
California, Arizona, New Mexico and Nevada.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries and joint ventures. Investments in joint
ventures in which the Company has a 50% or less ownership interest are accounted
for using the equity method. The accounting policies of the joint ventures are
substantially the same as those of the Company. All significant intercompany
accounts and transactions are eliminated in consolidation.
Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("Statement No. 131"). Statement No. 131
superseded FASB Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 establishes new standards for segment reporting
which are based on the way management organizes segments within the Company for
making operating decisions and assessing performance. The adoption of Statement
No. 131 did not affect the results of operations or financial position of the
Company.
The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets. For internal reporting purposes,
the Company is organized into six geographic home building regions and its
mortgage operations. Because each of the Company's geographic home building
regions has similar economic characteristics, housing products and class of
prospective buyers, the geographic home building regions have been aggregated
into a single home building segment. Mortgage company operations did not meet
the materiality thresholds which would require disclosure under Statement No.
131 for the years ended December 31, 1998, 1997 and 1996, and accordingly, are
not separately reported.
The Company evaluates performance and allocates resources primarily on the
operating income of individual home building projects. Operating income is
defined by the Company as sales of homes, lots and land; less cost of sales,
impairment losses on real estate, selling and marketing, and general and
administrative expenses. Accordingly, operating income excludes certain expenses
included in the determination of net income. Operating income (loss) from home
building operations totaled $15.6 million, $(84.5 million), and $0.1 million for
the years ended December 31, 1998, 1997 and 1996, respectively. All other
segment measurements are disclosed in the Company's consolidated financial
statements.
All revenues are from external customers and no revenues are generated from
transactions with other segments. There were no customers that contributed 10%
or more of the Company's total revenues during 1998, 1997, or 1996.
Real Estate Inventories and Related Indebtedness
Real estate inventories are carried at cost net of impairment losses and
real estate valuation adjustments. Real estate inventories consist primarily of
raw land, lots under development, houses under construction and completed
houses. All direct and indirect land costs, offsite and onsite improvements and
applicable interest and other carrying charges are capitalized to real estate
projects during periods when the project is under development. Land, offsite
costs and all other common costs are allocated to land parcels benefited based
upon relative fair values before construction. Onsite construction costs and
related carrying charges (principally
41
<PAGE> 44
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interest and property taxes) are allocated to the individual homes within a
phase based upon the relative sales value of the homes. Selling expenses and
other marketing costs are expensed in the period incurred. A provision for
warranty costs relating to the Company's limited warranty plans is included in
cost of sales at the time the sale of a home is recorded. The Company normally
reserves one percent of the sales price of its homes against the possibility of
future charges relating to its one-year limited warranty and similar potential
claims.
Interest incurred under the Working Capital Facility, the Senior Notes and
other notes payable, as more fully discussed in Note 7, is capitalized to
qualifying real estate projects under development. Any additional interest
charges related to real estate projects not under development are expensed in
the period incurred.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires
impairment losses to be recorded on assets to be held and used by the Company
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets (excluding interest) are less than the
carrying amount of the assets. Statement No. 121 also requires that long-lived
assets that are held for disposal be reported at the lower of the assets'
carrying amount or fair value less cost of disposal. When an impairment loss is
required for assets to be held and used by the Company, the related assets are
adjusted to their estimated fair value.
The net loss for the year ended December 31, 1997 included a non-cash
charge of $74,000,000 to record impairment losses on certain real estate assets
held and used by the Company. The impairment losses related to three of the
Company's master-planned communities. The impairment losses related to two
communities, which are located in the Inland Empire area of Southern California,
arose primarily from declines in home sales prices due to continued weak
economic conditions and competitive pressures in that area of Southern
California. The impairment loss relating to the other community, which is
located in Contra Costa County in the East San Francisco Bay area of Northern
California, was primarily attributable to lower than expected cash flow relating
to one of the high end residential products in this community and to a
deterioration in the value of the non-residential portion of the project. The
significant deteriorations in the market conditions associated with these
communities resulted in the undiscounted cash flows (excluding interest)
estimated to be generated by these communities being less than their historical
book values. Accordingly, the master-planned communities were written-down to
their estimated fair value.
Fair value represents the amount at which an asset could be bought or sold
in a current transaction between willing parties, that is, other than a forced
or liquidation sale. The estimation process involved in determining if assets
have been impaired and in the determination of fair value is inherently
uncertain because it requires estimates of current market yields as well as
future events and conditions. Such future events and conditions include economic
and market conditions, as well as the availability of suitable financing to fund
development and construction activities. The realization of the Company's real
estate projects is dependent upon future uncertain events and conditions and,
accordingly, the actual timing and amounts realized by the Company may be
materially different from the estimated fair values as described herein.
Interest incurred during the period in which real estate projects are not
under development or during the period subsequent to the completion of projects
are expensed in the period incurred. Economic conditions in the real estate
industry can cause a delay in the development of certain real estate projects
and, as a result, can lengthen the periods when such projects are not under
development and, accordingly, have a significant impact on profitability as a
result of expensed interest. Interest expensed during 1998, 1997 and 1996 was
approximately $9,214,000, $7,812,000 and $2,256,000, respectively.
42
<PAGE> 45
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives ranging from three to
thirty-five years. Leasehold improvements are stated at cost and are amortized
using the straight-line method over the shorter of either their estimated useful
lives or term of the lease.
Deferred Loan Costs
Deferred loan costs are amortized over the term of the applicable loans
using a method which approximates the interest method. Included in deferred loan
costs at December 31, 1998 and 1997, net of related amortization, are $1,643,000
and $2,958,000, respectively, of costs associated with the issuance of the
Company's Senior Notes.
Sales and Profit Recognition
A sale is recorded and profit recognized when a sale is consummated, the
buyer's initial and continuing investments are adequate, any receivables are not
subject to future subordination, and the usual risks and rewards of ownership
have been transferred to the buyer in accordance with the provisions of
Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real
Estate." When it is determined that the earnings process is not complete, profit
is deferred for recognition in future periods. As of December 31, 1998 and 1997,
there are no deferred profits.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Financial Instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash investments, receivables, and
deposits. The Company typically places its cash investments in investment grade
short-term instruments. Collateral on first trust deed notes receivable is
primarily located in Southern California and Arizona. Deposits, included in
other assets, are due from municipalities or utility companies and are generally
collected from such entities through fees assessed to other developers.
For those instruments, as defined under Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments," for
which it is practical to estimate fair value, management has determined that the
carrying amounts of the Company's financial instruments approximate their fair
value at December 31, 1998, except for the 12 1/2% Senior Notes as described in
Note 7.
The Company is an issuer of, or subject to, financial instruments with
off-balance sheet risk in the normal course of business which exposes it to
credit risks. These financial instruments include letters of credit and
obligations in connection with assessment district bonds. These off-balance
sheet financial instruments are described in the applicable Notes.
Cash and Cash Equivalents
Short-term investments with a maturity of three months or less when
purchased are considered cash equivalents.
43
<PAGE> 46
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Basic and Diluted Earnings Per Common Share
Earnings per share amounts for all periods presented conform to Financial
Accounting Standards Board Statement No. 128, Earnings Per Share. Basic and
diluted earnings per common share for each of the three years in the period
ended December 31, 1998 are based on 52,195,678 shares of Series A and Series B
common stock outstanding.
Use of Estimates
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 December 31, 1998 and 1997 and revenues and expenses for each of the three
years in the period ended December 31, 1998. Accordingly, actual results could
differ from those estimates in the near-term.
NOTE 2 -- COMPANY ENGAGES FINANCIAL ADVISOR AND ENTERS INTO LETTER OF INTENT
WITH
WILLIAM LYON HOMES, INC.
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. In conjunction with the engagement
of the financial advisor, a Special Committee comprised of independent directors
of the Company's Board of Directors was formed to evaluate strategic
alternatives. The Company's actions were 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 $89,894,000 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 $5,681,000 at December 31, 1997. As of
December 31, 1998, the Company's stockholders' equity totaled $5,824,000.
On December 31, 1998, the Company announced that, after unanimous approval
by the Special Committee of independent directors, Presley had entered into a
letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting
forth their preliminary understanding with respect to (i) the proposed
acquisition by Presley of substantially all of the assets of William Lyon Homes
for approximately $48,000,000 together with the assumption of related
liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to
a tender offer for not less than 40% and not more than 49% of the outstanding
shares of Presley common stock held by stockholders other than William Lyon at a
price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and
his son, William H. Lyon, is a California-based homebuilder and real estate
developer with projects currently under development in Northern and Southern
California. Following the completion of the proposed transactions, William Lyon,
who is the current Chairman of the Board of Presley, would beneficially own
between 55% and 65% (depending on the number of shares tendered) of the
outstanding shares of Presley common stock and the remaining shares would
continue to be publicly traded. The execution of the letter of intent followed a
review over several months by the Special Committee, together with its financial
and legal advisors, of strategic alternatives available to Presley as well as a
review of other proposals received from third parties.
Under the terms of the letter of intent, the proposed transactions are
subject to various conditions, including the successful negotiation and
execution of a definitive agreement, the receipt of opinions of
44
<PAGE> 47
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Presley's advisors with respect to the fairness of the transactions to Presley
and its stockholders as well as the solvency of Presley following consummation
of the transactions, the receipt of real estate appraisals satisfactory to
Presley and William Lyon Homes with respect to the real estate assets of William
Lyon Homes, the approval of a definitive agreement by the respective boards of
directors of Presley and William Lyon Homes by March 31, 1999, receipt of all
required regulatory approvals and third party consents, including any required
lender consents, the receipt of agreements from certain significant stockholders
of Presley to tender their shares pursuant to the tender offer, the receipt of
financing by Presley in an amount sufficient to enable Presley to finance the
transactions, and the absence of any material adverse change in the business or
financial condition of either Presley or William Lyon Homes.
