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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
THE PRESLEY COMPANIES
(NAME OF SUBJECT COMPANY)
THE PRESLEY COMPANIES
(NAME OF PERSON FILING STATEMENT)
SERIES A COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
741030 10 0
(CUSIP NUMBER OF CLASS OF SECURITIES)
WADE H. CABLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE PRESLEY COMPANIES
19 CORPORATE PLAZA
NEWPORT BEACH, CALIFORNIA 92660
(949) 640-6400
(NAME, ADDRESS AND TELEPHONE NUMBER
OF PERSON AUTHORIZED TO RECEIVE NOTICE AND COMMUNICATIONS ON
BEHALF OF THE PERSON FILING STATEMENT)
WITH COPIES TO:
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<S> <C> <C>
NANCY M. HARLAN, ESQ. BRIAN J. MCCARTHY, ESQ. KEITH PAUL BISHOP, ESQ.
THE PRESLEY COMPANIES SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP IRELL & MANELLA LLP
19 CORPORATE PLAZA 300 SOUTH GRAND AVENUE, SUITE 3400 840 NEWPORT CENTER DRIVE, SUITE 400
NEWPORT BEACH, CALIFORNIA 92660 LOS ANGELES, CALIFORNIA 90071 NEWPORT BEACH, CALIFORNIA 92660
(949) 640-6400 (213) 687-5000 (949) 760-0991
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is The Presley Companies, a Delaware
corporation ("Presley"). The address of the principal executive offices of
Presley is 19 Corporate Plaza, Newport Beach, California 92660. The title of the
class of equity securities to which this statement relates is the Series A
Common Stock, par value $.01 per share, of Presley (the "Series A Common
Stock").
ITEM 2. TENDER OFFER OF THE BIDDER.
This statement relates to the tender offer by William Lyon and his son,
William H. Lyon, (collectively, the "Lyons") disclosed in a Tender Offer
Statement on Schedule 14D-1 dated October 7, 1999 (the "Schedule 14D-1"), to
purchase up to 10,678,792 shares of Series A Common Stock, at $0.655 per share,
net to the tendering stockholder in cash, without interest thereon (the "Offer
Price"), upon the terms and subject to the conditions set forth in the Offer to
Purchase dated October 7, 1999 (as it may be amended or supplemented from time
to time, the "Offer to Purchase") and in the related Letter of Transmittal (as
it may be amended or supplemented from time to time, the "Letter of
Transmittal") which together with the Offer to Purchase constitute the "Offer"
and are attached as exhibits to the Schedule 14D-1.
The Offer is being made pursuant to the Purchase Agreement and Escrow
Instructions dated October 7, 1999 (the "Purchase Agreement"), by and among
William Lyon Homes, Inc., a California corporation ("William Lyon Homes"), the
Lyons, Presley Homes, a California corporation and a wholly owned subsidiary of
Presley ("Presley Homes"), and Presley. The Purchase Agreement provides for,
among other things, and subject to certain conditions, the acquisition by
Presley Homes of substantially all of the assets of William Lyon Homes for the
purchase price of forty-eight million dollars ($48,000,000), as adjusted
pursuant to the terms of the Purchase Agreement, together with the assumption of
substantially all of the liabilities of William Lyon Homes (the "Acquisition").
The Offer is conditioned upon, among other things, the consummation of the
Acquisition. The Lyons own all of the issued and outstanding shares of William
Lyon Homes. William Lyon is the Chairman of the Board of Presley and currently
owns 5,439,589 shares of Series A Common Stock after giving effect to the sale
of 2,500,000 shares in August 1999, which represents approximately 10.42% of the
outstanding Common Stock of Presley, and has the right to acquire 750,000 shares
of Series A Common Stock pursuant to stock options granted by Presley to him in
1994 in respect of his service as a consultant of Presley. The closing of the
Purchase Agreement is conditioned on, among other things, the cancellation of
these options. William H. Lyon is the son of William Lyon and is the beneficiary
of a trust which owns 492,450 shares of Series A Common Stock of Presley.
However, William H. Lyon does not have or share, directly or indirectly, the
power to vote or to direct the vote, or the power to dispose or to direct the
disposition, of such shares, and thus disclaims beneficial ownership of such
shares. William H. Lyon does not otherwise beneficially own any shares of Series
A Common Stock of Presley. See "Item 3. Identity and Background."
The Offer is also conditioned upon the approval of Presley's stockholders
of Presley's proposed merger (the "Merger") with and into Presley's wholly owned
subsidiary, Presley Merger Sub, Inc. ("Merger Sub"). Holders of record of the
common stock of Presley on September 15, 1999 will receive proxy materials
related to the Merger and will be entitled to vote on the Merger at a special
meeting of stockholders of Presley.
According to the Schedule 14D-1, the business address of the Lyons is c/o
William Lyon Homes, 4490 Von Karman Avenue, Newport Beach, CA 92660.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name of the person filing this statement is The Presley Companies,
and the business address is 19 Corporate Plaza, Newport Beach, California 92660.
The Purchase Agreement was negotiated on behalf of Presley by a special
committee of independent members of its Board of Directors currently comprised
of James E. Dalton, Steven B. Sample, and Ray A. Watt (the "Special Committee").
All information contained in this Schedule 14D-9 concerning the Lyons or William
Lyon Homes, or actions or events with respect to the Lyons or William Lyon
Homes, was provided by the Lyons and/or William Lyon Homes or obtained from the
Schedule 14D-1, and Presley takes no responsibility for that information.
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(b) Except as described below, to the knowledge of Presley, as of the date
hereof, there are no material contracts, agreements, arrangements or
understandings, or any actual or potential conflicts of interest between Presley
or its affiliates and (i) Presley, its executive officers, directors or
affiliates or (ii) the Lyons or their affiliates.
Each of the following summaries is not a complete description of the terms
and conditions of the respective agreement, and each summary is qualified in its
entirety by reference to the full text of such agreement, which is incorporated
by reference to the copy of the agreement filed as an exhibit hereto.
PURCHASE AGREEMENT
Presley and Presley Homes, a California corporation and wholly owned
subsidiary of Presley, have entered into a Purchase Agreement and Escrow
Instructions with William Lyon Homes, William Lyon and his son, William H. Lyon.
The following is a summary of the principal provisions of the Purchase
Agreement. Because the following is a summary description only, it does not
include the specific terms and provisions of the Purchase Agreement.
Accordingly, this summary is qualified in its entirety by reference to the
Purchase Agreement.
Pursuant to the terms of the Purchase Agreement, Presley Homes or its
permitted assigns will purchase from William Lyon Homes and any partnership or
limited liability company in which William Lyon Homes is a partner or member,
who will sell all, or substantially all, of the real property of William Lyon
Homes and such partnership or limited liability companies, together with certain
tangible and intangible personal property and other property used in connection
or associated with such real property, for a cash purchase price of $48 million,
subject to the adjustments described below, and the assumption by Presley Homes
of all, or substantially all, of the liabilities of William Lyon Homes.
The closing of the Acquisition as contemplated by the Purchase Agreement is
expected to occur prior to the completion of the Offer by the Lyons and the
completion of the Merger between Presley and Merger Sub, a newly formed Delaware
corporation. The completion of the Acquisition is a condition precedent to the
completion of the Offer and Merger.
Assets to be Acquired by Presley Homes
Subject to the terms and conditions in the Purchase Agreement, William Lyon
Homes will sell, or will cause any partnership or limited liability company
through which William Lyon Homes owns real property to sell, to Presley Homes or
its permitted assigns, all or substantially all of the assets and properties of
William Lyon Homes or any such partnership or limited liability company,
including without limitation the following assets:
- Substantially all real property located in the State of California that
is owned by William Lyon Homes and partnerships and limited liability
companies of which William Lyon Homes is a partner or a member, in each
case, as identified on an exhibit to the Purchase Agreement inclusive of
any and all buildings and improvements located on such real property and
all associated rights, privileges and easements appurtenant to such real
property;
- Substantially all personal property of any kind that is owned by William
Lyon Homes or any partnerships or limited liability companies and used in
connection with or related to the real property being sold to Presley
Homes; and
- All receivables, escrow proceeds, deposits and other assets arising out
of or related to the real property and the personal property being sold
by William Lyon Homes or the selling partnerships or limited liability
companies to Presley Homes.
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Pursuant to the Purchase Agreement, neither William Lyon Homes nor the
partnerships or limited liability companies through which William Lyon Homes
owns the assets will transfer to Presley Homes the following assets:
- Any rights and claims to tax refunds and adjustments of any kind owned or
held by William Lyon Homes or the partnerships or limited liability
companies, other than those relating to property taxes paid or payable
with respect to property owned as of December 31, 1998 or acquired after
that date;
- The cash consideration to be paid by Presley Homes to William Lyon Homes
pursuant to the Purchase Agreement;
- The company records and all income tax records and non-transferable
licenses and permits held by William Lyon Homes or the partnerships or
limited liability companies;
- Any assets acquired by William Lyon Homes or the partnerships or limited
liability companies after the closing date of the Purchase Agreement
except for assets that are acquired with proceeds constituting part of
the assets transferred to Presley Homes;
- Any cash reserves in respect of or relating to any of the excluded
liabilities that are not assumed by Presley Homes under the Purchase
Agreement; and
- All assets scheduled as excluded under the Purchase Agreement.
Adjustments to the Purchase Price
The purchase price for the real property of $48 million was determined
based on the value of the real property and related assets owned directly or
indirectly by William Lyon Homes and the selling partnerships and limited
liability companies as of December 31, 1998. The parties intend that these
assets, together with all income, receivables, escrow and other proceeds,
purchase deposits, cash and other assets earned or received by William Lyon
Homes or the selling partnerships and limited liability companies from the sale
of any of these assets, including any assets acquired with sales proceeds, in
the ordinary course of business since January 1, 1999 and through the closing
date of the Acquisition will inure to Presley. The amounts so inuring to Presley
are to be net of any amounts that have been used to pay or satisfy land
acquisition or development costs, capital expenditures, principal or interest on
indebtedness, accounts payable, accrued liabilities, employee wages and
benefits, taxes and other liabilities and operating expenses existing at
December 31, 1998 and incurred in the ordinary course of business.
The cash portion of the purchase price will be reduced by the following:
- Any dividends or similar payments or distributions during the period
except to the extent recorded on the books of William Lyon Homes or the
selling partnerships or limited liability companies at December 31, 1998;
- Except to the extent recorded on the books of William Lyon Homes or the
selling partnerships or limited liability companies at December 31, 1998,
the unpaid balance of any loans or other advances made during the period
to or for the personal benefit of its shareholders or affiliates or by
the partnerships or limited liability companies to or for the personal
benefit of any partner or affiliate other than William Lyon Homes, but
excluding loans or other advances, the right to receive payment is being
transferred to Presley Homes any advances or payments made in the form of
salary or other compensation for services rendered in the ordinary course
of business;
- The amount of any payments made or liabilities accrued by William Lyon
Homes or the selling partnerships or limited liability companies during
the period in respect of the following amounts to the extent the payment
or other liability had not been recorded as of December 31, 1998:
- Bonuses and other compensation to directors, officers and employees
for services rendered prior to December 31, 1998;
- Warranty expenses related to real estate assets sold and closed prior
to December 31, 1998;
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- Payments and related legal fees made in settlement of legal claims,
other than claims relating to the assets being purchased or the
liabilities being assumed;
- Significant and unusual charitable contributions during the period;
- The value of any real estate assets scheduled as assets excluded from
purchase;
- The amount of any costs and operating expenses incurred or accrued by
William Lyon Homes or any of the selling partnerships or limited
liability companies during the period in respect of or relating directly
to any of the excluded assets;
- The amount of any non-cash adjustments made on the books and records of
William Lyon Homes or any of the selling partnerships or limited
liability companies during the period for write-offs or abandonment of
assets to be purchased that were recorded on the books at December 31,
1998, but only to the extent that amount exceeds $500,000 in the
aggregate;
- The amount of any cash reserves to be retained in respect of liabilities
that are not being assumed by Presley Homes; and
- Any amounts paid or incurred by William Lyon Homes or any of the selling
partnerships and limited liability companies, except to the extent that a
corresponding liability was recorded on the books as of December 31,
1998, to the extent the amounts were paid or incurred in respect of
legal, financial and tax accounting, appraisal or financial advisory fees
and expenses incurred in connection with the transactions contemplated by
the Purchase Agreement which are in the aggregate greater than
$1,250,000.
The cash portion of the purchase price will be increased by the aggregate
of the following:
- Any capital contribution or other equity investment made in William Lyon
Homes by any of its shareholders, provided that Presley Homes has
approved any contribution or investment made after the date of the
Purchase Agreement;
- Any capital contribution to, or other equity investment made in, any of
the selling partnerships or limited liability companies during the period
by any of the partners or members, provided Presley Homes has approved
any contribution or investment made after the date of the Purchase
Agreement;
- Any accounts payable, accrued liabilities or indebtedness secured by or
relating to any of the assets not being purchased;
- Warranty reserves reflected on the books and records as of the closing
date retained by William Lyon Homes; and
- Tax refunds, insurance recoveries, utility deposits and other assets
acquired by William Lyon Homes or any of the selling partnerships or
limited liability companies during the period in exchange for or in
respect of any claims or other assets that were not reflected on their
books as of December 31, 1998.
Any adjustment to the purchase price will be determined by Ernst & Young
LLP or other independent accounting firm acceptable to Presley Homes and William
Lyon Homes based on a review of the books and records of the selling parties.
The independent auditor will perform a preliminary review and notify the parties
and the escrow holder not later than five business days prior to the closing
date of its estimate of any proposed adjustment. Unless either Presley Homes or
William Lyon Homes objects, the adjustment will be made to the purchase price at
the closing through escrow. If either objects, the escrow holder is required to
withhold the amount of the proposed adjustment until the amount of the
adjustment is finally determined.
After the closing, the independent auditor will complete a review and
deliver to the parties its final determination of any adjustment to the purchase
price within 30 calendar days of the closing date. If the parties agree or fail
to timely object, the determination will be final and conclusive. If either
party disagrees and makes a timely objection, the parties are required to make a
good faith attempt to resolve any differences. If the parties can't resolve the
matter, it will be directed to Arthur Andersen LLP or another independent
accounting firm acceptable to the parties whose determination shall be binding
and conclusive.
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Liabilities to be Assumed by Presley Homes
Pursuant to the Purchase Agreement, Presley Homes and its permitted assigns
will assume and agree to pay, perform and discharge all obligations and
liabilities of William Lyon Homes and the partnerships and limited liability
companies related to the assets purchased pursuant to the Purchase Agreement,
other than those obligations and liabilities excluded from assumption, including
but not limited to the following:
- The subcontract agreements on the standard form contracts for services,
materials or supplies to be incorporated into the works of improvement on
the real property;
- The purchase agreements on the standard form contracts for the sale of
individual lots to homebuyers which sales have not closed escrow on or
before the closing date;
- The subdivision agreements, development agreements and other entitlement
agreements with governmental entities relating to the real property;
- The contracts listed on an exhibit to the Purchase Agreement;
- The accounts payable and accrued liabilities of William Lyon Homes and
the partnerships and limited liability companies arising in the normal
course of business; and
- Any obligation of William Lyon Homes and the partnerships and limited
liability companies to pay compensation, salaries or other benefits to
employees of William Lyon Homes, or the partnerships and limited
liability companies, who are hired by Presley Homes.
Presley Homes will not assume or be responsible for any of the liabilities
or obligations of William Lyon Homes and the partnerships and limited liability
companies which are identified below:
- Any liabilities or obligations resulting from any alleged or actual
defect or breach of warranty claim with respect to any portion of the
real property, including all improvements thereon, for work done by
William Lyon Homes or the partnerships or limited liability companies on
the real property prior to the closing date;
- Any liabilities or obligations resulting from any claim or other
proceeding made by or against William Lyon Homes or the partnerships or
limited liability companies, either before the closing date or after the
closing date, with respect to events that occurred or conditions that
existed before the closing date, except for those liabilities or
obligations expressly assumed by Presley Homes;
- Any obligation, liability or expense of William Lyon Homes or the
partnerships or limited liability companies for income taxes;
- Any obligation, liability or expense relating to or arising out of the
excluded assets that are not being purchased by Presley Homes and will
remain with William Lyon Homes or the partnerships or limited liability
companies;
- Any liabilities or obligations of William Lyon Homes or the partnerships
or limited liability companies which arise after the closing date in
connection with the Purchase Agreement;
- Any liabilities or obligations of William Lyon Homes or the partnerships
or limited liability companies to its stockholders in respect of its
ownership interest in William Lyon Homes or the partnerships or limited
liability companies;
- Any liabilities or obligations for indebtedness secured by mortgages or
other security interests on the assets purchased to which William Lyon
Homes or the partnerships or limited liability companies are not directly
or indirectly liable or do not provide credit support;
- Any liabilities or obligations of William Lyon Homes or the partnerships
or limited liability companies to the extent that the selling party has
the right to be indemnified or reimbursed by an insurer or other third
party with respect to those liabilities or obligations; and
- All other excluded liabilities scheduled in the Purchase Agreement.
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As soon as reasonably possible after the execution of the Purchase
Agreement, the parties will open an escrow with First American Title Insurance
Company, the escrow holder. The closing of the purchase and sale of the real
property and related assets will take place through the escrow when all the
conditions to closing have been satisfied, but in no event later than November
30, 1999; provided, however, that if the closing of the transactions has not
occurred by November 30, 1999 due to delays in obtaining governmental or
regulatory approvals of the transactions, then the parties have agreed to extend
the closing date for up to an additional thirty (30) calendar days to obtain
such approvals. The close of escrow shall occur when Presley Homes deposits the
purchase price into escrow and the grant deeds held by William Lyon Homes
conveying the real property to Presley Homes are recorded through escrow in the
official records of the counties in which each respective parcel of real
property is located.
Tender Offer
Following execution of the Purchase Agreement and provided that it shall
not have been terminated prior to the closing date, as promptly as practicable,
but in no event later than five business days after the public announcement of
the execution of the Purchase Agreement, the Lyons will commence the cash tender
offer to acquire up to 10,678,792 shares, subject to adjustment, of the Series A
Common Stock of Presley at $0.655 per share. The Lyons will complete the Offer
in accordance with its terms and accept for payment and pay for the shares of
Series A Common Stock tendered pursuant to the Offer as soon as they are legally
permitted to do so under applicable law. The Offer will be subject to various
conditions set forth in the Purchase Agreement, including the minimum condition
described below. The Lyons may decrease or waive the minimum condition but shall
not decrease the Offer price, or decrease the number of shares of Series A
Common Stock sought, or amend any other condition of the Offer in any manner
adverse to the holders of the shares of Series A Common Stock without the prior
written consent of Presley.
In the event that Presley determines that consummation of the tender offer
or the Series B Purchase Agreements (as described below) would result in an
"ownership change" under applicable federal income tax laws and regulations or
other adverse tax consequences, the Lyons have agreed to amend the tender offer
to decrease the number of shares of Series A Common Stock being sought but not
below the number of shares required to satisfy the minimum specified in the
Purchase Agreement.
Notwithstanding any other provision of the Offer, the Lyons shall not be
required to accept for payment or, subject to any applicable rules and
regulations of the Commission, including Rule 14e-1(c) under the Exchange Act
(relating to the Lyons obligation to pay for or return tendered shares promptly
after termination of withdrawal of the Offer), pay for, and may delay the
acceptance for payment of or, subject to the restriction referred to above, the
payment for, any tendered shares of Series A Common Stock, and may amend the
Offer or terminate the Offer and not accept for payment any tendered shares, if
(i) there shall not have been tendered prior to and as of the expiration date of
the Offer at least 1,989,180 shares of Series A Common Stock, (ii) the
Acquisition has not been consummated in accordance with the terms of the
Purchase Agreement, (iii) the stockholders of Presley have not approved the
Merger by the required vote, or (iv) at any time after October 7, 1999 and prior
to the expiration date of the Offer, any of the following events shall have
occurred and be continuing as of the expiration date:
- there shall be any action taken, instituted or pending, or any statute,
rule, regulation, legislation, interpretation, ruling, condition,
judgment, order or injunction enacted, enforced, promulgated, proposed,
amended, issued or deemed applicable to the Offer, the purchase of the
Series B Common Stock pursuant to the Series B Purchase Agreements, the
Acquisition or the Merger, by any Governmental Entity (as defined in the
Purchase Agreement), that could reasonably be expected to, directly or
indirectly: (1) make illegal or otherwise prohibit consummation of the
Offer, the purchase of the Series B Common Stock pursuant to the Series B
Purchase Agreements, the Acquisition or the Merger as contemplated by the
Purchase Agreement, (2) impose a limitation on the ability of the Lyons
effectively to acquire, hold or exercise full rights of ownership of
Common Stock of Presley, including, without limitation, the right to vote
any shares acquired or owned by the Lyons on all matters properly
presented to the Presley's stockholders, or (3) require divestiture by
the Lyons,
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William Lyon Homes or their respective affiliates of shares of Common
Stock of Presley or any material portion of the business or assets of
Presley taken as a whole;
- (1) the representations of Presley and Presley Homes set forth in the
Purchase Agreement shall not be true and correct in any material respect
as of the date of the Purchase Agreement and as of consummation of the
Offer as though made on and as of such date, (2) Presley or Presley Homes
shall have failed to comply in all material respects with their
respective covenants and agreements set forth in the Purchase Agreement,
(3) there shall have occurred any events or changes which have had or
could reasonably be expected to have a material adverse effect on the
business, assets, prospects, condition (financial and other) and results
of operations of Presley taken as a whole;
- (1) it shall have been publicly disclosed, or the Lyons and William Lyon
Homes shall have otherwise learned, that beneficial ownership (determined
for the purposes of this bullet point as set forth in Rule 13d-3
promulgated under the Exchange Act) of 50% or more of the outstanding
shares of Common Stock has been acquired by any person (including Presley
and Presley Homes or any of their subsidiaries or affiliates) or group
(as defined in Section 13(d)(3) under the Exchange Act), (2) the Board of
Directors of Presley or any committee thereof shall have withdrawn, or
shall have modified or amended in a manner adverse to the Lyons and
William Lyon Homes, the approval, adoption or recommendation, as the case
may be, of the Offer or the Merger, or approved or recommended any,
merger, consolidation, other business combination, sale of material
assets, takeover proposal or other acquisition of shares of Common Stock
other than the Offer, the Acquisition, the Merger and the other
transactions contemplated by the Purchase Agreement, (3) a third party
shall have entered into a definitive agreement or a written agreement in
principle with Presley with respect to a tender offer or exchange offer
for any shares of Common Stock of Presley or a merger, consolidation,
other business combination with Presley or sale of material assets of
Presley or any of its subsidiaries (except as specifically permitted by
the Purchase Agreement), or (4) the Board of Directors of Presley or any
committee thereof shall have resolved to do any of the foregoing and such
resolution shall be made public;
- Presley, Presley Homes and William Lyon Homes agree to terminate the
Offer, the Acquisition or the Purchase Agreement, or the Purchase
Agreement shall have been otherwise terminated in accordance with its
terms;
- there shall have occurred, and continued to exist, (1) any general
suspension of, or limitation on prices for, trading in securities on the
NYSE (excluding any coordinated trading half-triggered solely as a result
of a specified decrease in a market index and suspensions on limitations
resulting solely from physical damage or interference with such exchanges
not related to market conditions), or (2) a banking moratorium in the
United States or other limitation on the extension of credit, or (3) a
commencement of a war, armed hostilities or other national or
international calamity involving the United States and having a material
adverse effect on the business, assets, prospects, condition (financial
and other) and results of operations of Presley, taken as a whole, or
materially adversely affecting or delaying the Offer, or (4) in the case
of any condition, circumstance or event referenced in any of the
foregoing clauses (1), (2) and (3) and existing at the time of the
commencement of the Offer, a material acceleration or worsening thereof;
- the Series B Purchase Agreements shall no longer be in full force or
effect, or the Series B Purchase Agreements shall no longer be
enforceable against the Series B Stockholders in accordance with their
terms (except for any such failure to be in full force or effect or
enforceable which is due solely to a breach thereof by William Lyon
Homes); or
- it is reasonably determined that upon consummation of the Offer, the
purchase of Series B Common Stock under the Series B Purchase Agreements
and the Merger, (1) the shares of Common Stock of Presley will cease to
be listed on the NYSE or another national securities exchange, or will
not be quoted on an inter-dealer quotation system of a registered
national securities association, or (2) the shares of Common Stock of
Presley outstanding immediately following consummation of such
transactions will be held of record by less than 300 persons.
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If on the initial scheduled expiration date of the Offer, which shall be no
earlier than 20 business days after the date upon which the Offer is commenced,
any of the following shall have occurred and is continuing:
- the minimum condition set forth in clause (i) above shall not have been
satisfied or waived by the Lyons, or
- either of the conditions set forth in clause (ii) or clause (iii) above
shall not have been satisfied or waived by the Lyons due to delays in
obtaining the necessary governmental or third party consents or obtaining
necessary financing or releases,
then the Lyons shall extend the Offer from time to time as may be necessary to
satisfy the conditions to the Offer to be substantially co-terminous with the
closing of the other transactions under the Purchase Agreement, provided,
however, the Offer shall not be extended beyond November 30, 1999 (or 30
calendar days thereafter in the event the closing of the Acquisition is delayed
due to delays in obtaining government approvals).
Notwithstanding the above, the conditions to the Offer set forth in the
Purchase Agreement (other than actions by governmental entities that would
prohibit completion of the Offer), shall be deemed satisfied upon completion of
the Acquisition by Presley Homes.
The Lyons will take all steps necessary to cause the Offer to Purchase,
form of Letter of Transmittal and other exhibits to the Schedule 14D-1 to be
filed with the Securities and Exchange Commission and to be distributed to the
holders of the Series A Common Stock of Presley as required by applicable
federal securities laws.
Presley represents that a Special Committee of Presley's Board of Directors
has unanimously determined that the Purchase Agreement and the transactions
contemplated in it, taken together, are fair to and in the best interests of
Presley and the holders of the Series A Common Stock, other than the Lyons,
provided that each holder is advised to consult with their financial and tax
advisors. Presley has received an opinion from Warburg Dillon Read, financial
advisor to the Special Committee, that after giving effect to the Acquisition,
the Offer, the Merger and the Series B Purchase Agreements the shares of common
stock of Merger Sub to be issued in the Merger to Presley's stockholders and the
cash that may be received by each such tendering holder of Series A Common Stock
in the Offer, is fair to the holders of the Series A Common Stock, other than
the Lyons and those selling Series B Common Stockholders, from a financial point
of view. The Special Committee has approved the transactions contemplated in the
Purchase Agreement and resolved to recommend that the Series A stockholders,
other than the Lyons and holders of the Series B Common Stock that have entered
into the Series B Purchase Agreements, accept the Offer, provided that they
should consult with their financial and tax advisors prior to tendering their
shares and that the recommendation may be withdrawn, modified or changed if in
their opinion, after consultation with counsel, the failure to take that action
would be inconsistent with their fiduciary duties.
As soon as practicable on or after the Offer is commenced, Presley has
agreed to file with the Securities and Exchange Commission a
solicitation/recommendation statement on Schedule 14D-9, which will contain
Presley's recommendation with respect to the Offer. At the time that the Offer
documents are first mailed by the Lyons to the holders of the Series A Common
Stock, or as soon as practicable thereafter, Presley will distribute to the
holders of the Series A Common Stock the Schedule 14D-9, together with the Offer
documents.
In the event that the Offer is oversubscribed, the Lyons will purchase the
shares of Series A Common Stock from each tendering holder on a pro rata basis
up to the amount of the Offer. In the event that the Offer is undersubscribed,
the Lyons will purchase additional shares of Common Stock at $0.655 per share
from each holder of the Series B Common Stock on a pro rata basis pursuant to
the Series B Purchase Agreements (as described below), such that the Lyons will
own not more than 49.9% of the issued and outstanding shares of Presley's Common
Stock. The Lyons will in no event purchase a number of shares of Common Stock of
Presley such that an "ownership change" would occur with respect to Presley
under applicable federal income tax laws and other regulations.