In addition, the letter of intent contemplates that each of the
transactions will be structured so as to be subject to the successful completion
of the other and that the parties will structure the transactions (including, if
necessary, by imposing limitations on certain transfers of shares) so as to
avoid triggering the change of control tax provisions that would result in the
loss of Presley's net operating losses for tax purposes. The letter of intent
also contemplates that Presley's 12 1/2% Senior Notes due 2001 shall remain
outstanding without modification.
The letter of intent provides that, subject to the fiduciary duties of
their respective boards of directors, Presley and William Lyon Homes will
negotiate exclusively with each other toward a definitive agreement until March
31, 1999.
The letter of intent does not constitute a binding agreement to consummate
the transactions and there can be no assurances that the parties ultimately will
enter into a definitive agreement with respect to the transactions or that the
conditions to the transactions will be satisfied.
On February 18, 1999 the company announced that it had received a letter
from William Lyon, Chairman of the Board of William Lyon Homes and also Chairman
of the Board of Presley, proposing a modification to the previously executed
letter of intent with William Lyon Homes. Under the proposed modification,
William Lyon Homes would make a tender offer for not more than 37% of the
outstanding shares of common stock of Presley for a purchase price of $0.62 per
share. In the event that more than 37% of the outstanding shares of common stock
of Presley is tendered, William Lyon Homes will purchase shares from each
tendering stockholder on a pro rata basis. The tender offer will be conditioned
upon there being tendered and not withdrawn, a number of shares which
constitutes at least 37% of the outstanding shares of Presley. The proposed
modification also provides that the transaction will be structured to permit
William Lyon or his affiliates, prior to consummation of the transaction and
consistent with applicable securities laws, to sell shares of Presley common
stock owned by them up to a maximum of 4% of the total number of shares of
Presley common stock presently outstanding. The proposed modification is
currently being considered by the Special Committee of independent directors.
On March 30, 1999, the parties amended the letter of intent to extend its
term and the period of exclusive negotiation to April 30, 1999. The condition
included in the letter of intent that the boards of directors of Presley and
William Lyon Homes must approve a definitive agreement by March 31, 1999 was
also extended to April 30, 1999. The parties have also agreed that William Lyon
Homes may participate in discussions and negotiations with the holders of
Presley's Series B Common Stock regarding the purchase by William Lyon Homes of
such percentage of the Series B holder's shares so as to reduce such Series B
holder's ownership interest in Presley Common Stock to between 4.9% and 5% of
Presley's outstanding Common Stock following consummation of the proposed
transactions. William Lyon Homes may also seek commitments from the Series B
holders to sell additional shares to the extent that the number of shares of
Series A Common Stock tendered in the tender offer are below the minimum
threshold set forth in a definitive agreement. Any such negotiations are to be
conducted exclusively so as to obtain the consent of the Series B holders to the
proposed transactions and to avoid triggering the change of control tax
provisions that would result in the loss of Presley's net operating loss
carryforwards for tax purposes. William Lyon Homes is required to notify the
45
<PAGE> 48
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Special Committee regarding the details of any such discussions and
negotiations. William Lyon Homes may not enter into any agreement with any
Series B Holder prior to receiving the written approval from the Special
Committee or Presley's Board of Directors.
In connection with these events, the Company has incurred costs of
approximately $1,286,000 for the year ended December 31, 1998 which are
reflected in the Consolidated Statement of Operations as financial advisory
expenses.
NOTE 3 -- 1994 CAPITAL RESTRUCTURING AND QUASI-REORGANIZATION
On March 28, 1994 the Company's Board of Directors approved a Plan for
Capital Restructuring, which was approved by the Company's Stockholders at the
Annual Meeting of Stockholders held on May 20, 1994.
In accordance with the Plan for Capital Restructuring, on March 29, 1994
the Company executed a definitive agreement with its lenders to restructure the
Company's $340,000,000 revolving line of credit. The Plan was approved at the
Company's Annual Meeting held on May 20, 1994 and on that date the lender group
under the Company's Revolving Debt Facility (see Note 7) converted $95,000,000
of outstanding debt under the Revolving Facility to equity through the issuance
of 43,166,667 shares of a new series of common stock representing initially 70%
of the outstanding shares of all series of common stock of the Company. As
provided in the agreement with its lenders, when the Company completed its
Senior Notes Offering of $200,000,000 on June 29, 1994, as described below, the
lending group returned to the Company a total of 8,809,524 shares of the new
series of common stock, reducing their aggregate equity interest in the Company
to 65% from 70%. In order to implement the Plan for Capital Restructuring, the
Company's Certificate of Incorporation was amended to redesignate existing
common stock as Series A Common Stock (the "Series A Common"), to establish a
second series of common stock which was issued to the lender group (the "Series
B Common"), and to increase the number of directors of the Company to nine, of
which six are elected by holders of outstanding shares of Series A Common, and
the remaining three are elected by the holders of outstanding shares of Series B
Common.
Concurrent with the conversion of debt to equity, under the Plan for
Capital Restructuring, the Revolving Debt Facility was reduced by $95,000,000 to
a total of $245,000,000, comprised of a $150,000,000 term facility (the "Term
Facility") and a $95,000,000 working capital facility (the "Working Capital
Facility"), each described below (collectively, the "Debt Facilities"). In
addition the lender group increased the Working Capital Facility by $20,000,000
to a total of $115,000,000. Revolving credit loans under the Working Capital
Facility may be borrowed, repaid and reborrowed from time to time prior to the
termination date of the Working Capital Facility. The lender group had therefore
provided Debt Facilities totaling $265,000,000 to the Company. The terms of the
Working Capital Facility are described more fully in Note 7.
As described more fully in Note 7, the Company filed with the Securities
and Exchange Commission a Registration Statement on Form S-1 for the sale of
$200,000,000 of Senior Notes which became effective on June 23, 1994. The
offering closed on June 29, 1994 and was fully subscribed and issued. The Term
Facility was repaid in full and the Working Capital Facility was reduced by
$43,000,000 from a portion of the proceeds from the issuance of the Senior
Notes.
The Series B Common ranks pari passu with the Series A Common in any
liquidation of the Company. The Company may not declare or pay any dividends on
the Series A Common unless equal dividends are declared and paid on the Series B
Common.
The Series B Common became convertible into Series A Common on a
share-for-share basis at the option of the holder from and after May 20, 1997.
On January 30, 1998 and June 30, 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
46
<PAGE> 49
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 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 were listed with the New
York Stock Exchange and reserved for issuance with ChaseMellon Shareholder
Services, Inc., the transfer agent for the Company.
As part of the Plan for Capital Restructuring, the Company's Board of
Directors also approved a Plan for Quasi-Reorganization retroactive to January
1, 1994. The Company implemented the quasi-reorganization at that time because
it was implementing a substantial change in its capital structure in accordance
with the Plan for Capital Restructuring. A quasi-reorganization allows certain
companies which are undergoing a substantial change in capital structure to
utilize "fresh start accounting."
Under the Plan for Quasi-Reorganization, the Company implemented an overall
accounting readjustment effective January 1, 1994, which resulted in the
adjustment of assets and liabilities to estimated fair values, and the
elimination of the accumulated deficit. The net amount of such revaluation
adjustments and costs related to the capital restructuring, together with the
accumulated deficit as of the date thereof, was transferred to paid-in capital
in accordance with the accounting principles applicable to
quasi-reorganizations.
The estimation process involved in the determination of the fair value of
those assets as to which an adjustment was made is inherently uncertain since it
required estimates and assumptions as to future events and conditions. Such
future events and conditions include economic and market conditions, the
availability and cost of governmental entitlements necessary to develop and
build product, the cost of financing to fund development and construction
activities, and the availability and cost of labor and materials necessary to
develop, build and sell product.
Because the amount and timing of the realization of the investments by the
Company and its subsidiaries in their respective real estate projects are
dependent upon such future uncertain events and conditions, the actual timing
and amounts may be materially different from the estimates and assumptions used
in determining fair value estimates utilized for purposes of the Plan for
Quasi-Reorganization.
The quasi-reorganization affects the comparability of operating statements
for periods beginning after December 31, 1993 with those for periods beginning
on or before December 31, 1993. Moreover, any income tax benefits resulting from
the utilization of net operating loss and other carryforwards existing at
January 1, 1994 and temporary differences existing prior to or resulting from
the quasi-reorganization, are excluded from the results of operations and
credited to additional paid-in capital.