8
<PAGE> 10
Representations and Warranties
William Lyon Homes makes the following representations and warranties to
Presley Homes in the Purchase Agreement:
- Good standing and corporate formation of William Lyon Homes, including
the selling partnerships and limited liability companies;
- Corporate authority to enter into the Purchase Agreement, Series B
Purchase Agreements and to complete the transactions contemplated
therein;
- The authority of the individuals executing the Purchase Agreement, the
Series B Purchase Agreements and the completion of the transactions
contemplated therein;
- The Purchase Agreement and the Series B Purchase Agreements are valid and
binding obligations of William Lyon Homes and enforceable against William
Lyon Homes;
- The partnerships and limited liability companies identified on an exhibit
to the Purchase Agreement are the only such equity interests owned by
William Lyon Homes;
- The California residency of William Lyon Homes for California tax
purposes and its status as not being a foreign entity for federal tax
purposes;
- The condition and marketability of title of the personal property assets
being sold to Presley Homes by William Lyon Homes;
- The delivery and accuracy of the financial statements of William Lyon
Homes and a representation that William Lyon Homes has conducted its
business in the ordinary course and has not paid dividends nor redeemed
or made other distributions in respect of its outstanding common stock
since December 31, 1998;
- The validity and the absence of breach or default under contracts being
assumed by Presley Homes;
- The status of zoning regulations affecting the real property sold to
Presley Homes;
- The receipt or existence of governmental notices affecting the real
property sold to Presley Homes;
- The absence of undisclosed defects to the real property sold to Presley
Homes;
- The absence of unrecorded interests on the real property sold to Presley
Homes;
- The compliance with all regulations, covenants, conditions, restrictions,
easements and similar matters affecting the real property;
- The absence of public improvements affecting the real property sold to
Presley Homes;
- The absence of any other agreements, to which William Lyon Homes is a
party, that would affect the ownership of the real property by Presley
Homes or the proposed development of the real property;
- The absence of any material litigation which adversely affects the
Purchase Agreement, the Series B Purchase Agreements or the ownership and
development of the real property sold to Presley Homes;
- The compliance with environmental laws, the absence of any communications
or claims alleging non-compliance with environmental laws, and the
presence, discharge or storage of any environmental pollutants;
- The absence of any endangered or threatened species that would adversely
impact the development of the real property;
- The validity and collectibility of accounts receivable;
- The disclosure of all employment contracts and employee benefit plans and
compliance with the obligations under ERISA;
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<PAGE> 11
- The maintenance of adequate insurance policies;
- The absence of any breach or conflict with any of the organizational
documents or any indebtedness of William Lyon Homes, or any action that
would result in the imposition of a lien on the assets;
- The lack of any intent to implement a "plant closing" or "mass lay off"
under the WARN Act; and
- The disclosure or absence of any brokers' or finders' fees.
Presley and Presley Homes will make the following representations and
warranties to William Lyon Homes in the Purchase Agreement:
- Corporate authority to enter into the Purchase Agreement and to complete
the transactions contemplated therein;
- Completion of all requisite corporate or other action by Presley and
Presley Homes to enter into the Purchase Agreement and the completion of
the transactions contemplated therein;
- The authority of the individuals executing the Purchase Agreement and the
completion of the transactions contemplated therein;
- The absence of any breach or conflict with any of the organizational
documents of Presley or Presley Homes, any law to which they are subject,
or any material contract that is material to the financial condition,
results of operations, business, assets, liabilities or prospects of
Presley or Presley Homes;
- The disclosure or absence of any brokers' or finders' fees;
- The absence of any legal proceedings that could reasonably be expected to
have a material adverse effect on the ability of Presley or Presley Homes
to complete the transactions contemplated by the Purchase Agreement; and
- The lack of any intent to implement a "plant closing" or "mass lay off"
under the WARN Act within 150 days of the closing date.
Indemnification and Survival of Representations
The representations and warranties of William Lyon Homes made in the
Purchase Agreement will survive for a period of one year after the closing date.
From and after the closing date, William Lyon Homes will indemnify and hold
Presley and Presley Homes harmless from any losses resulting from any breach of
representation, any breach of a covenant, and any of the excluded liabilities.
The indemnity liability will be reduced to the extent that the underlying loss
already resulted in an adjustment to the purchase price as provided for in the
Purchase Agreement. William Lyon Homes will not be obligated to indemnify
Presley or Presley Homes for losses resulting from any breach of representation
or covenant, unless the losses in the aggregate exceed $500,000 and in no event
will William Lyon Homes be obligated to cover losses, that are not covered by
insurance, in excess of $2,400,000.
From and after the closing date, Presley and Presley Homes will indemnify
and hold William Lyon Homes harmless from any losses resulting from any breach
of representation, any breach of a covenant, and any of the assumed liabilities.
The indemnity liability will be reduced to the extent that the underlying loss
already resulted in an adjustment to the purchase price as provided for in the
Purchase Agreement. Presley and Presley Homes will not be obligated to indemnify
William Lyon Homes for losses resulting from any breach of representation or
covenant, unless the losses in the aggregate exceed $500,000 and in no event
will Presley or Presley Homes be obligated to cover losses in excess of
$2,400,000.
The Lyons and William Lyon Homes agree to maintain the corporate existence
of William Lyon Homes for a period of one year after closing and to maintain a
tangible net worth of not less than $2,400,000 and for such longer period
thereafter as the representations and warranties may be extended pursuant to the
Purchase Agreement. Neither of the Lyons have personally guaranteed the
obligations of William Lyon Homes under the Purchase Agreement.
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<PAGE> 12
Interim Covenants
For the period between executing the Purchase Agreement and the closing
date, William Lyon Homes agrees to provide Presley Homes with reasonable access
to the assets and the books and records of William Lyon Homes, to use best
efforts to maintain and preserve the assets being sold to Presley Homes and to
manage the assets reasonably consistent with past practices in the ordinary
course of business and to cooperate in the obtaining of governmental or third
party consents necessary to complete the transactions.
For the period between executing the Purchase Agreement and the closing
date, Presley and Presley Homes agree to cooperate in the obtaining of any
governmental or third party consents necessary to complete the transactions,
maintain and preserve the business operations of Presley Homes in accordance
with past practices and use reasonable efforts to obtain financing without
triggering a default under the senior notes of Presley Homes.
Conditions to the Purchase Agreement
The conditions precedent to the obligations of Presley and Presley Homes
under the Purchase Agreement are as follows:
- The accuracy of the representations and warranties by William Lyon Homes
and the performance of all covenants by William Lyon Homes and the Lyons;
- The receipt of all required regulatory approvals and third party
consents;
- The absence of any material adverse change to the assets or assumed
liabilities;
- The receipt of a legal opinion from O'Melveny & Myers LLP, counsel for
William Lyon Homes, with respect to the following:
- The incorporation, valid existence and good standing of William Lyon
Homes;
- Due authorization, execution and delivery of the Purchase Agreement;
- The enforceability of the Purchase Agreement against William Lyon
Homes, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally and by general principles of equity and
the possible unavailability of specific performance or injunctive
relief, regardless of whether the proceeding is in law or equity;
- No consents of California or federal authorities that the counsel has,
in the exercise of customary professional diligence, recognized as
applicable to transactions of the type contemplated by the Purchase
Agreement for the execution and delivery of, and the performance by
William Lyon Homes under, the Purchase Agreement, except for those
that have been obtained; and
- William Lyon Homes' execution, delivery, and performance of the
Purchase Agreement does not violate its charter documents; violate,
breach or result in a default under any agreement identified in good
faith to counsel on a schedule, or breach or otherwise violate any
judgment or decree of any California or Federal court or governmental
authority binding William Lyon Homes and identified on a schedule.
Counsel is not required to express any opinion as to the effect of
Presley or Presley Homes' performance under the Purchase Agreement on
their compliance with financial covenants in any loan agreement.
- The absence of any litigation affecting the assets or the completion of
the asset purchase;
- The issuance of acceptable policies of title insurance in favor of
Presley Homes;
- The assignment of all necessary real property documents to Presley Homes;
- The receipt of a solvency opinion by Presley from Houlihan Lokey Howard &
Zukin Financial Advisors, Inc., financial adviser to Presley;
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<PAGE> 13
- The receipt of adequate financing;
- The absence of any default under the Senior Notes of Presley;
- The determination by Presley of the absence of an "ownership change"
under applicable federal income tax laws;
- The conditions to the Offer, other than the condition relating to the
Acquisition itself, shall have been satisfied or waived;
- The approval of the stockholders of Presley of the Merger between Presley
and Merger Sub;
- Each of the Series B Purchase Agreements shall be in full force and
effect against the Series B Common Stockholders in accordance with their
terms; and
- The cancellation by William Lyon of his outstanding options to acquire
750,000 shares of Presley's Series A Common Stock.
The conditions precedent to the obligations of William Lyon Homes under the
Purchase Agreement are as follows:
- The accuracy of the representations and warranties and the performance of
all covenants by Presley and Presley Homes;
- The receipt of all required regulatory approvals and third party
consents;
- The receipt of legal opinions from each of Irell & Manella LLP and
Morris, Nichols, Arsht & Tunnell, counsel for Presley and Presley Homes,
and of Nancy M. Harlan, Esq., Senior Vice President and General Counsel
of Presley collectively with respect to the following:
- The incorporation, valid existence and good standing of Presley and
Presley Homes;
- Due authorization, execution and delivery of the Purchase Agreement;
- The enforceability of the Purchase Agreement against Presley and
Presley Homes, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally and by general principles of equity and
the possible unavailability of specific performance or injunctive
relief, regardless of whether the proceeding is in law or equity;
- No consents of California or federal authorities that the counsel has,
in the exercise of customary professional diligence, recognized as
applicable to transactions of the type contemplated by the Purchase
Agreement for the execution and delivery of, and the performance by
Presley and Presley Homes under the Purchase Agreement, except for
those that have been obtained, and
- Presley and Presley Homes' execution, delivery, and performance of the
Purchase Agreement do not violate their respective charter documents;
violate, breach or result in a default under any agreement identified
to counsel in an officers' certificate as being material to Presley or
Presley Homes; or breach or otherwise violate any judgment or decree
of any California or Federal court or governmental authority binding
on Presley or Presley Homes and identified in an officer's
certificate. Counsel is not required to express any opinion as to the
effect of Presley or Presley Homes' performance under the Purchase
Agreement on their compliance with financial covenants in any loan
agreement.
- The absence of any litigation affecting the completion of the asset
purchase;
- The conditions to the Offer, other than the condition relating to the
Acquisition itself, shall have been satisfied or waived;
- The approval of the stockholders of Presley of the Merger between Presley
and Merger Sub;
- The release of William Lyon Homes from its contracts and obligations
assumed by Presley Homes;
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<PAGE> 14
- The Series B Purchase Agreements shall continue in full force and effect
and shall be enforceable against the Series B Common Stockholders in
accordance with their terms, except that this condition shall be
satisfied if any failure is due solely to a breach of the Series B
Purchase Agreements by William Lyon Homes; and
- The determination by William Lyon Homes and its affiliates of the absence
of an "ownership change" under applicable federal income tax laws.
Escrow
As soon as reasonably possible after the execution of the Purchase
Agreement, Presley, Presley Homes and William Lyon Homes shall open an escrow
with First American Title Insurance Company as escrow holder.
Subject to the conditions in the Purchase Agreement, William Lyon Homes
will deliver, and will cause each of the partnerships and limited liability
companies to deliver, to the escrow holder, on or prior to the closing date,
each of the following documents:
- grant deeds conveying the real property to Presley Homes;
- assignments of all of William Lyon Homes', the partnerships' and the
limited liability companies' interests in and to any purchase agreements
and other agreements;
- two copies of the assignment of plans and warranties executed by William
Lyon Homes and the partnerships and limited liability companies;
- two copies of each bill of sale conveying the personal property and other
instruments of transfer as required by law or Presley Homes;
- two copies of any other assignments or instruments of transfer, including
those required by law;
- two copies of each assignment and assumption of leasehold, accompanied by
all required consents, executed by William Lyon Homes and the
partnerships and limited liability companies;
- affidavits of William Lyon Homes; and
- two copies of the assignment and assumption agreement executed by William
Lyon Homes and the partnerships and liability companies.
Subject to the conditions in the Purchase Agreement, Presley Homes will
deliver to the escrow holder, on or prior to the closing date, each of the
following items:
- the purchase price, together with Presley Homes' share of any escrow
closing costs;
- two copies of the assignment of plans and warranties executed by Presley
Homes;
- two copies of the assignment and assumption agreement executed by Presley
Homes; and
- two copies of each assignment and assumption of leasehold executed by
Presley Homes.
Upon the close of escrow, when all funds and documents have been deposited
into escrow, the escrow holder shall promptly undertake all of the following, in
the following order:
- cause the grant deeds to be recorded in the official place of records for
the county in which the real property is located;
- disburse all funds to William Lyon Homes after deducting escrow costs and
all items chargeable to the account of William Lyon Homes;
- deliver the affidavits to Presley Homes;
- deliver one copy of each document identified above to each of William
Lyon Homes and Presley Homes; and
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<PAGE> 15
- cause the title policy, which the escrow holder is obligated to issue and
provide to Presley Homes, to be delivered to Presley Homes.
The escrow instructions do not contemplate any procedure to address
breaches of representations, warranties or covenants, or obligations arising
under the indemnification provisions in the Purchase Agreement.
Post Closing Obligations
After the closing date, Presley Homes agrees to offer continued employment
to the officers, employees and sales agents of William Lyon Homes on an "at
will" basis. Presley Homes agrees for purposes of the WARN Act to consider any
employee of William Lyon Homes who accepts employment with Presley Homes as an
employee of Presley Homes immediately prior to the closing date. William Lyon
Homes will comply with applicable COBRA requirements and those of any comparable
state or local law with respect to the termination of employees in connection
with the transactions contemplated by the Purchase Agreement. William Lyon
Homes, the partnerships, limited liability companies, and their ERISA affiliates
will continue any group health plan coverage to their employees to the extent
necessary to prevent Presley Homes from being deemed a successor employer of
William Lyon Homes, the partnerships, limited liability companies, or their
ERISA affiliates under applicable law or regulation.
William Lyon Homes will remain liable and indemnify and defend Presley
Homes for any claims relating to homes which close escrow prior to the closing
date for this transaction. Presley Homes will be liable and indemnify and defend
William Lyon Homes for any claims relating to homes where no work had commenced
prior to the closing date. To the extent that construction has begun on any
improvements prior to the closing date, or a home has been started but has not
yet closed escrow, Presley Homes and William Lyon Homes will each remain liable
for any claims for alleged construction defects for any work done by or for
them, respectively, on the real property and each shall indemnify the other in
accordance with the Purchase Agreement. The overall intent of the Purchase
Agreement is to maximize insurance coverage, whether purchased for the benefit
of William Lyon Homes or Presley Homes, and nothing contained in the Purchase
Agreement will be construed to reduce or change coverage to the detriment of
either Presley Homes or William Lyon Homes, as applicable.
Following the closing, Presley Homes will manage and provide other services
as William Lyon Homes may request with respect to certain real estate
development projects identified on a schedule, regardless of the fact that such
projects are excluded from the assets being purchased by Presley Homes. William
Lyon Homes will reimburse Presley Homes for all costs incurred in providing
these services.
After the closing date, William Lyon Homes agrees to cooperate, and to
cause the partnerships and the limited liability companies through which it owns
real property to cooperate, in the transfer and delivery of the assets being
purchased by Presley Homes and to maintain adequate levels of insurance coverage
to protect the assets being purchased by Presley Homes.
Termination
The Purchase Agreement may be terminated under the following circumstances:
- By mutual consent of the parties;
- By Presley Homes, Presley or William Lyon Homes if any governmental
entity issues an order, decree or ruling which permanently restrains or
otherwise prohibits the purchase of the shares pursuant to the Offer or
the Series B Purchase Agreements;
- By Presley Homes, Presley or William Lyon Homes if the closing of the
asset purchase has not occurred, other than through the failure of any
party seeking to terminate to comply fully with its obligations under the
Purchase Agreement, on or before November 30, 1999; provided that if the
closing has not occurred by that date due to delays in obtaining
government approvals, then the parties agree to extend the closing date
for up to an additional 30 days;
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<PAGE> 16
- By Presley Homes or Presley if the Lyons fail to commence the Offer
within the time set forth in the Purchase Agreement, provided that
Presley Homes is not in material breach at that time;
- By Presley Homes or Presley in connection with entering into a definitive
agreement with a third party as permitted under the Purchase Agreement in
respect of Presley's board of directors' fiduciary duties to Presley's
stockholders, provided that Presley Homes has complied with all
provisions of the Purchase Agreement;
- By Presley Homes or Presley if William Lyon Homes shall have breached in
any material respect any of its representations, warranties or agreements
if the breach cannot be or has not been cured within 30 days after
written notice of the breach;
- By William Lyon Homes if due to an occurrence not involving a breach by
it of its obligations under the Purchase Agreement, which makes it
impossible to satisfy any of the conditions to the Offer, William Lyon
and one or more of his affiliates or associates shall have failed to
commence the Offer within the time specified in the Purchase Agreement.
- By William Lyon Homes if, prior to the purchase of the Series A Common
Stock by William Lyon and one or more of his affiliates or associates
pursuant to the Offer, Presley's Board of Directors shall have withdrawn,
modified or changed in a manner adverse to William Lyon and one or more
of his affiliates or associates its approval or recommendation of the
Offer or shall have recommended an acquisition proposal or executed an
agreement relating to an acquisition proposal or similar business
combination with a person or entity other than William Lyon Homes or its
affiliates; or
- By William Lyon Homes if Presley Homes or Presley shall have breached any
representation, warranty or covenant in the Purchase Agreement which
cannot be or has not been cured within 30 days after notice.
If the Purchase Agreement is terminated, all further obligations of the
parties shall terminate, provided that the termination will not relieve any
party of any liability that it may have for breach of any representation or
warranty or nonperformance of any covenant or constitute a waiver of any
available remedy for breach or nonperformance.
No Solicitation
Each of the parties to the Purchase Agreement has agreed that prior to the
closing neither it nor any of its representatives will:
- Solicit or encourage the submission of an acquisition proposal other than
from a party to the Purchase Agreement; or
- Provide any information concerning it or the assets to any other person
or permit any other person to visit its premises in connection with or
for the purpose of soliciting or facilitating an acquisition proposal.
In the event any other potential acquiror contacts a party to the Purchase
Agreement, that party is required to inform the other parties and to inform the
potential acquirer of the period of exclusive negotiations. If the board of
directors of Presley or William Lyon Homes, after receiving advice from counsel,
determines that a failure to act would be inconsistent with the fiduciary duties
of Presley's Board of Directors, they may furnish information pursuant to
confidentiality agreements and participate in discussions and negotiations. A
party receiving a competing acquisition proposal is required to promptly notify
the other party of the proposal. If a party enters into a definitive agreement
with respect to a competing proposal, that party is required to concurrently pay
all fees and expenses incurred by the other party through that date in
connection with the Purchase Agreement.
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<PAGE> 17
SERIES B COMMON STOCK PURCHASE AGREEMENTS
William Lyon Homes has entered into three Stock Purchase and Sale
Agreements (collectively, the "Series B Purchase Agreements"), dated as of July
6, 1999, between itself and each of ING (U.S.) Capital, LLC, G.S. Credit
Partners, L.P., and The Chase Manhattan Bank, as trustee for First Plaza Group
Trust (the "Series B Stockholders"), which provide for the sale of Series B
Common Stock by such Series B Common Stockholders to William Lyon Homes. Presley
is not a party to the Series B Purchase Agreements.
William Lyon and William H. Lyon own all of the outstanding stock of
William Lyon Homes. Gregory P. Flynn is a director of Presley and is a managing
partner of Hampshire Equity Partners (formerly known as ING Equity Partners)
which is an affiliate of ING (U.S.) Capital, LLC. ING (U.S.) Capital, LLC, GS
Credit Partners, L.P. and First Plaza Trust Group own 8.71%, 11.34% and 13.02%
of Presley's outstanding shares of Common Stock, respectively.
The Series B Purchase Agreements provide that the Series B Common
Stockholders set forth below will each sell to William Lyon Homes the amounts of
Series B Common Stock set forth opposite their names, at a price of $0.655 per
share:
<TABLE>
<S> <C>
ING (U.S.) Capital, LLC..................................... 1,937,486
GS Credit Partners, L.P. ................................... 3,310,579
The Chase Manhattan Bank, as Trustee for First Plaza Group
Trust..................................................... 4,186,748
---------
Total............................................. 9,434,813
</TABLE>
The number of shares of Series B Common Stock purchasable by William Lyon
Homes pursuant to the Series B Purchase Agreements is subject to adjustment
based upon the number of shares of Series A Common Stock tendered and not
withdrawn as of the expiration date of the Offer. If the maximum of 10,678,792
shares of Series A Common Stock are tendered and not withdrawn, then William
Lyon Homes will have the right to purchase the minimum of 9,434,813 shares of
Series B Common Stock pursuant to the Series B Purchase Agreements. If, however,
less than the maximum number of 10,678,792 shares of Series A Common Stock are
validly tendered and not withdrawn, then the Series B Stockholders have agreed
to sell to William Lyon Homes, on a pro rata basis, additional shares of Series
B Common Stock at a purchase price of $0.655 per share, so as to enable William
Lyon Homes and its affiliates to own an aggregate of approximately 49% (but in
no case more than 49.9%) of Presley's outstanding shares of Common Stock.
William Lyon Homes has provided each of the selling Series B Common
Stockholders with whom it has entered into a Series B Purchase Agreement with
customary representations and warranties with regard to William Lyon Homes' due
incorporation, authority, enforceability, lack of conflicts and investment
intent. In return, each of the selling Series B Common Stockholders has provided
William Lyon Homes with customary representations and warranties with regard to
organization, good standing, authority, enforceability, lack of conflicts and
ownership of the Series B Common Stock being sold.
Pursuant to the Series B Purchase Agreements, each Series B Common
Stockholder has agreed that prior to the closing of the Series B Purchase
Agreements, it will not (i) transfer or dispose of any interest in, tender
(pursuant to the Offer or otherwise), or pledge or otherwise create any
encumbrance on any shares of Presley's Common Stock owned by such Series B
Stockholder, (ii) convert any shares of Series B Common Stock into shares of
Series A Common Stock, or (iii) acquire any beneficial interest in any shares of
Presley's Common Stock, or any options, warrants or other rights to acquire
shares of Presley's Common Stock.
Pursuant to the Series B Purchase Agreements, William Lyon Homes agreed,
for a period of three years from the closing date of the Series B Stock
Purchase, that William Lyon Homes and its affiliates will not transfer any of
the shares of Presley's Common Stock, other than the Series A Common Stock it
owned prior to entering into the Series B Purchase Agreements, unless such
transfer takes place in connection with a transaction in which all other holders
of Presley's Common Stock are afforded an opportunity to participate pro-rata,
and on the same terms and conditions as William Lyon Homes and its affiliates.
Excluded from this restriction is William Lyon Homes' or any of its affiliates'
right to transfer Presley's Common Stock to and
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<PAGE> 18
among certain affiliated entities, individuals and trusts, provided that such
transferees agree to the foregoing restrictions on transfer.
Pursuant to the Series B Purchase Agreements, each Series B Stockholder has
agreed to vote all shares of Common Stock owned by it or its affiliates in favor
of the Merger conditioned on the understanding that the stock transfer
restrictions effected by the Merger will not be effective until after the
closings of the Offer, the Series B Purchase Agreements, and the Acquisition.
The purchase of the shares of Series B Common Stock pursuant to the Series
B Purchase Agreements is subject to numerous conditions set forth therein,
including the consummation of the Acquisition, the acceptance and payment for
the shares of Series A Common Stock pursuant to the Offer, the approval of the
Merger by a vote sufficient under applicable law, and the absence of any person
(other than the William Lyon Homes and its affiliates) owning beneficially 5% or
more of the outstanding Common Stock of Presley. If and when such conditions are
satisfied or waived by William Lyon Homes, the closing of the purchases under
the Series B Purchase Agreements is expected to occur after the expiration date
of the Offer and prior to the effectiveness of the Merger. Each of the Series B
Purchase Agreements may be terminated by either party upon (among other events)
the termination of the Purchase Agreement or in the event the closing under the
Series B Purchase Agreement has not occurred on or before November 15, 1999.
CONFIDENTIALITY AGREEMENT
William Lyon Homes and Presley are parties to a letter agreement dated
November 17, 1998, which requires Presley and its representatives to maintain
the confidentiality of certain information provided Presley by William Lyon
Homes for the purpose of evaluating a possible transaction with William Lyon
Homes, and to use such information solely for the purpose of evaluating a
possible transaction.
SEVERANCE AGREEMENTS
Effective as of September 24, 1998, Presley entered into Severance
Agreements with certain key employees and members of management, including all
executive officers of Presley. Pursuant to the terms of the Severance
Agreements, in the event of a Change of Control (as defined in the Severance
Agreements) of Presley prior to December 31, 1999, if the employee is terminated
within twelve months following a Change of Control and during the Term, other
than (a) by Presley for cause, (b) by reason of the death or disability of the
employee, or (c) by the employee without good reason, Presley will pay the
employee a specified Severance Payment. In the event of a Change of Control and
termination, Wade Cable, David Siegel, Nancy Harlan, Douglass Harris and Linda
Foster would be entitled to a Severance Payment of $400,000, $220,000, $65,000,
$62,000 and $45,000, respectively.
Neither the Offer nor the Merger will trigger the Change of Control
provision in the Severance Agreements. As a result, the consummation of the
Offer and the Merger will not result in any Severance Payments under the
Severance Agreements.
The form of the Severance Agreements was filed as an exhibit to Presley's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998.
WORKING CAPITAL FACILITY
Presley Homes maintained a revolving lending facility (the "Working Capital
Facility") with a group of lenders that included Foothill Capital Corporation,
First Plaza Group Trust, and International Nederlanden (U.S.) Capital
Corporation, all of which own Series B Common Stock. On July 6, 1998, Presley
completed an agreement with the agent of the lender group under the Working
Capital Facility, pursuant to which all of the lenders (other than Foothill
Capital Corporation) including First Plaza Group Trust and International
Nederlanden (U.S.) Capital Corporation were repaid, and Foothill Capital
Corporation remained the sole lender under the Working Capital Facility. The
agreement also modified the Working Capital Facility to (1) extend the 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.
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<PAGE> 19
Marshall E. Stearns and Karen S. Sandler, directors of Presley, are Senior
Vice Presidents of Foothill Capital Corporation.
The collateral for the loans provided by the Working Capital Facility
includes substantially all real estate and other assets of Presley (excluding
assets of partnerships and the portion of the partnership interests in Carmel
Mountain Ranch partnership which are currently pledged to other lenders). The
borrowing base is calculated based on specified percentages of book values of
real estate assets. The borrowing base at June 30, 1999 was approximately $102.0
million; however, the maximum loan under the Working Capital Facility, as stated
above, is limited to $100.0 million. The principal outstanding under the Working
Capital Facility at June 30, 1999 was $46.0 million.
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, Presley pays a monthly fee of
0.25% on the average daily unused portion of the Working Capital Facility.
Upon completion of the new Working Capital Facility agreement, Presley paid
a one-time, non-refundable facility fee of $2.0 million, as well as a yearly
non-refundable administrative fee of $100,000.
The Working Capital Facility requires certain minimum cash flow and pre-tax
and pre-interest tests. The Working Capital Facility also includes negative
covenants which, among other things, place limitations on the 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, Presley 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. Presley may, however, acquire any new raw land or improved land
provided Presley has obtained the prior written approval of lenders holding
two-thirds of the obligations under the Working Capital Facility.
The Working Capital Facility requires that mandatory prepayments be made to
reduce the outstanding balance of loans to the extent of all funds in excess of
$20.0 million in the principal operating accounts of Presley.
The Fifth Amended and Restated Loan Agreement, dated as of July 16, 1998,
was filed as an exhibit to Presley's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998.