47
<PAGE> 50
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effect of the capital restructuring and quasi-reorganization on the
consolidated balance sheet as of December 31, 1993 is as follows as of January
1, 1994 (in thousands except number of shares and par value per share):
<TABLE>
<CAPTION>
HISTORICAL
BALANCE ADJUSTMENTS BALANCE
SHEET --------------------------------- SHEET
DECEMBER 31, DEBT QUASI- JANUARY 1,
1993 CONVERSION(A) REORGANIZATION(B) 1994
------------ ------------- ----------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 26,632 $ -- $ -- $ 26,632
Receivables................................ 10,591 -- -- 10,591
Real estate inventories.................... 439,548 -- (65,500) 374,048
Property and equipment..................... 1,632 -- -- 1,632
Deferred loan costs........................ 835 -- -- 835
Other assets............................... 6,176 -- -- 6,176
-------- -------- --------- --------
$485,414 $ -- $ (65,500) $419,914
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................... $ 8,440 $ -- $ -- $ 8,440
Accrued expenses........................... 15,190 -- -- 15,190
Notes payable.............................. 372,198 (95,000) -- 277,198
Minority partners' interest................ 8,196 -- -- 8,196
-------- -------- --------- --------
404,024 (95,000) -- 309,024
-------- -------- --------- --------
Stockholders' equity
Common stock:
Common stock, par value $.01 per
share; 100,000,000 shares
authorized; 18,500,000 shares issued
and outstanding (designated as
Series A common stock at January 1,
1994)............................... 185 -- -- 185
Series B restricted voting convertible
common stock, par value $.01 per
share; 50,000,000 shares authorized;
43,166,667 shares issued and
outstanding at January 1, 1994...... -- 432 -- 432
Additional paid-in capital............... 155,474 94,568 (136,778) 113,264
Promissory notes related to management
stock................................. (2,991) -- -- (2,991)
Retained earnings (accumulated
deficit).............................. (71,278) -- 71,278 --
-------- -------- --------- --------
81,390 95,000 (65,500) 110,890
-------- -------- --------- --------
$485,414 $ -- $ (65,500) $419,914
======== ======== ========= ========
</TABLE>
- ---------------
(A) To reflect the conversion of $95,000,000 of the Company's Revolving Debt
Facility to equity through the issuance of 43,166,667 shares of Series B
common stock.
(B) To reflect the readjustment of the Company's accounts to estimated fair
values and the elimination of the accumulated deficit against additional
paid-in capital as of January 1, 1994.
48
<PAGE> 51
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
First trust deed notes secured by real estate sold,
interest rates generally ranging from 8.00% to
12.00%........................................... $ 637 $1,165
Other notes receivable............................. 80 147
------ ------
717 1,312
Other receivables -- primarily escrow proceeds..... 7,896 7,340
------ ------
$8,613 $8,652
====== ======
</TABLE>
Notes receivable as of December 31, 1998 mature through 2010 approximately
as follows (in thousands):
<TABLE>
<S> <C>
1999.................................. $ 68
2000.................................. 637
2001.................................. --
2002.................................. --
2003.................................. --
Thereafter............................ 12
----
$717
====
</TABLE>
NOTE 5 -- REAL ESTATE INVENTORIES
Real estate inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------
COMPLETED
LAND AND INVENTORY,
CONSTRUCTION INCLUDING COMPLETED
REGION IN PROGRESS LOTS HELD FOR SALE MODELS TOTAL
------ ------------ ------------------- ------- --------
<S> <C> <C> <C> <C>
Southern California.................... $ 39,739 $10,385 $ 7,979 $ 58,103
San Diego.............................. 26,982 3,978 1,952 32,912
Northern California.................... 34,086 2,702 2,125 38,913
Arizona................................ 17,412 436 271 18,119
New Mexico............................. 6,793 546 1,276 8,615
Nevada................................. 14,869 1,345 1,173 17,387
Other.................................. 453 -- -- 453
-------- ------- ------- --------
$140,334 $19,392 $14,776 $174,502
======== ======= ======= ========
</TABLE>
49
<PAGE> 52
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
COMPLETED
LAND AND INVENTORY,
CONSTRUCTION INCLUDING COMPLETED
REGION IN PROGRESS LOTS HELD FOR SALE MODELS TOTAL
------ ------------ ------------------- ------- --------
<S> <C> <C> <C> <C>
Southern California.................... $ 34,362 $11,241 $ 2,940 $ 48,543
San Diego.............................. 46,424 1,116 2,740 50,280
Northern California.................... 87,931 5,060 2,529 95,520
Arizona................................ 21,613 5,227 1,545 28,385
New Mexico............................. 8,766 2,903 1,584 13,253
Nevada................................. 15,392 3,147 0 18,539
Other.................................. 952 -- -- 952
-------- ------- ------- --------
$215,440 $28,694 $11,338 $255,472
======== ======= ======= ========
</TABLE>
NOTE 6 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES
The Company and certain of its subsidiaries are general partners or members
in twelve joint ventures involved in the development and sale of residential
projects. Such joint ventures are 50% or less owned and, accordingly, such joint
ventures are not consolidated with the Company's financial statements. The
Company's investments in unconsolidated joint ventures are accounted for using
the equity method. Condensed combined financial information of these joint
ventures as of December 31, 1998 and 1997 is summarized as follows (in
thousands):
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 304 $ 18
Receivables................................................. 851 293
Real estate inventories..................................... 168,417 32,097
Other assets................................................ 1,034 750
-------- -------
$170,606 $33,158
======== =======
LIABILITIES AND OWNERS' CAPITAL
Accounts payable............................................ $ 6,453 $ 86
Accrued expenses............................................ 2,098 701
Notes payable............................................... 29,024 --
Advances from The Presley Companies and subsidiaries........ 655 127
-------- -------
38,230 914
-------- -------
Owners' Capital
The Presley Companies and subsidiaries.................... 29,807 6,950
Others.................................................... 102,569 25,294
-------- -------
132,376 32,244
-------- -------
$170,606 $33,158
======== =======
</TABLE>
50
<PAGE> 53
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1998 1997
--------- -------
<S> <C> <C>
Sales
Homes.................................................. $ 41,081 $ --
Operating costs
Cost of sales -- homes................................. (32,883) --
Sales and marketing.................................... (1,861) --
-------- ------
Operating income......................................... 6,337 --
Other income, net........................................ 213 --
-------- ------
Net income............................................... $ 6,550 $ --
======== ======
Allocation to owners
The Presley Companies and subsidiaries................. $ 3,499 $ --
Others................................................. 3,051 --
-------- ------
$ 6,550 $ --
======== ======
</TABLE>
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. The Company received cash of approximately $5,600,000 and was credited
with a capital contribution of approximately $5,100,000 upon the formation of
this joint venture. 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. The Company received cash of approximately $1,260,000 and was credited
with a capital contribution of approximately $525,000 upon the formation of this
joint venture. 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 Company received cash of
approximately $25,431,000 and was credited with a capital contribution of
approximately $3,950,000 upon the formation of this joint venture. 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.
NOTE 7 -- NOTES PAYABLE AND 12 1/2% SENIOR NOTES
Notes payable and 12 1/2% Senior Notes consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Notes payable:
Working Capital Facility............................. $ 44,000 $ 43,000
Revolving line of credit -- consolidated joint
venture........................................... 5,657 9,440
Purchase money notes payable -- land acquisitions.... 5,736 22,495
-------- --------
55,393 74,935
12 1/2% Senior Notes due 2001.......................... 140,000 180,000
-------- --------
$195,393 $254,935
======== ========
</TABLE>
51
<PAGE> 54
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest relating to the above debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest incurred.................. $(31,475) $(32,970) $(31,571)
Interest capitalized............... 22,261 25,158 29,315
-------- -------- --------
Interest expense................... $ (9,214) $ (7,812) $ (2,256)
======== ======== ========
</TABLE>
Senior Notes
In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due in 2001, if the Company's Consolidated Tangible Net
Worth is less than $60,000,000 for two consecutive fiscal quarters, the Company
is required to offer to purchase $20,000,000 in principal amount of the Senior
Notes. Because the Company's Consolidated Tangible Net Worth has been less than
$60,000,000 beginning with the quarter ended June 30, 1997, the Company would,
effective on December 4, 1997, June 4, 1998 and December 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, March 31, 1998 and September 30, 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, again after March 31, 1998 and
prior to June 4, 1998, and again after September 30, 1998 and prior to December
4, 1998, and therefore was not required to make said offers. As a result of
these transactions, the Company recognized as an extraordinary item a net gain
from retirement of debt totaling $2,741,000 during the year ended December 31,
1998, after giving effect to income taxes and amortization of related loan
costs.
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 December 31, 1998, the Company's Consolidated Tangible Net
Worth was $2,443,000. The Company's management has previously held discussions,
and may in the future hold discussions, with representatives of the holders of
the Senior Notes with respect to modifying this repurchase provision of the bond
indenture agreement. To date, no agreement has been reached to modify this
repurchase provision. Any such change in the terms or conditions of the bond
indenture agreement requires the affirmative vote of at least a majority in
principal amount of the Senior Notes outstanding. No assurances can be given
that any such change will be made.
Because of the Company's obligation to offer to purchase $20,000,000
principal amount of the Senior Notes each six months so long as the Company's
Consolidated Tangible Net Worth is less than $60,000,000, the Company is
restricted in its ability to acquire, hold and develop real estate projects. The
Company changed its operating strategy during 1997 to finance certain projects
by forming joint ventures with venture partners that would provide a substantial
portion of the capital necessary to develop these projects.
The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a
Delaware corporation ("Delaware Presley"), are unconditionally guaranteed on a
senior basis by Presley Homes (formerly The Presley Companies), a California
corporation and a wholly owned subsidiary of Delaware Presley. However, Presley
Homes has granted liens on substantially all of its assets as security for its
obligations under the Working Capital Facility and other loans. Because the
Presley Homes guarantee is not secured, holders of the Senior Notes are
effectively junior to borrowings under the Working Capital Facility with respect
to such assets. Delaware Presley and its consolidated subsidiaries are referred
to collectively herein as "Presley" or the "Company." Interest on the Senior
Notes is payable on January 1 and July 1 of each year, commencing January 1,
1995.