SALE OF LOTS TO WILLIAM LYON HOMES
During the fiscal year ended December 31, 1998, Presley made a bulk lot
sale to William Lyon Homes for $6,996,000. Presley purchased the lots in June
1997 and made certain improvements thereon. Presley received the full purchase
price in cash and recognized a gain of $265,000 above the cost of the lots and
improvements on this sale. In the opinion of management, this sale was an arm's
length transaction representing fair market value at the time the transaction
was negotiated based upon competitive bids from other homebuilders.
1998 INCENTIVE COMPENSATION PLAN
Effective on January 1, 1997, Presley's Board of Directors approved a new
incentive compensation plan for all full-time, salaried employees of Presley and
Presley Homes, including Wade Cable, the CEO of Presley and David Siegel, the
CFO of Presley, executives, managers, field construction supervisors, and
certain other employees. The same Incentive Compensation Plan was approved for
1998. 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
were repriced from $2.875 to $1.00 in 1997.
In addition, the 1998 Incentive Compensation Plan stipulates annual setting
of individual bonus targets, expressed as a percent of each executive's salary,
with awards based on performance against business plan
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goals pertaining to each participant's operating area. All awards will be
prorated downward if the sum of all calculated awards exceeds 20% of Presley's
consolidated pre-tax income before bonuses. After completion of Presley's
applicable annual audit, awards will be paid out in three installments, 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.
The 1998 Incentive Compensation Plan was filed as an exhibit to Presley's
Annual Report on Form 10-K for the year ended December 31, 1998.
INDEMNIFICATION AGREEMENTS
Pursuant to the power granted to Presley under its Bylaws, Presley is a
party to an indemnity agreement with each of the directors, executive officers
and certain other officers, including, without limitation, William Lyon, which
provides that the indemnitee will be entitled to receive indemnification,
including advancement of expenses, to the full extent permitted by the Bylaws
and applicable law for all expenses, damages, liabilities, and settlement
payments incurred by the indemnitee in actions brought against the indemnitee in
connection with any act taken in the indemnitee's capacity as a director or
officer of Presley.
The form of indemnification agreements for the directors and executive
officers was filed as an exhibit to Presley's Registration Statement on Form
S-1, and amendments thereto (Registration No. 33-42161).
1991 STOCK OPTION PLAN
Under the amended 1991 Stock Option Plan of Presley, options to purchase an
aggregate of not more than 2,642,000 shares of Series A Common Stock may be
granted from time to time to key employees, officers, directors, consultants and
advisors of Presley or any of its subsidiaries. The plan is administered by the
Stock Option Committee of the Board of Directors. 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. It is currently anticipated that the per share exercise
price for stock 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.
It is contemplated under the Purchase Agreement that the 750,000 stock
options exercisable by William Lyon under the 1991 Stock Option Plan will be
cancelled by Presley and William Lyon upon the closing of the Acquisition.
The 1991 Stock Option Plan was filed as an exhibit to Presley's Proxy
Statement for Annual Meeting of Stockholders held on May 20, 1994.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Recommendation. The Special Committee, at special meetings held on
September 16, 1999 and October 7, 1999, unanimously approved the Purchase
Agreement and the transactions contemplated thereby, which transactions include
the Offer and the Acquisition, and determined that the transactions contemplated
by the Purchase Agreement are fair to and in the best interests of Presley and
its stockholders.
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF PRESLEY UNANIMOUSLY
RECOMMENDS THAT, IN FURTHERANCE OF THE TRANSACTIONS CONTEMPLATED BY THE PURCHASE
AGREEMENT, THE HOLDERS OF SERIES A COMMON STOCK, OTHER THAN THE LYONS AND THOSE
HOLDERS OF SERIES B COMMON STOCK THAT ARE PARTIES TO PRIVATE STOCK PURCHASE AND
SALE AGREEMENTS WITH WILLIAM LYON HOMES, ACCEPT THE OFFER AND TENDER THEIR
SHARES OF SERIES A COMMON STOCK PURSUANT TO THE OFFER; PROVIDED, HOWEVER, THAT
THE HOLDERS OF THE SERIES A COMMON STOCK SHOULD CONSULT WITH THEIR FINANCIAL AND
TAX ADVISORS PRIOR TO TENDERING THEIR SHARES IN THE OFFER.
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(b) Background of the Offer and Reasons for the Recommendation.
As part of their ongoing efforts to enhance stockholder value, Presley's
Board of Directors and management have from time to time considered various
strategic alternatives for Presley. These alternatives included the
refinancing/restructuring of Presley's outstanding debt obligations, merger,
reorganization or the sale of certain, or substantially all, of the assets of
Presley, or a similar transaction ("Strategic Alternatives").
As part of Presley's ongoing exploration of Strategic Alternatives, on May
5, 1998, Presley retained SBC Warburg Dillon Read Inc. (such firm, together with
its successor entity, Warburg Dillon Read LLC, being hereinafter referred to as
"Warburg Dillon Read"), to serve as exclusive financial advisor with respect to
Strategic Alternatives. In conjunction with the engagement of Warburg Dillon
Read, on June 10, 1998, Presley's Board of Directors formed a special committee
comprised of independent directors (the "Special Committee") to investigate,
review and consider Strategic Alternatives and to make a recommendation to
Presley's Board of Directors with respect thereto. The Special Committee
initially consisted of James E. Dalton, Gregory P. Flynn, Steven B. Sample,
Karen S. Sandler, Marshal E. Stearns and Ray A Watt.
Presley's Board of Directors authorized and directed the Special Committee
to engage such experts, accountants, investment bankers and advisers, including
legal counsel, as the Special Committee shall deem necessary or desirable in
order to assist it in the discharge of its responsibilities in connection with
the investigation, review and consideration of Strategic Alternatives and the
making of a recommendation to the Board of Directors with respect thereto.
Presley's Board of Directors also authorized and directed the Special Committee
to solicit third parties with respect to Strategic Alternatives and to negotiate
the terms of definitive documentation with respect thereto, subject to final
approval of any recommended Strategic Alternative by Presley's Board of
Directors. On June 16, 1998, the Special Committee selected Warburg Dillon Read
as its financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP as its
special legal counsel.
Among the Strategic Alternatives explored by the Special Committee have
been:
- continuing to operate Presley's business as currently operated, coupled
with ongoing efforts to further improve operating performance;
- a sale of all or substantially all of Presley's assets;
- a recapitalization or financial restructuring, with or without the early
retirement or other restructuring of Presley's 12 1/2% Senior Notes (the
"Senior Notes") and/or with or without an infusion of new capital;
- forming a strategic alliance with one or more other organizations in the
homebuilding industry; and
- merging with a strategic buyer with significant resources to bring to the
combination.
The Strategic Alternatives considered by the Special Committee included a
transaction with William Lyon Homes, which had previously indicated its interest
in engaging in an acquisition of or other strategic transaction with Presley.
William Lyon Homes is owned by William Lyon and his son, William H. Lyon.
William Lyon Homes is a California-based homebuilder and real estate developer
with projects currently under development in Northern and Southern California.
On June 30, 1998, Presley received a non-binding proposal from William Lyon
Homes (the "June 30 Proposal"), proposing a series of related transactions by
which William Lyon Homes would acquire all of the Common Stock of Presley for a
cash price of $0.40 per share. The June 30 Proposal was conditioned on, among
other things, the negotiation and execution of a definitive agreement,
completion of due diligence, certain amendments of the Senior Notes, and
regulatory, stockholder and other approvals. The June 30 Proposal, by its terms,
would expire on July 31, 1998, unless accepted prior to that date.
In early July 1998, after Presley's public announcement of the receipt of
the June 30 Proposal, Presley received an unsolicited preliminary proposal from
a third party to acquire Presley in a merger pursuant to which Presley's
stockholders would receive not less than $0.50 per share in cash (the "July
Proposal"). The July Proposal was conditioned on, among other things, due
diligence and the negotiation of an agreement in principle.
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During a series of meetings between June 30, 1998 and July 31, 1998, the
Special Committee met with Warburg Dillon Read to discuss the June 30 Proposal,
the unsolicited July Proposal and other Strategic Alternatives available to
Presley. On July 28, 1998, the Special Committee determined that the June 30
Proposal was not so compelling as to preempt the Special Committee's exploration
of additional Strategic Alternatives. On or about July 28, 1998, the Special
Committee advised William Lyon Homes of its decision and encouraged William Lyon
Homes to make a new or revised proposal to the Special Committee. In addition,
the Special Committee directed its special legal counsel to advise counsel to
the party making the unsolicited July Proposal that the Special Committee had
not yet determined whether to engage in a transaction involving a third party,
that the Special Committee was exploring various Strategic Alternatives, and
that the Special Committee would consider the July Proposal in due course.
On or about July 28, 1998, the Special Committee directed Warburg Dillon
Read to begin to contact third parties regarding the possibility of such parties
submitting a proposal to acquire Presley or engage in another Strategic
Alternative with Presley and to prepare materials for distribution to such
parties. On August 21, 1998, Warburg Dillon Read presented a list of third
parties which Warburg Dillon Read determined were among the more likely parties
to express interest in the possibility of acquiring Presley or engaging in
another Strategic Alternative with Presley. After discussion, the Special
Committee agreed upon seventeen parties which Warburg Dillon Read should contact
regarding the possibility of such parties submitting an indication of interest
to the Special Committee regarding an acquisition of Presley or other Strategic
Alternative with Presley. The parties contacted by Warburg Dillon Read included
William Lyon Homes and the party which made the unsolicited July Proposal. With
the approval of the Special Committee, an eighteenth party was also contacted by
Warburg Dillon Read regarding a possible transaction with Presley.
Thereafter, Warburg Dillon Read contacted the agreed upon parties seeking
indications of interest. Interested parties were asked to enter into a
confidentiality agreement with Presley. After execution of a confidentiality
agreement, interested parties were sent information concerning Presley. Of these
parties, five indicated their interest in continuing to explore the possibility
of a transaction with Presley. During the Fall of 1998, these parties were given
additional information regarding Presley, including (i) a presentation by the
management of Presley, (ii) a proposed form of agreement on which they were
asked to indicate their proposed revisions, and (iii) access to financial,
project and other information of Presley, including access to Presley's
properties and employees. After conducting a due diligence review of such
information, these parties were asked to submit a proposal for a transaction
with Presley. The Special Committee received proposals from two of these
parties, including a revised proposal from William Lyon Homes made in November
1998. The other proposal, which was received in December 1998, proposed a sale
of a number of newly issued shares at a cash price of $0.50 per share whereby
the party making the proposal would own approximately 49% of Presley's
outstanding shares of Common Stock following consummation of the transaction.
The December 1998 proposal would not be subject to a financing condition at the
time of signing a definitive agreement. The December 1998 proposal was
conditioned upon holders of at least 90% of the face amount of the Senior Notes
exchanging their Senior Notes for new 12 1/2% senior notes representing 80% of
the Senior Notes' face value. The new 12 1/2% senior notes would require certain
modifications to the terms of the Senior Notes, including elimination of the
Senior Notes' requirement that Presley purchase $20 million of Senior Notes
every six months for so long as Presley's consolidated tangible net worth is
less than $60 million. The December 1998 proposal was also conditioned upon
satisfactory completion of due diligence and execution of a satisfactory
shareholders' agreement. This agreement would grant the party making the
proposal the ability to elect a majority of Presley's Board of Directors.
After discussion with Warburg Dillon Read regarding the value to
stockholders of such proposals and the likelihood that such proposed
transactions would be successfully consummated, the Special Committee determined
that the revised proposal from William Lyon Homes was superior to the December
1998 proposal. The Special Committee's basis for this decision included:
- the fact that the revised William Lyon Homes proposal provided for a
price per share for the Series A Common Stock of $0.62 per share while
the December 1998 proposal provided for a price per share of $0.50 per
share, and
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- that the revised William Lyon Homes proposal provided partial liquidity
for Presley's Series A Common Stockholders, while the December 1998
proposal provided no added liquidity for Presley's stockholders.
In addition, the Special Committee determined that the conditions and other
contingencies associated with the revised William Lyon Homes proposal were more
likely to be satisfied than were the conditions and contingencies associated
with the December 1998 proposal, including that:
- The December 1998 proposal required that the holders of 90% of the Senior
Notes agree to exchange their Senior Notes for notes representing 80% of
the face value of the Senior Notes; the new notes would not require
Presley to purchase $20 million of notes every six months if Presley's
consolidated tangible net worth is below $60 million. In contrast, the
William Lyon Homes proposal contemplated that the approval or consent of
the holders of the Senior Notes would not be required; and
- The December 1998 proposal was conditioned upon completion of due
diligence while the William Lyon Homes proposal was not.
In late 1998, it became apparent that Presley would not likely engage in a
sale or business combination transaction with a party other than William Lyon
Homes. Because of this, it also became apparent that Presley's existing working
capital facility with Foothill Capital Corporation might remain outstanding,
including after a transaction with William Lyon Homes. Because Karen S. Sandler
and Marshall E. Stearns are officers of Foothill Capital Corporation, each of
them resigned from the Special Committee, effective December 10, 1998, to avoid
any appearance of a potential conflict of interest that might arise were they to
continue to serve as both officers of Foothill Capital Corporation and as
members of the Special Committee of independent directors.
On December 31, 1998, after unanimous approval by the Special Committee,
Presley entered into a letter of intent with William Lyon Homes. The letter of
intent contemplated the Merger or other transactions designed to help preserve
Presley's substantial tax net operating loss carryforwards to offset future
taxable income. The letter also set forth the parties' preliminary understanding
with respect to 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 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's Common Stock held by stockholders other than
the Lyons at a price of $0.62 per share. Following the completion of the
proposed transactions, and depending on the number of shares tendered, the Lyons
would own beneficially between 55% and 65% of the outstanding shares of
Presley's common stock. The remaining shares would continue to be publicly
traded.
Under the terms of the December 31, 1998 letter of intent, the proposed
transactions would be 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;
- the 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
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- the absence of any material adverse change in the business or financial
condition of either Presley or William Lyon Homes.
In addition, the December 31, 1998 letter of intent contemplated that each
of the transactions would be structured so as to be subject to the successful
completion of the other and that the parties would 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 tax net operating loss carryforwards for tax purposes.
The December 31, 1998 letter of intent also contemplated that Presley's Senior
Notes would remain outstanding without modification.