52
<PAGE> 55
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
letter of intent with William Lyon Homes described in Note 2 contemplates that
the transaction would be structured so as to not constitute a change of control
as described in the Indenture.
The Indenture governing the Senior Notes restricts, among other things: (i)
the payment of dividends on and redemptions of capital stock by 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.
As of December 31, 1998, the 12 1/2% Senior Notes with a face value of
$140,000,000 have a fair value of approximately $120,000,000 to $122,000,000,
based on quotes from industry sources.
53
<PAGE> 56
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplemental consolidating financial information of the Company,
specifically including information for Presley Homes, is presented below.
Investments in subsidiaries are presented using the equity method of accounting.
Separate financial statements of Presley Homes are not provided, as the
consolidating financial information contained herein provides a more meaningful
disclosure to allow investors to determine the nature of assets held and the
operations of the combined groups.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-------------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ -- $ 22,605 $ 1,350 $ -- $ 23,955
Receivables........................ -- 7,157 1,456 -- 8,613
Real estate inventories............ -- 161,667 12,835 -- 174,502
Investments in and advances to
unconsolidated joint ventures.... -- 3,225 27,237 -- 30,462
Property and equipment, net........ -- 2,614 298 -- 2,912
Deferred loan costs................ 1,643 1,708 30 -- 3,381
Other assets....................... -- 2,440 139 -- 2,579
Investments in subsidiaries........ 4,369 31,553 -- (35,922) --
Intercompany receivables........... 143,740 3,928 -- (147,668) --
-------- -------- ------- --------- --------
$149,752 $236,897 $43,345 $(183,590) $246,404
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable................... $ -- $ 15,867 $ 1,497 $ -- $ 17,364
Accrued expenses................... -- 25,965 1,858 -- 27,823
Notes payable...................... -- 49,736 5,657 -- 55,393
12 1/2 Senior Notes................ 140,000 -- -- -- 140,000
Intercompany payables.............. 3,928 143,740 -- (147,668) --
-------- -------- ------- --------- --------
Total liabilities............. 143,928 235,308 9,012 (147,668) 240,580
STOCKHOLDERS' EQUITY............... 5,824 1,589 34,333 (35,922) 5,824
-------- -------- ------- --------- --------
$149,752 $236,897 $43,345 $(183,590) $246,404
======== ======== ======= ========= ========
</TABLE>
54
<PAGE> 57
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
--------------------------------------
DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... $ -- $ 4,377 $ 192 $ -- $ 4,569
Receivables......................... -- 6,905 1,747 -- 8,652
Real estate inventories............. -- 235,583 19,889 -- 255,472
Investments in and advances to
unconsolidated joint ventures..... -- 1,165 5,912 -- 7,077
Property and equipment, net......... -- 3,407 206 -- 3,613
Deferred loan costs................. 2,958 290 18 -- 3,266
Other assets........................ -- 2,439 156 -- 2,595
Investments in subsidiaries......... (5,681) 16,398 -- (10,717) --
Intercompany receivables............ 180,000 2,958 -- (182,958) --
-------- -------- ------- --------- --------
$177,277 $273,522 $28,120 $(193,675) $285,244
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable.................... $ -- $ 11,870 $ 984 $ -- $ 12,854
Accrued expenses.................... -- 22,669 467 -- 23,136
Notes payable....................... -- 65,495 9,440 -- 74,935
12 1/2% Senior Notes................ 180,000 -- -- -- 180,000
Intercompany payables............... 2,958 180,000 -- (182,958) --
-------- -------- ------- --------- --------
Total liabilities.............. 182,958 280,034 10,891 (182,958) 290,925
STOCKHOLDERS' EQUITY (DEFICIT)...... (5,681) (6,512) 17,229 (10,717) (5,681)
-------- -------- ------- --------- --------
$177,277 $273,522 $28,120 $(193,675) $285,244
======== ======== ======= ========= ========
</TABLE>
55
<PAGE> 58
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- --------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales................................ $ -- $ 261,394 $106,888 $ -- $368,282
------- --------- -------- -------- --------
Operating costs
Cost of sales...................... -- (228,629) (90,144) -- (318,773)
Sales and marketing................ -- (16,275) (5,188) -- (21,463)
General and administrative......... -- (17,587) 1,622 -- (15,965)
------- --------- -------- -------- --------
-- (262,491) (93,710) -- (356,201)
------- --------- -------- -------- --------
Income from unconsolidated joint
ventures........................... -- 6 3,493 -- 3,499
------- --------- -------- -------- --------
Income from subsidiaries............. 8,400 17,955 -- (26,355) --
------- --------- -------- -------- --------
Operating income..................... 8,400 16,864 16,671 (26,355) 15,580
Interest expense, net of amounts
capitalized........................ -- (7,784) (1,430) -- (9,214)
Financial advisory expenses.......... (1,286) -- -- -- (1,286)
Other income (expense), net.......... -- (392) 3,617 -- 3,225
------- --------- -------- -------- --------
Income before income taxes and
extraordinary item................. 7,114 8,688 18,858 (26,355) 8,305
Provision for income taxes........... -- (1,191) -- -- (1,191)
------- --------- -------- -------- --------
Income before extraordinary item..... 7,114 7,497 18,858 (26,355) 7,114
Extraordinary item -- gain from
retirement of debt net of
applicable income taxes............ 2,741 -- -- -- 2,741
------- --------- -------- -------- --------
Net income........................... $ 9,855 $ 7,497 $ 18,858 $(26,355) $ 9,855
======= ========= ======== ======== ========
</TABLE>
56
<PAGE> 59
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- --------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales.............................. $ -- $ 270,284 $ 59,658 $ -- $ 329,942
-------- --------- -------- ------- ---------
Operating costs
Cost of sales.................... -- (248,655) (53,546) -- (302,201)
Impairment loss on real estate
assets........................ -- (74,000) -- -- (74,000)
Sales and marketing.............. -- (18,492) (3,787) -- (22,279)
General and administrative....... -- (15,777) (219) -- (15,996)
-------- --------- -------- ------- ---------
-- (356,924) (57,552) -- (414,476)
-------- --------- -------- ------- ---------
Income (loss) from subsidiaries.... (89,894) 3,730 -- 86,164 --
-------- --------- -------- ------- ---------
Operating income (loss)............ (89,894) (82,910) 2,106 86,164 (84,534)
Interest expense, net of amounts
capitalized...................... -- (7,677) (135) -- (7,812)
Other income (expense), net........ -- 91 2,361 -- 2,452
-------- --------- -------- ------- ---------
Net income (loss).................. $(89,894) $ (90,496) $ 4,332 $86,164 $ (89,894)
======== ========= ======== ======= =========
</TABLE>
57
<PAGE> 60
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-------------------------------------------
DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales............................... $ -- $ 309,599 $9,398 $ -- $ 318,997
---- --------- ------ ----- ---------
Operating costs
Cost of sales..................... -- (274,144) (7,835) -- (281,979)
Sales and marketing............... -- (22,221) (656) -- (22,877)
General and administrative........ -- (13,856) (122) -- (13,978)
---- --------- ------ ----- ---------
-- (310,221) (8,613) -- (318,834)
---- --------- ------ ----- ---------
Income from subsidiaries............ 152 745 -- (897) --
---- --------- ------ ----- ---------
Operating income.................... 152 123 785 (897) 163
Interest expense, net of amounts
capitalized....................... -- (2,203) (53) -- (2,256)
Other income (expense), net......... -- 1,571 674 2,245
---- --------- ------ ----- ---------
Net income (loss)................... $152 $ (509) $1,406 $(897) $ 152
==== ========= ====== ===== =========
</TABLE>
58
<PAGE> 61
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
--------------------------------------
DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 9,855 $ 7,497 $18,858 $(26,355) $ 9,855
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ -- 988 71 -- 1,059
Equity in earnings of joint ventures..... -- (6) (3,493) -- (3,499)
Equity in earnings of subsidiaries....... (8,400) (17,955) -- 26,355 --
Extraordinary gain on repurchase of
Senior Notes........................... (3,200) -- -- -- (3,200)
Provision for income taxes............... -- 1,650 -- -- 1,650
Net changes in operating assets and
liabilities:
Other receivables...................... -- (846) 290 -- (556)
Intercompany receivables/payables...... 970 (970) -- -- --
Real estate inventories................ -- 34,218 7,054 -- 41,272
Deferred loan costs.................... 775 (1,418) (12) -- (655)
Other assets........................... -- (1) 18 -- 17
Accounts payable....................... -- 3,997 513 -- 4,510
Accrued expenses....................... -- 3,296 1,391 -- 4,687
-------- -------- ------- -------- ---------
Net cash provided by operating activities..... -- 30,450 24,690 -- 55,140
-------- -------- ------- -------- ---------
Cash flows from investing activities:
Investment in unconsolidated joint
ventures................................. -- (2,054) (17,832) -- (19,886)
Proceeds from contribution of land to joint
venture.................................. -- 25,431 -- -- 25,431
Issuance of/payments on notes receivable.... -- 594 -- -- 594
Purchases of property and equipment......... -- (195) (163) -- (358)
Investment in subsidiaries.................. -- 2,800 -- (2,800) --
Advances to affiliates...................... 36,260 -- -- (36,260) --
-------- -------- ------- -------- ---------
Net cash provided by (used in) investing
activities.................................. 36,260 26,576 (17,995) (39,060) 5,781
-------- -------- ------- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings on notes payable... -- 95,873 37,080 -- 132,953
Principal payments on notes payable......... -- (97,365) (40,863) -- (138,228)
Repurchase of 12 1/2% Senior Notes.......... (36,260) -- -- -- (36,260)
Distributions to/contributions from
shareholders............................. -- (1,046) (1,754) 2,800 --
Advances from affiliates.................... -- (36,260) -- 36,260 --
-------- -------- ------- -------- ---------
Net cash used in financing activities......... (36,260) (38,798) (5,537) 39,060 (41,535)
-------- -------- ------- -------- ---------
Net increase in cash and cash equivalents..... -- 18,228 1,158 -- 19,386
Cash and cash equivalents at beginning of
period...................................... -- 4,377 192 -- 4,569
-------- -------- ------- -------- ---------
Cash and cash equivalents at end of period.... $ -- $ 22,605 $ 1,350 $ -- $ 23,955
======== ======== ======= ======== =========
</TABLE>
59
<PAGE> 62
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
--------------------------------------
DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $(89,894) $(90,496) $ 4,332 $ 86,164 $(89,894)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization......... -- 844 63 -- 907
Impairment loss on real estate
assets.............................. -- 74,000 -- -- 74,000
Equity in (earnings) loss of
subsidiaries........................ 89,894 (3,730) -- (86,164) --
Net changes in operating assets and
liabilities:
Other receivables................... -- (2,975) (1,298) -- (4,273)
Intercompany receivables/payables... (1,301) 1,301 -- -- --
Real estate inventories............. -- 4,719 (5,399) -- (680)
Deferred loan costs................. 1,301 (202) (18) -- 1,081
Other assets........................ -- 6,405 65 -- 6,470
Accounts payable.................... -- (6,019) 445 -- (5,574)
Accrued expenses.................... -- 3,812 7 -- 3,819
-------- -------- -------- -------- --------
Net cash used in operating activities...... -- (12,341) (1,803) -- (14,144)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Investment in unconsolidated joint
ventures.............................. -- (1,165) (5,912) -- (7,077)
Issuance of/payments on notes
receivable............................ -- (154) -- -- (154)
Purchases of property and equipment...... -- (1,447) (26) -- (1,473)
Investment in subsidiaries............... -- 2,354 -- (2,354) --
Advances to affiliates................... 10,000 -- -- (10,000) --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities............................... 10,000 (412) (5,938) (12,354) (8,704)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings on notes
payable............................... -- 133,026 38,938 -- 171,964
Principal payments on notes payable...... -- (109,599) (29,498) -- (139,097)
Repurchase/sale of 12 1/2% Senior
Notes................................. (10,000) -- -- -- (10,000)
Distributions to/contributions from
shareholders.......................... -- 626 (2,980) 2,354 --
Advances from affiliates................. -- (10,000) -- 10,000 --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................... (10,000) 14,053 6,460 12,354 22,867
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.............................. -- 1,300 (1,281) -- 19
Cash and cash equivalents at beginning of
period................................... -- 3,077 1,473 -- 4,550
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................... $ -- $ 4,377 $ 192 $ -- $ 4,569
======== ======== ======== ======== ========
</TABLE>
60
<PAGE> 63
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED
PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY
----------- --------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $ 152 $ (509) $ 1,406 $ (897) $ 152
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... -- 585 -- -- 585
Equity in earnings of
subsidiaries................... (152) (745) -- 897 --
Provision for uncollectible notes
receivable..................... -- 145 -- -- 145
Net changes in operating assets
and liabilities:
Other receivables.............. -- (564) (214) -- (778)
Intercompany
receivable/payable.......... (945) 945 -- -- --
Real estate inventories........ -- 11,385 24 -- 11,409
Deferred loan costs............ 945 74 -- -- 1,019
Other assets................... -- (3,343) (43) -- (3,386)
Accounts payable............... -- 8,393 (516) -- 7,877
Accrued expenses............... -- (1,061) (376) -- (1,437)
----- --------- ------- ------- ---------
Net cash provided by operating
activities.......................... -- 15,305 281 -- 15,586
----- --------- ------- ------- ---------
Cash flows from investing activities:
Issuance of/payments on notes
receivable....................... -- 1,712 -- -- 1,712
Purchases of property and
equipment........................ -- (811) (244) -- (1,055)
Investment in subsidiaries.......... -- (2,957) -- 2,957 --
----- --------- ------- ------- ---------
Net cash provided by (used in)
investing activities................ -- (2,056) (244) 2,957 657
----- --------- ------- ------- ---------
Cash flows from financing activities:
Proceeds from borrowings on notes
payable.......................... -- 101,741 6,150 -- 107,891
Principal payments on notes
payable.......................... -- (115,197) (8,604) -- (123,801)
Distributions to/contributions from
shareholders..................... -- 353 2,604 (2,957) --
----- --------- ------- ------- ---------
Net cash provided by (used in)
financing activities................ -- (13,103) 150 (2,957) (15,910)
----- --------- ------- ------- ---------
Net increase in cash and cash
equivalents......................... -- 146 187 -- 333
Cash and cash equivalents at beginning
of period........................... -- 2,931 1,286 -- 4,217
----- --------- ------- ------- ---------
Cash and cash equivalents at end of
period.............................. $ -- $ 3,077 $ 1,473 $ -- $ 4,550
===== ========= ======= ======= =========
</TABLE>
61
<PAGE> 64
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 the 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 December
31, 1998 was approximately $116,000,000; however, the maximum loan under the
Working Capital Facility is limited to $100,000,000. The principal outstanding
under the Working Capital Facility at December 31, 1998 was $44,000,000. In
addition, $2,000,000 of available loan capacity is restricted for letters of
credit outstanding under the Working Capital Facility.
Pursuant to the terms of the Working Capital Facility, outstanding advances
bear interest at the "reference rate" of Chase Manhattan Bank plus 2%. An
alternate option provides for interest based on a specified overseas base rate
plus 4.44%, but not less than 8.0%. In addition, the Company pays a monthly fee
of 0.25% on the average daily unused portion of the loan facility.
Upon completion of the new Working Capital Facility agreement, 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 provides for 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.
Revolving Line of Credit -- Wholly-owned Joint Venture
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
December 31, 1998, the revolving line of credit had an outstanding balance of
$5,657,000. 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. At the option of the borrower, the maturity date of
this line may be extended from April 16, 1999 to August 16, 1999, subject to
certain specified terms and conditions.
Purchase Money Notes Payable -- Land Acquisitions
At December 31, 1998, the Company had various notes payable outstanding
related to land acquisitions for which seller financing was provided in the
amount of $5,736,000.
62
<PAGE> 65
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The prime rate averaged 8.35%, 8.46% and 8.27% for 1998, 1997 and 1996,
respectively, and was 7.75% and 8.50% at December 31, 1998 and 1997,
respectively.
NOTE 8 -- STOCK OPTIONS AND INCENTIVE COMPENSATION PLANS
Stock Option Plan
Effective May 20, 1994, Delaware Presley amended the 1991 Stock Option Plan
(the "Plan") to increase the number of shares authorized for options to be
granted to 2,642,000 shares of Series A Common Stock. Under the Plan, options
may be granted from time to time to key employees, officers, directors,
consultants and advisors of the Company. The Plan is administered by the Stock
Option Committee of the Board of Directors (the "Committee"). The Committee is
generally empowered to interpret the Plan, prescribe rules and regulations
relating thereto, determine the terms of the option agreements, amend them with
the consent of the optionee, determine the employees to whom options are to be
granted, and determine the number of shares subject to each option and the
exercise price thereof. The per share exercise price for options will not be
less than 100% of the fair market value of a share of the Series A Common Stock
on the date the option is granted. The options will be exercisable for a term
determined by the Committee, not to exceed ten years from the date of grant or
upon a change of control.
On May 20, 1994, Delaware Presley issued options to purchase a total of
2,035,000 shares of Series A Common Stock at $2.875 per share. Subsequently,
options to purchase 440,000 shares were canceled due to employee terminations,
resulting in 1,595,000 options outstanding at December 31, 1998. The options
outstanding vested at various times and became fully vested on May 20, 1997 and
expire five years from the date of vesting. In connection with a new incentive
compensation plan (as described below), 725,000 stock options currently
outstanding were repriced effective January 1, 1997 from $2.875 to $1.00.
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting and Disclosure of Stock-Based Compensation", issued in
October 1995, the Company has elected to continue applying the methodology
prescribed by APB Opinion 25 and related interpretations to account for
outstanding stock options. Accordingly, no compensation cost has been recognized
in the financial statements related to stock options awarded to officers,
directors and employees under the Stock Option Plan. As required by Statement
No. 123, for disclosure purposes only, the Company has measured the amount of
compensation cost which would have been recognized related to stock options had
the fair value of the options at the date of grant been used for accounting
purposes. Based on such calculations, net income and earnings per share amounts
would be approximately the same as the amounts reported by the Company. The
Company estimated the fair value of the stock options at date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 6.25%; a dividend yield of 0.00%, a
volatility factor for the market price of the Company's common stock of 0.514;
and a weighted average expected life of four years for the stock options.
Incentive Compensation Plan
Effective on January 1, 1997, the Company's Board of Directors approved a
new incentive compensation plan for all of the Company's full-time, salaried
employees, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), Executives, Managers, Field Construction Supervisors, and
certain other employees. Under the terms of this new plan, the CEO and CFO are
eligible to receive bonuses at the discretion of the Compensation Committee of
the Board; in addition, the stock options currently outstanding and held by the
CEO and CFO (totaling 725,000 options) were repriced from $2.875 to $1.00.