The December 31, 1998 letter of intent provided that, subject to the
fiduciary duties of their respective boards of directors, Presley and William
Lyon Homes would negotiate exclusively with each other toward a definitive
agreement until March 31, 1999. The letter of intent did not constitute a
binding agreement to consummate the transactions.
On January 21, 1999, the Special Committee retained Houlihan Lokey Howard &
Zukin Financial Advisors, Inc. ("Houlihan Lokey") to assist it with respect to
the proposed acquisition of the assets of William Lyon Homes and the other
transactions proposed by the December 31, 1998 letter of intent, including the
solvency of Presley after completion of the proposed transactions with William
Lyon Homes.
On February 18, 1999, after further discussions with William Lyon Homes
regarding the terms of a definitive agreement, Presley announced that it had
received a letter from William Lyon Homes proposing a modification to the
previously executed letter of intent with William Lyon Homes. Under the proposed
modification, which had been developed by William Lyon Homes as a result of tax
and accounting considerations to, among other things, ensure preservation of
Presley's tax net operating loss carryforwards after consummation of the
proposed transactions, 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 were tendered, William Lyon Homes would
purchase shares from each tendering stockholder on a pro rata basis. The tender
offer was to be conditioned upon there being tendered, and not withdrawn, a
number of shares which constituted at least 37% of the outstanding shares of
Presley. The proposed modification also provided that the transaction would 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's Common Stock owned by them up to a maximum of 4% of the total
number of shares of Presley's Common Stock presently outstanding.
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. A condition
included in the March 30, 1999 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 also agreed that William
Lyon Homes could 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 Common Stockholders' shares so as to reduce each
such Series B Common Stockholders' ownership interest in Presley's Common Stock
to between 4.9% and 5% of Presley's outstanding Common Stock following
consummation of the proposed transactions. William Lyon Homes was also permitted
to seek commitments from the Series B Common Stockholders 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 were to be conducted exclusively so as to
obtain the consent of the Series B Common Stockholders 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 was required to notify the Special Committee
regarding the details of any such discussions and negotiations. William Lyon
Homes was not permitted to enter into any agreement with any Series B Common
Stockholder prior to receiving the written approval from the Special Committee
or Presley's Board of Directors.
In negotiating the terms of the March 30, 1999 letter of intent, the
parties became aware that William Lyon Homes would approach the individual
holders of Series B Common Stock to negotiate the terms of agreements by which
William Lyon Homes would purchase shares of Series B Common Stock. These
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negotiations ultimately resulted in the Series B Purchase Agreements which
William Lyon Homes entered into with three of the holders of Series B Common
Stock, including ING (U.S.) Capital, L.L.C. In apprehension of a potential
conflict of interest that might arise as a result of his serving both as a
member of the Special Committee and as a representative of ING at a time when
ING would be negotiating its Series B Purchase Agreement with William Lyon
Homes, Gregory P. Flynn resigned from the Special Committee of independent
directors, effective March 31, 1999.
On May 4, 1999, Presley announced that after approval by the Special
Committee, it had entered into a revised letter of intent with William Lyon
Homes on May 3, 1999. The letter set forth their preliminary understanding with
respect to the proposed acquisition by Presley of substantially all of the
assets of William Lyon Homes for a cash purchase price of $48.0 million and the
assumption of all or substantially all of the liabilities of William Lyon Homes;
and the proposed purchase by William Lyon Homes of a portion of the outstanding
shares of Common Stock of Presley. Like the December 31, 1998 letter of intent,
the May 3, 1999 letter of intent contemplated the Merger or other transaction
structured to help preserve Presley's substantial tax net operating loss
carryforwards to offset future taxable income. Under the terms of the May 3,
1999 letter of intent, William Lyon Homes would make offers to the holders of
Presley's Series B Common Stock and a tender offer to the holders of Presley's
Series A Common Stock to purchase, for a cash purchase price of $0.655 per
share, an aggregate number of shares of Common Stock which when added to the
number of shares of Presley already owned by William Lyon Homes and its
affiliates, and after giving effect to a disposition of up to 8% of the total
number of shares of Common Stock currently outstanding by William Lyon Homes
and/or its affiliates would cause William Lyon Homes and its affiliates to own
an aggregate of approximately 49% of the outstanding shares of Presley's Common
Stock. The proposed transactions were 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 the 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 July 15, 1999;
- the receipt of all required regulatory approvals and third party
consents, including any required lender consents;
- the availability of sufficient borrowing capacity or the receipt of
financing by Presley in an amount sufficient to enable Presley to finance
the transactions; the holders of Company's Series B Common Stock not
acquiring or disposing of any beneficial interest in Presley's Common Stock
prior to closing;
- the purchase by William Lyon Homes of a sufficient number of shares
of Presley's Common Stock to cause, when added to the number of shares
already owned and after giving effect to the sale of up to 8% of Presley's
Common Stock, William Lyon Homes to own at least 49% of Presley's Common
Stock, but not more than 49.9%; and
- the absence of any material adverse change in the business or
financial condition of either Presley or William Lyon Homes.
Effective as of July 15, 1999, Presley and William Lyon Homes amended the
revised letter of intent to extend from July 15 to October 15, 1999 the term of
the letter of intent, the period of exclusive negotiations and the date by which
the respective boards of directors of Presley and William Lyon Homes must
approve a definitive agreement with respect to the proposed transactions. The
proposed transactions were also conditioned upon certain holders of Presley's
Series B Common Stock having consented to the transactions and executed a
written agreement, in form and substance satisfactory to William Lyon Homes and
Presley, to
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sell shares of Presley's Series B Common Stock to William Lyon Homes such that
each holder would own less than 5% of the aggregate number of shares of
Presley's Common Stock.
William Lyon Homes entered into separate agreements each dated as of July
6, 1999, with three holders of the Series B Common Stock which provide for the
purchase by William Lyon Homes from these holders of an aggregate of 9,434,813
shares, subject to adjustment as described below, of Presley's Series B Common
Stock for a cash price of $0.655 per share. The parties have agreed that if less
than 10,678,792 shares of Series A Common Stock are validly tendered and not
withdrawn prior to and as of the expiration of the tender offer, then such
holders of Presley's Series B Common Stock will sell to William Lyon Homes, at a
cash price of $0.655 per share, an additional number of shares of Presley's
Series B Common Stock so as to enable William Lyon Homes and its affiliates to
own approximately 49%, but in no event more than 49.9%, of Presley's outstanding
Common Stock.
The obligation of William Lyon Homes to purchase the shares pursuant to the
Series B Purchase Agreements is conditioned on, among other things, the closing
of the asset purchase, the acceptance and payment of shares pursuant to the
tender offer, the approval of the merger and the absence of any person other
than William Lyon Homes and its affiliates owning beneficially more than 5% of
the outstanding Common Stock of Presley. Each of these holders of Presley's
Series B Common Stock has also agreed that prior to the closing of the purchase,
it will not transfer, tender, or encumber any shares of the Series A Common
Stock that it owns or convert any of its remaining Series B Common Stock. Each
of these holders has also agreed that prior to the closing, it will not acquire
any beneficial interest in shares of Presley's Common Stock or options, warrants
or other rights to acquire shares of Presley's Common Stock. William Lyon Homes
has also agreed with the three holders of the Series B Common Stock not to sell
for three years any shares of Presley's Common Stock in excess of the number of
shares of Common Stock of Presley owned by William Lyon Homes, William Lyon or
their affiliates on July 6, 1999 unless such sale occurs in a transaction in
which all stockholders of Presley are given the opportunity to participate pro
rata and on the same terms and conditions. The agreements with these holders of
Presley's Series B Common Stock contain conditional commitments on the part of
the selling security holders to vote their shares in favor of the proposed
merger. Each of the agreements with such holders of Presley's Series B Common
Stock may be terminated by either of the parties if the closing has not occurred
by November 15, 1999. Presley is not a party to these Series B Purchase
Agreements.
The May 3, 1999 letter of intent contemplated that each of the transactions
would be structured so as to be subject to the successful completion of the
others. The May 3, 1999 letter of intent also contemplated that the parties
would 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 May 3, 1999 letter of intent also
contemplated that Presley's Senior Notes would remain outstanding without
modification. The May 3, 1999 letter of intent, provides that, subject to the
fiduciary duties of their respective boards of directors, Presley and William
Lyon Homes would negotiate exclusively with each other toward a definitive
agreement until October 15, 1999.
As of July 15, 1999, Presley's Board of Directors approved the Merger by
unanimous written consent.
On August 12, 1999, and in separate transactions, William Lyon and William
H. Lyon sold an aggregate of 2,500,000 shares and 500,000 shares, respectively,
of Series A Common Stock for a cash price of $0.65 per share. Such sales were
effected through privately negotiated sale transactions not involving a broker
or dealer.
On September 3, 1999, Presley's Board of Directors, after its members had
reviewed a substantially final draft of the Purchase Agreement, authorized the
Special Committee with all of the power of the Board of Directors with respect
to the adoption, authorization, execution and performance of the Purchase
Agreement and any amendments or supplements thereto.
On September 16, 1999, after receiving the opinions of Warburg Dillon Read
and Houlihan Lokey as hereinafter described (see "Opinion of Warburg Dillon Read
LLC" and "Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc."),
the Special Committee, consisting of James E. Dalton, Steven B. Sample and Ray
A. Watt, approved the Purchase Agreement and the transactions contemplated
thereby, subject to
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review of the final form of the Purchase Agreement and related documentation at
a meeting to take place at a later date. Also at its September 16, 1999 meeting,
pursuant to authority previously granted by the Board of Directors and subject
to review of final documentation, the Special Committee resolved to, in
furtherance of the transactions contemplated by the Purchase Agreement,
recommend the tender offer to the holders of the Series A Common Stock, other
than the Lyons and the Series B Common Stockholders who are parties to a stock
purchase agreement with William Lyon Homes, provided that each such holder
should consult with his or her financial and tax advisors prior to tendering
their shares in the tender offer.
Following its meeting of September 16, 1999 and in the course of finalizing
documentation relating to the proposed transactions, Presley's management
advised the Special Committee that management had prepared an updated projection
for Presley and William Lyon Homes on a combined basis. The Special Committee
reviewed the updated projection with Presley's management and requested that
Warburg Dillon Read review the updated projection and assess whether it could
confirm its fairness opinion dated September 16, 1999 in light of the updated
projection. At a meeting on October 7, 1999, Warburg Dillon Read advised the
Special Committee that it had confirmed, as of October 7, 1999, its fairness
opinion of September 16, 1999. Following Warburg Dillon Read's confirmation of
its September 16, 1999 fairness opinion, the Special Committee authorized
management of Presley to execute the Purchase Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF PRESLEY AND REASONS FOR THE MERGER
Presley's Board of Directors has unanimously approved the certificate of
ownership and merger, subject to the receipt of stockholder approval, and
unanimously recommends that stockholders of Presley approve the Merger. In
deciding to approve the certificate of ownership and merger, the Board
considered each of the following:
- The value to Presley of the tax benefits associated with its net
operating loss carryforwards;
- The fact that Presley cannot currently prevent an ownership change that
could limit the availability of these tax benefits;
- The advice of counsel regarding the relative enforceability of stock
transfer restrictions under Delaware corporate law when the restrictions
are imposed by amending the corporation's certificate of incorporation or
by merger;
- The recommendation of the Special Committee of the board with respect to
the approval of the letter of intent with William Lyon Homes, which
required the Merger or other transaction structured to help preserve
Presley's substantial tax net operating loss carryforwards to offset
future taxable income;
- The consummation of the transactions contemplated by the letter of
intent, including the tender offer, the asset purchase, and the purchase
of Series B Common Stock from the Series B Common Stockholders, would
facilitate approval of the merger;
- The federal income tax consequences of the merger to Presley and Merger
Sub;
- The accounting treatment of the merger; and
- The current market price of Presley's Series A Common Stock.
Each director has advised Presley that he or she plans to vote all of his or her
shares of Presley's Common Stock in favor of the Merger. Presley's Board of
Directors authorized the Special Committee to approve the Purchase Agreement.
Accordingly, Presley's Board of Directors will not separately approve the
Purchase Agreement.
The Board of Directors of Presley has granted the Special Committee the
authority of the Board with respect to making a recommendation to Presley's
stockholders as it shall determine.
After the Special Committee received presentations and reviewed the terms
and conditions of the Offer, the Purchase Agreement and the transactions
contemplated thereby with Presley's management, the Special Committee's legal
counsel, its financial advisor, Warburg Dillon Read, and with Houlihan Lokey,
which assisted the Special Committee with the Acquisition, the Special Committee
determined that the Purchase Agreement and the transactions contemplated thereby
were fair to and in the best interests of Presley's
26
<PAGE> 28
stockholders. In reaching its conclusions, the Special Committee considered many
factors, including, but not limited to, the following factors. Except where
otherwise noted, the following factors favored the fairness of the Purchase
Agreement and the transactions contemplated thereby to Presley's stockholders:
- the terms and conditions of the Offer, the Purchase Agreement and related
agreements and transactions;
- the fact that the Acquisition is conditioned upon a minimum number of
shares being tendered pursuant to the Offer, such that the Lyons and
William Lyon Homes will own at least 45% of the outstanding shares of
Common Stock of Presley after the consummation of the transactions
contemplated by the Purchase Agreement and, therefore, the transactions
contemplated by the Purchase Agreement may not be consummated unless a
sufficient number of shares of Series A Common Stock are tendered
pursuant to the Offer, which favors the fairness of the Offer as a part
of and condition to all of the transactions contemplated by the Purchase
Agreement;
- the written opinion of Warburg Dillon Read, to the effect that, as of
September 16, 1999 and based upon and subject to certain matters stated
in such opinion, after giving effect to the Acquisition, the Offer, the
Merger and the Series B Purchase Agreements, the shares of common stock
of Merger Sub to be issued in the Merger to Presley's stockholders
and/or, to the extent any holder of Series A Common Stock, other than the
Lyons and those stockholders who have entered into Series B Purchase
Agreements with William Lyon Homes, tenders shares in the Offer, the cash
that may be received by each such tendering stockholder, subject to the
proration provisions of the tender offer, is fair to the holders of
Series A Common Stock, other than the Lyons and the stockholders who have
entered into a Series B Purchase Agreement with William Lyon Homes, from
a financial point of view. The full text of Warburg Dillon Read's written
opinion, which sets forth the assumptions made, matters considered and
limitations on the review undertaken by Warburg Dillon Read, is attached
as Exhibit 11 hereto. Warburg Dillon Read confirmed its opinion as of
October 7, 1999. Warburg Dillon Read's opinion is not intended to
constitute, and does not constitute, a recommendation as to whether any
stockholder should tender Series A Common Stock pursuant to the Offer.