In addition, the 1998 Executive Bonus Plan stipulates annual setting of
individual bonus targets, expressed as a percent of each executive's salary,
with awards based on performance against goals pertaining to each participant's
operating area.
63
<PAGE> 66
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All awards are prorated downward if the sum of all calculated awards for
the entire Company exceeds 20% of the Company's consolidated pre-tax income
before bonuses. Awards are paid out over three years, with 50% paid following
the determination of bonus awards, 25% paid one year later and 25% paid two
years later. The deferred amounts will be forfeited in the event of termination
for any reason except retirement, death or disability.
NOTE 9 -- INCOME TAXES
The following summarizes the provision for income taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Current
Federal................................................ $ -- $-- $--
State.................................................. (7) (6) (4)
------- --- ---
(7) (6) (4)
------- --- ---
Deferred
Federal................................................ (1,191) -- --
State.................................................. 7 6 4
------- --- ---
(1,184) 6 4
------- --- ---
Provision for income taxes before extraordinary item..... (1,191) -- --
Provision for income taxes on extraordinary item......... (459) -- --
------- --- ---
$(1,650) $-- $--
======= === ===
</TABLE>
Income taxes differ from the amounts computed by applying the applicable
Federal statutory rates due to the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- ----
<S> <C> <C> <C>
(Provision) credit for Federal income taxes at the
statutory rate....................................... $ (2,907) $ 31,463 $(53)
(Provision) credit for state income taxes, net of
Federal income tax benefits.......................... (661) 2,583 (20)
Extraordinary item -- gain from retirement of debt..... (1,120) -- --
Valuation allowance for deferred tax asset............. 3,038 (34,046)
Other.................................................. -- -- 73
-------- -------- ----
$ (1,650) $ -- $ --
======== ======== ====
</TABLE>
64
<PAGE> 67
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Temporary differences giving rise to deferred income taxes consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets
Reserves deducted for financial reporting purposes not
allowable for tax purposes............................. $ 27,785 $ 33,720
Compensation deductible for tax purposes
when paid.............................................. 1,231 326
Net operating loss and alternative minimum tax credit
carryovers............................................. 49,930 64,184
Valuation allowance....................................... (96,331) (99,369)
State income tax provisions deductible when paid for
Federal tax purposes................................... 15,315 17,281
Effect of book/tax differences for joint ventures......... 5,221 945
Other..................................................... (280) 67
-------- --------
2,871 17,154
-------- --------
Deferred tax liabilities
Interest capitalized for financial reporting purposes and
deducted currently for tax purposes.................... (2,871) (17,154)
-------- --------
(2,871) (17,154)
-------- --------
$ -- $ --
======== ========
</TABLE>
As discussed in Note 3, the Company implemented a quasi-reorganization
effective January 1, 1994. Income tax benefits resulting from the utilization of
net operating loss and other carryforwards existing at January 1, 1994 and
temporary differences existing prior to the quasi-reorganization, are excluded
from results of operations and credited to additional paid-in capital. Income
tax benefits of $1,650,000 related to temporary differences resulting from the
quasi-reorganization have been excluded from the results of operations and
credited to additional paid-in capital for the year ended December 31, 1998.
At December 31, 1998 the Company has net operating loss carryforwards for
Federal tax purposes (both pre and post quasi-reorganization) of approximately
$117,875,000, of which $5,066,000 expires in 2007, $17,542,000 expires in 2008,
$27,378,000 expires in 2009, $35,840,000 expires in 2010, $13,668,000 expires in
2011, $16,402,000 expires in 2012 and $1,979,000 expires in 2013. Due to the
transactions discussed in Note 3, the future benefits associated with the
utilization of the net operating loss carryforwards may be substantially
limited.
NOTE 10 -- 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.
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 $2,219,000.
NOTE 11 -- RELATED PARTY TRANSACTIONS
Sales of lots, land and other for the year ended December 31, 1998 include
a bulk lot sale of $6,996,000 to William Lyon Homes, Inc., a majority-owned
corporation of William Lyon, Chairman of the Board and
65
<PAGE> 68
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stockholder of the Company. The Company received the full purchase price in cash
and recognized a gain of $265,000 on the sale.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company's commitments and contingent liabilities include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Company's consolidated financial position.
The Company is a defendant in various lawsuits related to its normal
business activities. In the opinion of management, disposition of the various
lawsuits will have no material effect on the consolidated financial statements
of the Company.
In some jurisdictions in which the Company develops and constructs
property, assessment district bonds are issued by municipalities to finance
major infrastructure improvements. As a land owner benefited by these
improvements, the Company is responsible for the assessments on its land. When
properties are sold, the assessments are either prepaid or the buyers assume the
responsibility for the related assessments. Assessment district bonds issued
after May 21, 1992 are accounted for under the provisions of 91-10, "Accounting
for Special Assessment and Tax Increment Financing Entities" issued by the
Emerging Issues Task Force of the Financial Accounting Standards Board on May
21, 1992, and recorded as liabilities in the Company's consolidated balance
sheet, if the amounts are fixed and determinable.
NOTE 13 -- UNAUDITED SUMMARIZED QUARTERLY FINANCIAL INFORMATION
Summarized quarterly financial information for the years ended December 31,
1998, 1997 and 1996 is as follows (in thousands except per common share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Sales........................................ $ 66,478 $ 80,530 $ 89,509 $ 131,765
Costs and expenses, net...................... (69,676) (80,301) (86,007) (123,993)
-------- --------- -------- ---------
Income (loss) before income taxes and
extraordinary item......................... (3,198) 229 3,502 7,772
Credit (provision) for income taxes.......... -- 363 (203) (1,351)
-------- --------- -------- ---------
Income (loss) before extraordinary item...... (3,198) 592 3,299 6,421
Extraordinary item -- gain from retirement of
debt, net of applicable income taxes....... -- 522 -- 2,219
-------- --------- -------- ---------
Net income (loss)............................ $ (3,198) $ 1,114 $ 3,299 $ 8,640
======== ========= ======== =========
Basic and diluted earnings per common share--
Note 1
Before extraordinary item.................. $ (0.06) $ 0.01 $ 0.06 $ 0.13
Extraordinary item......................... -- 0.01 -- $ 0.04
-------- --------- -------- ---------
After extraordinary item................... $ (0.06) $ 0.02 $ 0.06 $ 0.17
======== ========= ======== =========
</TABLE>
66
<PAGE> 69
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Sales........................................ $ 67,795 $ 97,566 $ 68,349 $ 96,232
Costs and expenses, net...................... (71,369) (173,020) (71,549) (103,898)
-------- --------- -------- ---------
Loss before income taxes..................... (3,574) (75,454) (3,200) (7,666)
Credit (provision) for income taxes.......... -- -- -- --
-------- --------- -------- ---------
Net loss(1).................................. $ (3,574) $ (75,454) $ (3,200) $ (7,666)
======== ========= ======== =========
Basic and diluted earnings per common share--
Note 1..................................... $ (0.07) $ (1.45) $ (0.06) $ (0.15)
======== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Sales.......................................... $ 61,071 $ 82,219 $ 79,550 $ 96,157
Costs and expenses, net........................ (63,392) (81,852) (78,867) (94,734)
-------- -------- -------- --------
Income (loss) before income taxes.............. (2,321) 367 683 1,423
Credit (provision) for income taxes............ -- -- -- --
-------- -------- -------- --------
Net income (loss).............................. $ (2,321) $ 367 $ 683 $ 1,423
======== ======== ======== ========
Basic and diluted earnings per common
share -- Note 1.............................. $ (0.04) $ 0.01 $ 0.01 $ 0.03
======== ======== ======== ========
</TABLE>
- ---------------
(1) Results for the three months ended June 30, 1997 were adversely affected by
a $74,000,000 reduction of certain real estate assets to their estimated net
realizable value as described in Note 1.
67
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
The Presley Companies
We have audited the accompanying combined balance sheet of the Significant
Subsidiaries of The Presley Companies, as defined in Note 1, as of December 31,
1998, and the related combined statements of operations, members' capital and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Significant Subsidiaries of The Presley Companies at December 31, 1998, and the
combined results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Newport Beach, California
February 16, 1999
68
<PAGE> 71
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash........................................................ $ 374,000 $ 18,000
Accounts receivable......................................... 784,000 750,000
Real estate inventories (Note 2)............................ 97,595,000 22,869,000
----------- -----------
$98,753,000 $23,637,000
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable and accrued liabilities.................... $ 5,786,000 $ 709,000
Amounts due to members (Note 4)............................. 410,000 73,000
Note payable (Note 3)....................................... 9,375,000 --
----------- -----------
15,571,000 782,000
Commitments and contingencies (Note 5)
Members' capital............................................ 83,182,000 22,855,000
----------- -----------
$98,753,000 $23,637,000
=========== ===========
</TABLE>
See accompanying notes.
69
<PAGE> 72
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUES
Sales of homes.............................................. $26,725,000 $ --
Interest and other income................................... 127,000 --
----------- ------
26,852,000 --
----------- ------
COSTS AND EXPENSES
Cost of homes sold.......................................... 19,801,000 --
Sales, marketing and administrative expenses................ 1,091,000 --
----------- ------
20,892,000 --
----------- ------
NET INCOME.................................................. $ 5,960,000 $ --
=========== ======
</TABLE>
See accompanying notes.
70
<PAGE> 73
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
COMBINED STATEMENTS OF MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON TOTAL
PRESLEY UNAFFILIATED MEMBERS'
MEMBER MEMBER CAPITAL
------------- ------------ ------------
<S> <C> <C> <C>
Initial contributions (unaudited)................. $ 5,912,000 $ 16,943,000 $ 22,855,000
----------- ------------ ------------
BALANCE -- December 31, 1997 (unaudited).......... 5,912,000 16,943,000 22,855,000
Contributions..................................... 10,396,000 70,099,000 80,495,000
Distributions..................................... (506,000) (25,622,000) (26,128,000)
Net income........................................ 3,276,000 2,684,000 5,960,000
----------- ------------ ------------
BALANCE -- December 31, 1998...................... $19,078,000 $ 64,104,000 $ 83,182,000
=========== ============ ============
</TABLE>
See accompanying notes.
71
<PAGE> 74
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 5,960,000 $ --
Adjustments to reconcile net income to net cash used in
operating activities
Cost of homes sold..................................... 19,801,000 --
Increase in accounts receivable........................ (34,000) (750,000)
Additions to real estate inventories................... (94,527,000) (22,869,000)
Increase in accounts payable and accrued liabilities... 5,076,000 709,000
Increase in amounts due to members..................... 338,000 73,000
------------ ------------
Net cash used in operating activities....................... (63,386,000) (22,837,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contributions from members.................................. 80,495,000 22,855,000
Distributions to members.................................... (26,128,000) --
Proceeds from notes payable................................. 9,375,000 --
------------ ------------
Net cash provided by financing activities................... 63,742,000 22,855,000
------------ ------------
NET INCREASE IN CASH........................................ 356,000 18,000
CASH -- beginning of year................................... 18,000 --
------------ ------------
CASH -- end of year......................................... $ 374,000 $ 18,000
============ ============
</TABLE>
See accompanying notes.
72
<PAGE> 75
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements are presented in accordance with Rule
3-09 of SEC Regulation S-X ("Rule 3-09") and represent the combined financial
position, results of operations and cash flows of the subsidiaries of The
Presley Companies ("Presley") which have a common unaffiliated member and are
deemed "significant" when aggregated for purposes of Rule 3-09 (collectively,
the "Significant Subsidiaries of The Presley Companies") as of December 31,
1998. The significant subsidiaries of The Presley Companies were not deemed
"significant" when aggregated for purposes of Rule 3-09 as of December 31, 1997,
and as such, unaudited combined financial statements are presented as of and for
the year ended December 31, 1997.
Organization
The Significant Subsidiaries of The Presley Companies are all Delaware
limited liability companies consisting of second-tier wholly-owned Presley
subsidiaries (the "Presley Member") as one member and an unaffiliated common
member (the "Unaffiliated Member") as the other member.
The Significant Subsidiaries of The Presley Companies were formed for the
purpose of acquiring, developing and selling single-family homes in the state of
California.
Net income per the respective Limited Liability Company Operating
Agreements (the "Agreements") are generally allocated first, to the Presley
Member, to the extent that net losses charged to the Presley Member exceed the
net income allocated to the Presley Member; second, to the Unaffiliated Member
to the extent that the amount of net losses charged to the Unaffiliated Member
exceeds the net income allocated to the Unaffiliated Member; thereafter, to the
members in accordance with the allocation of net income, including preferred
returns, anticipated to be generated as reflected in the then approved project
pro forma. Net losses are generally allocated first, to the members to the
extent that allocations of net income exceed the net losses charged to the
members; second, to the Presley Member until and to the extent required to
reduce positive balance of its capital account to zero; third, to the
Unaffiliated Member in a like amount to that charged against the Presley Member;
fourth, to the members in equal shares until the amounts charged against the
Unaffiliated Member pursuant to this section have reduced the remaining positive
balance of its capital account to zero; thereafter to the Presley Member.
The Agreements provide, among other things, that the members shall be
entitled to receive a preferred return on unrecovered contributed capital that
ranges from prime plus 1.0% to prime plus 4.75%. Preferred returns are included
in the allocation of net income reflected in the Significant Subsidiaries of The
Presley Companies' approved project pro forma.
Cash flow, as defined in the Agreements, is generally distributed first, to
the members in the ratio that, in the case of the Unaffiliated Member, the
unpaid preferred return on its additional capital contributed and, in the case
of the Presley Member, the unpaid preferred return on its base additional
capital contributed, bears to the aggregate of the unpaid preferred return on
additional capital contributed by the Presley Member, until and to the extent
required to reduce the unpaid preferred return on all such additional capital to
zero; second, to the members in the ratio that, in the case of the Unaffiliated
Member, the additional capital contributed by the Unaffiliated Member and, in
the case of the Presley Member, the base additional capital contributed by the
Presley Member, bears to the aggregate of the additional capital contributed by
the Unaffiliated Member plus the base additional capital contributed by the
Presley Member, until and to the extent required to repay to each member such
additional capital contributed by such member; third, to the Unaffiliated Member
until and to the extent required to reduce the balance of the unpaid preferred
return due to the Unaffiliated Member to zero; fourth, to the Unaffiliated
Member until and to the extent required to reduce the balance of the
Unaffiliated Member's unrecovered capital account to zero; fifth, to the Presley
Member until and to the
73
<PAGE> 76
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
extent required to reduce the balance of the unpaid preferred return due to the
Presley Member to zero; sixth, to the Presley Member until and to the extent
required to reduce the balance of the Presley Member's unrecovered capital
account (exclusive of additional capital contributions by the Presley Member in
excess of the base additional capital contributed by the Presley Member) to
zero; seventh, between 40% to 75% to the Unaffiliated Member and between 25% to
60% to the Presley Member until the Unaffiliated Member has received specified
returns pursuant to this section; thereafter, except as otherwise provided,
between 50% to 80% to the Presley Member and between 20% to 50% to the
Unaffiliated Member. In addition, certain Agreements provide low priority
distributions to the Presley Member and to the Unaffiliated Member until each
have received a specified amount.
Use of Estimates
The preparation of the Significant Subsidiaries of The Presley Companies'
combined financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of December 31, 1998 and 1997 and
the revenues and expenses for the years then ended. Actual results could
materially differ from these estimates in the near term.
Real Estate Inventories
Real estate inventories are carried at cost. Project costs include direct
and indirect land costs, offsite costs and onsite improvement costs, as well as
carrying charges (principally interest and property taxes) which are capitalized
to real estate inventories while under active development. Selling costs are
expensed as incurred. Land, offsite costs and all other common costs are
allocated to land parcels benefited based upon relative fair values before
construction. Onsite construction costs and related carrying charges
(principally interest and property taxes) are allocated to individual homes
within a phase based upon the relative sales value of the homes.
The Significant Subsidiaries of The Presley Companies account for their
real estate inventories in accordance with Financial Accounting Standards Board
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("Statement No. 121"). Statement No. 121
requires impairment losses to be recorded on assets to be held and used by the
Significant Subsidiaries of The Presley Companies when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets, excluding future interest, are less than the carrying amount of the
assets. Under Statement No. 121, when an asset to be held and used by the
Significant Subsidiaries of The Presley Companies is determined to be impaired,
the related carrying amount of the asset is adjusted to its estimated fair
value. Statement No. 121 also requires that long-lived assets that are held for
disposal be reported at the lower of the assets' carrying amount or fair value
less costs of disposal.
Fair value represents the amount at which an asset could be bought or sold
in a current transaction between willing parties; that is, other than a forced
or liquidation sale. The estimation process involved in determining if assets
have been impaired and in the determination of fair value is inherently
uncertain since it requires estimates of current market yields as well as future
events and conditions. Such future events and conditions include economic and
market conditions, as well as the availability of suitable financing to fund
development and construction activities. The realization of the Significant
Subsidiaries of The Presley Companies' projects is dependent upon future
uncertain events and conditions and, accordingly, the actual timing and amounts
realized by the Significant Subsidiaries of The Presley Companies may be
materially different from the estimated fair values as described herein.
Management has evaluated the projects and determined that no indicators of
impairment are present as of December 31, 1998 and 1997.
74
<PAGE> 77
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Revenue and Profit Recognition
A sale is recorded and profit recognized when a sale is consummated, the
buyer's initial and continuing investments are adequate, any receivables are not
subject to future subordination, and the usual risks and rewards of ownership
have been transferred to the buyer in accordance with the provisions of
Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real
Estate." When it is determined that the earnings process is not complete, profit
is deferred for recognition in future periods. As of December 31, 1998, there
are no deferred profits.
Warranty Costs
The Significant Subsidiaries of The Presley Companies account for warranty
costs under the reserve method. As homes are sold, an estimate of warranty costs
is charged to the cost of homes sold and an accrual for future warranty costs is
established. As actual costs are incurred, the warranty reserve is reduced.
Income Taxes
The Significant Subsidiaries of The Presley Companies are not taxable
entities and the results of operations are included in the tax returns of the
members. Accordingly, no provision for income taxes is reflected in the combined
financial statements.
2. REAL ESTATE INVENTORIES
Real estate inventories consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Land under development............................ $75,784,000 $22,869,000
Construction in process........................... 21,811,000 --
----------- -----------
$97,595,000 $22,869,000
=========== ===========
</TABLE>
3. NOTE PAYABLE
The note payable is collateralized by a first deed of trust on a real
estate project in Northern California with an inventory balance of $26,970,000
as of December 31, 1998, and bears interest at 8% per annum. Future maturities
of the note payable at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $3,125,000
2000........................................................ 3,125,000
2001........................................................ 3,125,000
----------
$9,375,000
==========
</TABLE>
During the year ended December 31, 1998, the Significant Subsidiaries
incurred $938,000 of interest cost, all of which was capitalized to the real
estate project.