Stockholders are urged to read such opinion carefully in its entirety;
- the written opinion of Houlihan Lokey that, as of September 16, 1999 and
based upon and in reliance on certain assumptions and other
considerations stated in its opinion, the consideration to be paid by
Presley and Presley Homes in connection with the Acquisition is fair to
Presley and Presley Homes from a financial point of view. The full text
of Houlihan Lokey's opinion, which sets forth the assumptions made,
matters considered and limitations on the review undertaken by Houlihan
Lokey, is attached as Exhibit 12 hereto. Houlihan Lokey's opinion does
not constitute a recommendation to Presley, Presley Homes or any
stockholder as to whether to tender Series A Common Stock pursuant to the
Offer or to take other action in connection with the transactions
contemplated by the Purchase Agreement. Holders of Series A Common Stock
are urged to read Houlihan Lokey's opinion carefully in its entirety;
- the receipt by Presley of determinations of value in the aggregate of the
real estate assets of William Lyon Homes made by CB Richard Ellis, Inc.,
a real estate appraisal firm which is of regional standing in the regions
in which the subject properties are located and is a Member Appraisal
Institute (MAI) certified, which appraisals were considered in the
aggregate by Houlihan Lokey in determining the fairness of the
Acquisition;
- the fact that three holders of Series B Common Stock, each of which is a
significant stockholder of Presley, were willing to enter into agreements
with William Lyon Homes pursuant to which they will sell an aggregate of
not less than 9,434,813 shares, subject to adjustment, of their Series B
Common Stock to William Lyon Homes at $0.655 and pursuant to which they
have conditionally agreed to vote in favor of the Merger;
- Presley's need to acquire suitable properties for development;
27
<PAGE> 29
- that the transactions contemplated by the Purchase Agreement enable
Presley to expand its operations in key markets in Northern and Southern
California;
- that the transactions contemplated by the Purchase Agreement may
strengthen Presley's and Presley Homes' management;
- a comparison of the historical financial results and present financial
condition of Presley and of William Lyon Homes with those of others that
were deemed relevant;
- that the Offer provides partial liquidity to the holders of Series A
Common Stock, other than the Lyons and those holders of Series B Common
Stock who have agreed with William Lyon Homes not to tender any shares of
Series A Common Stock in the Offer, enabling holders who wish to sell
some of their shares of Series A Common Stock at $0.655 per share to do
so;
- that the holders of Series A Common Stock have the right not to tender
their shares pursuant to the Offer;
- the fact that the Offer price of $0.655 per share is lower than the
current and recent historical market price for the Series A Common Stock,
including the fact that the closing sale price for the Series A Common
Stock on the NYSE on September 15, 1999 was $1.00 per share. While this
factor, alone, would appear to weigh against the fairness of the Offer,
the Special Committee also considered, in connection with this factor,
that the current market price of the Series A Common Stock reflects
limited trading volume and that the market for the Series A Common Stock
would not likely sustain a price comparable to the current market price
and at the same time provide liquidity for the up to 10,678,792 shares
sought in the Offer;
- the limited trading volume of the Series A Common Stock, including the
fact that the average daily trading volume of the Series A Common Stock
over the previous three months ended on September 16, 1999 was 73,045
shares per day and in connection with this, the added liquidity that the
Offer would present to Presley's Series A Stockholders;
- the fact that the Offer is not for all of the shares of Series A Common
Stock and that any purchase of shares of Series A Common Stock pursuant
to the Offer is subject to prorationing if more than 10,678,792 shares of
Series A Common Stock are tendered. While this factor, alone, would
appear to weigh against the fairness of the Offer because it provides for
less liquidity than would a Offer for all outstanding shares, the up to
10,678,792 shares the Lyons will offer to purchase approximate the
greatest number of shares they could purchase in the Offer and, at the
same time, preserve Presley's significant tax net operating losses by
avoiding an "ownership change" for tax purposes, after purchasing a
number of shares of Series B Common Stock sufficient to reduce the
holdings of all Series B Stockholders to no greater than 5% of Presley's
outstanding Common Stock, which purchases are also to help prevent an
"ownership change" for tax purposes;
- that the liquidity of the common stock of Merger Sub, as the surviving
corporation in the Merger, may be limited as a result of the fact that
the Lyons and William Lyon Homes will together hold up to 49.9% of such
common stock and as a result of the imposition of the transfer
restrictions on such common stock after the Merger. While this factor,
alone, would appear to weigh against the fairness of the Offer, the
Special Committee also considered, in connection with this factor, the
liquidity that the Offer presents to the Series A Stockholders and that
the Lyon affiliates' ownership of between 45% and 49.9% of Presley's
Common Stock was a condition to all of the transactions contemplated by
the Purchase Agreement;
- the fact that the transactions contemplated by the Purchase Agreement
will not result in the refinancing or restructuring of the Senior Notes,
including that the Senior Notes will continue to require the purchase of
$20 million of the Senior Notes every six months for so long as Presley's
consolidated tangible net worth is less than $60 million and that the
transactions contemplated by the Purchase Agreement will not have the
effect of increasing Presley's consolidated tangible net worth to $60
million or above. This factor is not believed to weigh against the
fairness of the transactions
28
<PAGE> 30
contemplated by the Purchase Agreement because this obligation would
remain if Presley were not to engage in the transactions contemplated by
the Purchase Agreement and, while the December 1998 proposal required the
restructuring of the Senior Notes to eliminate this obligation, the
Special Committee did not believe that the holders of the requisite
percentage of the Senior Notes were likely to agree to such a
modification. In addition, the Special Committee determined that the
terms of the December 1998 proposal were inferior to the terms of William
Lyon Homes' proposal;
- that the transactions contemplated by the Purchase Agreement are
structured in a way so as to not require the approval or consent of the
holders of the Senior Notes;
- that the transactions contemplated by the Purchase Agreement provide
Presley's stockholders with the opportunity to share in any enhancement
of value of Presley's Common Stock that may result from such
transactions;
- that the transactions contemplated by the Purchase Agreement should not
inhibit the ability of Presley to utilize the tax benefits associated
with its tax net operating loss carryforwards;
- the fact that the Offer and the transactions are structured in a way as
to allow Presley to implement transfer restrictions intended to decrease
the risk that an ownership change could occur that would severely limit
Presley's ability to use the tax benefits associated with its tax net
operating loss carryforwards in offsetting future taxable income;
- the fact that the Merger, as it is to be presented to Presley's
stockholders for their approval at a special meeting of stockholders, is
conditioned upon the consummation of the Acquisition and the purchase of
shares of Series A Common Stock pursuant to the Offer and, therefore, the
Merger may not be consummated if a sufficient number of shares of Series
A Common Stock are not tendered pursuant to the Offer;
- that the consummation of the Series B Purchase Agreements, which are
conditioned upon the consummation of the Acquisition, the purchase of
shares pursuant to the Offer, and the receipt of stockholder approval of
the Merger, are expected to reduce the holdings of such holders of Series
B Common Stock to below 5% of Presley's outstanding Common Stock, which
may help to reduce the likelihood of an ownership change of Presley for
tax purposes which would otherwise restrict Presley's ability to utilize
its tax net operating loss carryforwards;
- the scope and detail of the negotiating process that led to the
finalization of the Purchase Agreement;
- the scope and detail of the limited auction process undertaken by the
Special Committee seeking proposals for Strategic Alternatives with
Presley;
- the fact that, in the Special Committee's view, an auction process more
extensive than the limited auction process undertaken by the Special
Committee would not have likely resulted in proposals more favorable to
Presley and its stockholders than those received by the Special
Committee;
- the fact that, in the Special Committee's and management's view, an
auction process more extensive than the limited auction process
undertaken by the Special Committee could cause harm to Presley and
significant disruption in Presley's operations;
- Warburg Dillon Read's view that the eighteen parties contacted by Warburg
Dillon Read represented the most likely parties for a transaction with
Presley involving a Strategic Alternative and that, of the eighteen
parties contacted, only one party other than William Lyon Homes submitted
a proposal for a transaction with Presley after such solicitation;
- the Special Committee's determination that William Lyon Homes' proposal
was superior to each of the December 1998 proposal and the unsolicited
July 1998 proposal based on, among other things, the fact that William
Lyon Homes' proposal provided for a higher price per share for the Series
A Common Stock than did the other proposals received and the Special
Committee's determination that the conditions and other contingencies
associated with William Lyon Homes' proposal were more
29
<PAGE> 31
likely to be satisfied than were the conditions and contingencies
associated with the other proposals received;
- that, despite the fact that Presley had announced the formation of the
Special Committee to explore strategic alternatives and the receipt of
William Lyon Homes' initial proposal on June 30, 1998, the Company had
received no proposals for a transaction involving a strategic alternative
with Presley other than the proposals made by William Lyon Homes, the
December 1998 proposal and the unsolicited July 1998 proposal;
- the fact that the Special Committee received no proposals for a
transaction with Presley involving a Strategic Alternative other than
those identified above despite the fact that the letters of intent
entered into with William Lyon Homes allowed Presley to, subject to
certain conditions, receive and consider competing proposals from third
parties, subject to certain exclusive negotiating agreements contained
therein and subject to Presley's agreement to pay William Lyon Homes'
fees and expenses incurred in connection with the proposed transactions
in the event that Presley entered into a definitive agreement with a
third party for a competing transaction; the letters of intent with
William Lyon Homes were publicly announced by Presley; and such letters
of intent were filed as exhibits to Presley's filings with the Securities
and Exchange Commission;
- the fact that the Purchase Agreement may be terminated by Presley and
Presley Homes in connection with entering into a competing definitive
agreement with a third party without any obligation to pay any
"termination fee" or "break-up fee" to William Lyon Homes, other than
Presley's agreement to pay William Lyon Homes' fees and expenses incurred
in connection with the Purchase Agreement upon entering into such a
competing definitive agreement; and
- other information with respect to the financial condition, results of
operations and business of Presley, on both a historical and a
prospective basis, current industry, economic and market conditions and
trends, including increased competition, historical market prices, price
to earnings multiples and recent trading patterns of the Series A Common
Stock, market prices and financial data relating to other companies
engaged in the same or similar businesses as Presley.
The foregoing discussion of the information and factors considered and
given weight by the Special Committee is not intended to be exhaustive. In view
of the wide variety of factors considered in connection with its evaluation of
the Offer and the transactions, the Special Committee did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determinations. In
addition, individual members of the Special Committee may have given different
weights to different factors.
OPINION OF WARBURG DILLON READ LLC
In May 1998, Presley retained Warburg Dillon Read LLC to explore various
strategic alternatives, including the refinancing/restructuring of its
outstanding debt obligations, merger, reorganization, the sale of certain, or
substantially all of its assets or other similar transaction. The Special
Committee of the Board of Directors of Presley retained Warburg Dillon Read to
act as its financial advisor in connection with certain aspects of the
transactions.
At the meeting of the Special Committee held on September 16, 1999, Warburg
Dillon Read delivered its written opinion, attached hereto as Exhibit 11, to the
Special Committee. As of October 7, 1999, after reviewing management's updated
projection for Presley with management, Warburg Dillon Read confirmed, as of
such date, its fairness opinion dated September 16, 1999.
The opinion states that based upon and subject to the assumptions,
limitations and qualifications set forth therein, the consideration to be
received by the holders of Series A Common Stock of Presley, other than William
Lyon, William H. Lyon, GS Credit Partners, L.P., ING (U.S.) Capital, L.L.C. and
The Chase Manhattan Bank, as Trustee for First Plaza Group Trust (collectively,
the "Contractually Non-Tendering Holders"), after giving effect to the asset
acquisition, the tender offer, the Series B Purchase Agreements and
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<PAGE> 32
the Merger, is fair to the holders of Series A Common Stock of Presley, other
than the Contractually Non-Tendering Holders, from a financial point of view.
The consideration to be received by the holders of Series A Common Stock of
Presley, other than the Contractually Non-Tendering Holders, will consist of 0.2
share of Merger Sub common stock for each share of Series A Common Stock owned
immediately prior to the Merger or, to the extent any such holder of Series A
Common Stock tenders shares of Series A Common Stock in the tender offer, cash
for those shares at a price of $0.655 per share, subject to the pro ration
provisions of the Offer. The shares of common stock of Merger Sub and/or cash
that may be received by each holder of Series A Common Stock of Presley, other
than the Contractually Non-Tendering Holders, after giving effect to the
transactions is referred to in this description of Warburg Dillon Read's opinion
as the "transaction consideration."
The following summary of the Warburg Dillon Read opinion is qualified in
its entirety by reference to the full text of the opinion. The full text of
Warburg Dillon Read's opinion sets forth the assumptions made, matters
considered and limitations on the scope of review undertaken and is attached as
Exhibit 11 to this document. We urge you to carefully read the Warburg Dillon
Read opinion in its entirety.
The Warburg Dillon Read opinion:
- is directed to the Special Committee of the Presley Board of Directors;
- does not constitute a recommendation to any holder of Series A Common
Stock as to whether to tender shares in the tender offer;
- does not constitute a recommendation to any holder of Series A Common
Stock as to whether to vote in favor of the Merger;
- does not address Presley's underlying business decision to effect the
transactions;
- does not imply any conclusion or offer any opinion as to the trading
price of the common stock of Merger Sub following the transactions;
- is based upon economic, monetary, market and other considerations as in
effect on, and the information made available to Warburg Dillon Read as
of, September 16, 1999; and
- does not offer any opinion as to the material terms of the Series B
Purchase Agreements, or, except as is provided in the Warburg Dillon Read
opinion, the Purchase Agreement or the form of any of the transactions.