4. RELATED PARTY TRANSACTIONS
The Agreements provide for builder overhead fees to be paid to the Presley
Member in monthly installments during construction of the projects and a project
commitment fee to the Unaffiliated Member, one-third to one-half of which is
paid upon the Unaffiliated Member's initial capital funding with the remaining
balance paid in equal monthly installments.
75
<PAGE> 78
SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following fees were incurred and capitalized to real estate inventories
during the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Presley Member...................................... $1,885,000 $135,000
Unaffiliated Member................................. 671,000 360,000
---------- --------
$2,556,000 $495,000
========== ========
</TABLE>
As of December 31, 1998 and 1997, $410,000 and $73,000, respectively, is
due the members for fees.
5. COMMITMENTS AND CONTINGENCIES
The Significant Subsidiaries of The Presley Companies' commitments and
contingencies include the usual obligations incurred by real estate developers
in the normal course of business. In the opinion of management, these matters
will not have a material effect on the Significant Subsidiaries of The Presley
Companies' financial position or results of operations.
6. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the computer
programs or hardware utilized by the Presley Member, which manages the
activities of the Significant Subsidiaries of The Presley Companies, that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions or engage in normal business
activities.
The Presley Member has been required to modify and upgrade the hardware and
software used by its accounting and office systems to address the Year 2000
Issue. The Presley Member presently believes the modifications and replacements
it is making to its computer systems will mitigate the Year 2000 Issue. In
considering the impact of the Year 2000 Issue on its external agents such as
significant subcontractors, service providers and business partners, management
of the Significant Subsidiaries of The Presley Companies' believes that, with
respect to the Year 2000 Issue, external agents will not have a significant
impact on the operations of the Significant Subsidiaries of The Presley
Companies'. Based on its assessment of the remaining risks associated with the
Year 2000 Issue, management of the Significant Subsidiaries of The Presley
Companies' does not believe the development of contingency plans is warranted at
this time.
Ultimately, the potential impact of the Year 2000 Issue will depend not
only on the measures undertaken by the Significant Subsidiaries of The Presley
Companies and the Presley Member, but also on the way in which the issue is
addressed by businesses and other entities whose financial condition and
operational capability are important to the Significant Subsidiaries of The
Presley Companies.
76
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION FILE
------- ----------- ------------
<S> <C> <C>
3.1(1) Certificate of Incorporation of the Company.................
3.3(1) Bylaws of the Company.......................................
4.1(1) Specimen certificate of Common Stock........................
10.1(1) Form of Indemnity Agreement, dated October 18, 1991, between
the Company and Messrs. Lyon and Cable as Directors, and
dated December 12, 1991 as to the other Directors...........
10.2(1) Form of Registration Rights Agreement, dated October 7,
1991, between the Company and William Lyon..................
10.3(1) Form of Registration Rights Agreement, dated October 7,
1991, between the Company and each of the existing
stockholders other than William Lyon........................
10.4(1) 1991 Stock Option Plan......................................
10.5(2) Agreement for Redemption of Partnership Interest dated
December 30, 1992 between Carmel Mountain Ranch, a
California general partnership, The Presley Companies, a
California corporation, Presley CMR, Inc., a California
corporation, Home Capital Corporation, a California
corporation and Humboldt Financial Services Corp., a
California corporation......................................
10.6(2) Amended Statement of Partnership of Carmel Mountain Ranch
dated December 30, 1992.....................................
10.7(2) Amendment to Amended and Restated Partnership Agreement of
Carmel Mountain Ranch dated December 29, 1992...............
10.8(3) Agreement to Issue and Purchase Stock as dated for reference
purposes the 25th day of March, 1994 by and among The
Presley Companies, a Delaware corporation, and Foothill
Capital Corporation, Continental Illinois Commercial
Corporation, First Plaza Group Trust (Mellon Bank, N.A.,
acting as trustee as directed by General Motors Investment
Management Corporation), Pearl Street, L.P., International
Nederlanden (U.S.) Capital Corporation, and
Whippoorwill/Presley Obligations Trust -- 1994 (Continental
Stock Transfer & Trust Company, as trustee under that
certain trust agreement dated as of January 11, 1994).......
10.9(4) First Amendment to the Agreement to Issue and Purchase Stock
dated as of April 8, 1994 by and among The Presley
Companies, a Delaware corporation, and Foothill Capital
Corporation, Continental Illinois Commercial Corporation,
First Plaza Group Trust (Mellon Bank, N.A., acting as
trustee as directed by General Motors Investment Management
Corporation), Pearl Street, L.P., International Nederlanden
(U.S.) Capital Corporation, and Whippoorwill/Presley
Obligations Trust -- 1994 (Continental Stock Transfer &
Trust Company, as trustee under that certain trust agreement
dated as of January 11, 1994)...............................
10.10(4) Form of Registration Rights Agreement dated as of May 20,
1994, by and among The Presley Companies, a Delaware
corporation and each of the holders of shares of the Series
B Common Stock..............................................
10.11(4) Amended and Restated 1991 Stock Option Plan of The Presley
Companies, a Delaware corporation...........................
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION FILE
------- ----------- ------------
<S> <C> <C>
10.12(5) Forms of Stock Option Agreements, dated as of May 20, 1994,
between the Company and Wade H. Cable.......................
10.13(5) Forms of Stock Option Agreements, dated as of May 20, 1994,
between the Company and David M. Siegel
10.14(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and Nancy M. Harlan.....................
10.15(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and Linda L. Foster.....................
10.16(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and W. Douglass Harris..................
10.17(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and C. Dean Stewart.....................
10.18(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and Alan Uman...........................
10.19(5) Form of Stock Option Agreement, dated as of May 20, 1994,
between the Company and William Lyon........................
10.20(6) Agreement and Assignment; Mutual Releases, as of August 23,
1994, by and between Gateway Highlands, a California limited
partnership, HSP Inc., a California corporation and The
Presley Companies, a California corporation.................
10.21(7) Master Credit Agreement by and between Carmel Mountain
Ranch, a California general partnership and Bank One,
Arizona, N.A., a national banking association dated as of
February 15, 1995...........................................
10.22(8) First Amendment to Master Credit Agreement by and between
Carmel Mountain Ranch, a California general partnership and
Bank One, Arizona, NA dated as of October 10, 1995..........
10.23(9) Second Amendment to Master Credit Agreement and Secured
Promissory Note by and between Carmel Mountain Ranch, a
California general partnership ("Borrower"), and Bank One,
Arizona, NA, a national banking association ("Bank"), dated
as of October 4, 1996.......................................
10.24(10) Third Amendment to Master Credit Agreement, dated as of
September 25, 1997, by and between Carmel Mountain Ranch, a
California general partnership ("Borrower"), and Bank One,
Arizona, NA, a national banking association ("Bank")........
10.25(11) Fifth Amended and Restated Loan Agreement, dated as of July
6, 1998, between Presley Homes (formerly The Presley
Companies), a California corporation, as the Borrower, and
Foothill Capital Corporation, as the Lender.................
10.26(11) Modification to Master Credit Agreement dated as of March
17, 1998, between Carmel Mountain Ranch, a California
general partnership, as Borrower, and Bank One, Arizona, NA,
a national banking association, as Bank.....................
10.27(11) Modification to Master Credit Agreement dated as of June 16,
1998, between Carmel Mountain Ranch, a California general
partnership, as Borrower, and Bank One, Arizona, NA, a
national banking association, as Bank.......................
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION FILE
------- ----------- ------------
<S> <C> <C>
10.28(12) Modification to Master Credit Agreement dated as of August
25, 1998, between Carmel Mountain Ranch, a California
general partnership, as Borrower, and Bank One, Arizona, NA,
a national banking association, as Bank.....................
10.29(12) Form of Severance Agreements dated September 24, 1998.......
10.30(14) Presley Homes 1998 Bonus Plan...............................
10.31(13) Letter of Intent dated December 31, 1998 by and among
William Lyon Homes, Inc., a California corporation, The
Presley Companies, a Delaware corporation and The Presley
Companies, a California corporation.
10.32(14) Amendment to Letter of Intent dated March 30, 1999 by and
among William Lyon Homes, Inc., a California corporation,
The Presley Companies, a Delaware corporation and Presley
Homes, a California corporation.
21.1(14) List of Subsidiaries of the Company.........................
23.1 Consent of Independent Auditors.............................
27(14) Financial Data Schedule.....................................
</TABLE>
- ---------------
(1) Previously filed in connection with the Company's Registration Statement on
Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and
incorporated herein by this reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by this
reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by this
reference.
(4) Previously filed as an exhibit to the Company's Proxy Statement for Annual
Meeting of Stockholders held on May 20, 1994 and incorporated herein by
this reference.
(5) Previously filed in connection with the Company's Registration Statement on
Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and
incorporated herein by this reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994 and incorporated
herein by this reference.
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995 and incorporated herein
by this reference.
(8) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995 and incorporated
herein by this reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1996 and incorporated
herein by this reference.
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997.
(11) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998.
(13) Previously filed as an exhibit to the Company's Report on Form 8-K dated
December 31, 1998.
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by this
reference.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 16, 1999 included in the
Annual Report of The Presley Companies for the year ended December 31, 1998,
with respect to the consolidated financial statements, as amended, included in
this Form 10-K/A.
/s/ ERNST & YOUNG LLP
Newport Beach, California
October 4, 1999