In rendering the Warburg Dillon Read opinion, Warburg Dillon Read, with the
consent of the Special Committee of the Board of Directors of Presley, assumed
that:
- the consideration to be paid by Presley for the assets of William Lyon
Homes and of certain partnerships and limited liability companies
pursuant to the Purchase Agreement is fair to Presley and Presley Homes
from a financial point of view;
- the consummation of the transactions will not restrict or adversely
affect the utilization by Presley of its tax net operating loss
carryforwards;
- after giving effect to the transactions, the common stock of Merger Sub
will remain eligible for listing on the New York Stock Exchange;
- the final executed form of the Purchase Agreement will not differ from
the draft Warburg Dillon Read examined;
- each party to the Series B Purchase Agreements and the Purchase Agreement
complies in all material respects with its respective obligations
thereunder;
- the transactions contemplated by the Series B Purchase Agreements and the
Purchase Agreement will be consummated in accordance with the respective
terms thereof, with no modification or waiver of any material term or
condition thereunder, including the conditions to the tender offer; and
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<PAGE> 33
- the consummation of the transactions in the manner contemplated by the
Series B Purchase Agreements and the Purchase Agreement complies with all
applicable laws.
In connection with rendering its opinion, Warburg Dillon Read:
- reviewed certain publicly available business and historical information
relating to Presley;
- reviewed certain internal financial information and other financial data
provided to Warburg Dillon Read by Presley and William Lyon Homes, that
is not publicly available relating to the business and financial
prospects of Presley and of the assets to be acquired from William Lyon
Homes and certain partnerships and limited liability companies pursuant
to the Purchase Agreement, including estimates and financial projections
prepared by the management of Presley and William Lyon Homes;
- conducted discussions with members of the senior management of Presley
and William Lyon Homes;
- reviewed publicly available financial and stock market data with respect
to certain other companies in lines of business Warburg Dillon Read
believed to be generally comparable to those of Presley (the
"Comparables");
- considered certain pro forma effects of the transactions on Presley's
financial statements;
- reviewed the historical market prices and trading volumes of the Series A
Common Stock and the common stocks of the Comparables reviewed by Warburg
Dillon Read;
- reviewed the Series B Purchase Agreements and the drafts of the Purchase
Agreement and other ancillary documents;
- considered the results of solicitations of interest from and discussions
with third parties regarding potential business combinations involving
Presley; and
- conducted such other financial studies, analyses and investigations, and
considered such other information, as Warburg Dillon Read deemed
necessary or appropriate.
In connection with its review, with the consent of the Special Committee of
the Board of Directors of Presley, Warburg Dillon Read:
- did not assume any responsibility for independent verification of any of
the foregoing information received by it for the purpose of its opinion;
- relied on such information being complete and accurate in all material
respects;
- did not make any independent evaluation or appraisal of any of the assets
or liabilities, contingent or otherwise, of Presley, William Lyon Homes
or certain partnerships and limited liability companies referred to
above; and
- assumed that the financial projections referred to above had been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the managements of Presley and William Lyon
Homes, as applicable, as to the future financial performance of Presley,
the assets of William Lyon Homes and of certain partnerships and limited
liability companies to be acquired pursuant to the Purchase Agreement.
In connection with its opinion, Warburg Dillon Read performed certain
financial analyses which it discussed with the Special Committee of the Board of
Directors of Presley. The material portion of the analyses performed by Warburg
Dillon Read in connection with rendering its opinion are summarized below.
In delivering the Warburg Dillon Read opinion and making its presentation
to Presley's Special Committee of the Board of Directors, representatives of
Warburg Dillon Read considered and discussed various financial and other matters
that it deemed relevant. General valuation considerations deemed relevant by
Warburg Dillon Read include, without limitation:
- Presley's obligation, in accordance with the trust indenture governing
its 12 1/2% Senior Notes to purchase $20 million principal amount of the
Senior Notes each six months as long as Presley's
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consolidated tangible net worth is less than $60 million, which has
restricted its ability to acquire, hold and develop real estate projects
and has caused Presley to realign its operating strategy to finance
certain of its projects by forming joint ventures with venture partners
that would provide a substantial amount of the capital necessary to
develop these projects;
- Presley, in accordance with the trust indenture governing the Senior
Notes, will purchase $20 million principal amount of the Senior Notes on
or before December 4, 1999, as indicated in the projections provided by
management, and all valuation methodologies contemplate such purchase of
the Senior Notes as of December 4, 1999;
- the recent historical market price and trading volume of the Series A
Common Stock;
- the results of solicitations of interest from and discussions with third
parties regarding potential business combinations involving Presley;
- that the proposed transactions would not require the consent or approval
of the holders of the Senior Notes under the trust indenture governing
the Senior Notes;
- that due to Presley's current financial condition, the shift in operating
strategy and reduction in wholly-owned projects as a percentage of total
projects Presley will develop going forward, and the fact that most of
the publicly-traded companies and companies that have recently been
acquired with businesses comparable to that of Presley have or had
different operating, financial and/or growth characteristics to those of
Presley, certain traditional valuation methodologies have limited
applicability in valuing Presley; and
- management projections prepared by Presley's management and provided to
Warburg Dillon Read that are otherwise not publicly available, other than
as disclosed in this Schedule 14D-9.
DISCOUNTED CASH FLOW ANALYSIS. Warburg Dillon Read performed a discounted
cash flow analysis of Presley using projections provided by Presley's
management, which were based upon Presley as a stand-alone entity ("Presley
Stand-Alone") and the combination of the operations of Presley and certain
assets and liabilities of William Lyon Homes and of certain partnerships
referred to above ("Presley/WLH Combined") purchased and assumed in the
transactions. In performing its discounted cash flow analysis, Warburg Dillon
Read considered various assumptions and applied valuation parameters that it
deemed appropriate to the Presley Stand-Alone projections and the Presley/WLH
Combined projections. Utilizing both sets of projections and relevant
assumptions, Warburg Dillon Read calculated the theoretical discounted present
value for Presley Stand-Alone and Presley/WLH Combined as of December 31, 1999,
by adding together:
- the projected stream of future unlevered free cash flows through a
forecast horizon, the fiscal years ending December 31, 2000 through
December 31, 2003, discounted to the present; and
- the projected value of the entity at the end of the fiscal year ending
December 31, 2003 (the "Terminal Value") discounted to the present.
The Discounted Cash Flow Analysis of Presley Stand-Alone, net of projected
net debt as of December 31, 1999 of $116 million, results in an implied equity
value at an approximate midpoint of the valuation range of $16.7 million, or
$0.32 per share.
The Discounted Cash Flow Analysis of Presley/WLH Combined, using the EBITDA
multiple range of 5.0x to 6.0x, net of the projected net debt as of December 31,
1999 of $197 million, results in an implied equity value at the approximate
midpoint of the valuation range of $74.4 million, or $1.43 per share, and using
the net asset multiple range of 0.55x to 0.65x, results in an implied equity
value at the approximate midpoint of the valuation range of $7.8 million, or
$0.15 per share.
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VALUATION METHODOLOGY AND SUMMARY
<TABLE>
<CAPTION>
VALUATION METHODOLOGY TOTAL ENTERPRISE VALUE
--------------------- ----------------------
<S> <C>
Discounted Cash Flow Analysis Presley....................... $120 million to $140 million
Discounted Cash Flow Analysis Presley-William Lyon Homes
Combined.................................................. $245 million to $300 million
</TABLE>
For Presley Stand-Alone, the Terminal Value was calculated based on a
terminal net asset multiple range of 0.55x to 0.65x. The cash flow streams and
the Terminal Values were then discounted to present values using a range of
discount rates from 12% to 16%. For Presley/WLH Combined, the Terminal Value was
calculated using two approaches: an EBITDA, as defined below, multiple range of
5.0x to 6.0x and a net asset multiple range 0.55x to 0.65x. The cash flow
streams and the Terminal Values were then discounted to present values using a
range of discount rates from 10% to 14% and 12% to 16%, respectively.
For Presley Stand-Alone, Warburg Dillon Read arrived at an implied total
enterprise value of approximately $120 million to $140 million, which, net of
the projected net debt as of December 31, 1999 of $116 million, resulted in an
implied equity value at an approximate midpoint of the valuation range of $16.7
million, or $0.32 per share. For Presley/WLH Combined, Warburg Dillon Read
arrived at implied equity values based on the two approaches described above:
- using the EBITDA multiple range of 5.0x to 6.0x to calculate the Terminal
Value, a total enterprise value range of approximately $245 million to
$300 million was calculated which, net of the projected net debt as of
December 31, 1999 of $197 million, resulted in an implied equity value at
the approximate midpoint of the valuation range of $74.4 million, or
$1.43 per share, and
- using the net asset multiple range of 0.55x to 0.65x to calculate the
Terminal Value, an implied equity value was calculated at the approximate
midpoint of the valuation range of $7.8 million or $0.15 per share.
Warburg Dillon Read analyzed a range of possible outcomes for the holders
of Series A Common Stock of Presley, other than the Contractually Non-Tendering
Holders, after giving effect to:
- the Transactions;
- the range of possible levels of participation in the tender offer;
- the effect of the pro ration provisions of the tender offer, if any; and
- the range of values per share calculated for Presley/WLH Combined.
In the event that:
- a holder of Series A Common Stock declines to participate in the tender
offer, such holder will receive for each share of Series A Common Stock
held 0.2 shares in Merger Sub common stock, which range in value from
$0.15 to $1.43 per share of Series A Common Stock based on the midpoint
of the two valuation approaches described above;
- a holder tenders all of his shares, and all shares are accepted with no
pro ration, the value per share of Series A Common Stock received will be
$0.655 per share; and
- all holders of the Series A Common Stock (other than the Contractually
Non-Tendering Holders) tender their shares, resulting in a pro ration of
approximately 42% of shares eligible for tender being accepted in the
tender offer, the value per share of Series A Common Stock received will
range in value from $0.36 to $1.10 in a mixture of cash and stock based
on the midpoint of the two valuation approaches described above.
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<PAGE> 36
ANALYSIS OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES. Using publicly
available information, Warburg Dillon Read compared selected financial data of
Presley with similar data of selected companies, the securities of which are
publicly traded and which are engaged in businesses that Warburg Dillon Read
believed to be generally comparable in certain respects to those of Presley (the
"Comparables"). The following table summarizes the market value of the equity of
the comparable public homebuilding companies:
<TABLE>
<CAPTION>
MARKET VALUE
PUBLIC HOMEBUILDING COMPANIES OF EQUITY(1)(2)
----------------------------- ---------------
<S> <C>
Capital Pacific Holdings.................................... $ 43.6
Dominion Homes.............................................. 44.3
Engle Homes................................................. 112.7
Hovnanian Enterprises....................................... 179.3
M/I Schottenstein Homes..................................... 165.1
Meritage Corporation........................................ 72.4
Newmark Homes Corporation................................... 80.5
Schuler Homes............................................... 137.8
Washington Homes............................................ 52.1
Zaring National Corporation................................. 31.6
------
High........................................................ 179.3
Low......................................................... 31.6
Average..................................................... 91.9
Median...................................................... 76.4
------
Presley..................................................... $ 48.9
</TABLE>
- ---------------
(1) Based on stock prices as of September 13, 1999.
(2) Includes unconsolidated joint ventures.
Warburg Dillon Read determined the total equity value, defined as shares
outstanding multiplied by the share price as of September 13, 1999, and derived
an unlevered value, defined as total equity value plus the book value of debt,
preferred stock and minority interest less cash and cash equivalents, for each
of the comparable companies. Warburg Dillon Read calculated a range of such
total equity value as a multiple of latest twelve months net income and book
value and projected net income, on a per share basis, for the year ended
December 31, 1999 and 2000, using mean earnings estimates for calendar year 1999
and 2000 as reported by Institutional Brokers Estimate System. Warburg Dillon
Read also calculated a range of such unlevered value as a multiple of last
twelve months sales, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), earnings before interest and taxes ("EBIT") and net
assets.
Total equity value as a multiple of last twelve months net income averaged
6.5x and total equity value as a multiple of projected net income for calendar
years ended December 31, 1999 and 2000 averaged 5.3x and 4.3x, respectively.
Total equity value as a multiple of book value averaged 0.8x. Unlevered values
as a multiple of last twelve months sales, EBITDA, EBIT and net assets were also
calculated. For the Comparables, unlevered value as a multiple of last twelve
months sales averaged 0.6x; unlevered value as a multiple of last twelve months
EBITDA averaged 6.0x; unlevered value as a multiple of last twelve months EBIT
averaged 6.5x; and unlevered value as a multiple of net assets averaged 0.9x.
Warburg Dillon Read noted that, based on current trading data, total equity
value for Presley as a multiple of last twelve months net income, projected net
income for the calendar years ending December 31, 1999 and December 31, 2000,
were 2.1x, 2.0x and 2.7x, respectively. Unlevered value for Presley represented
0.5x last twelve months sales, 3.2x last twelve months EBITDA, 3.3x last twelve
months EBIT and 1.1x net assets. However, due to Presley's current financial
condition, recent trading price range and volume, and Presley's shift in its
operating strategy to finance certain of its projects by forming joint ventures
with venture partners that would provide a substantial amount of the capital
necessary to develop these projects, traditional valuation methodologies based
on publicly traded comparable companies are of limited applicability in valuing
Presley.
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<PAGE> 37
ANALYSIS OF SELECTED COMPARABLE ACQUISITIONS. Using publicly available
information, Warburg Dillon Read compared selected financial data of Presley
with similar data of numerous companies and/or businesses that have been
involved in acquisitions in the past six years engaged in businesses that
Warburg Dillon Read believed to be relevant or comparable in certain respects to
that of Presley. However, due to Presley's current financial condition, recent
trading price range and volume, and Presley's shift in its operating strategy to
finance certain of its projects by forming joint ventures with venture partners
that would provide a substantial amount of the capital necessary to develop
these projects, traditional valuation methodologies based on comparable
acquisitions are of limited applicability in valuing Presley.
No company, transaction or business used in the analyses described under
"Analysis of Selected Publicly Traded Comparable Companies" and "Analysis of
Selected Comparable Acquisitions" is identical to Presley or the Transactions.
Accordingly, an analysis of the results thereof necessarily involves complex
considerations and judgments concerning the differences in financial and
operating characteristics and other factors that could affect the transaction or
the public trading price or other values of the company or companies or
businesses to which they are being compared. Mathematical analysis, such as
determining the average or median, is not in itself a meaningful method of using
selected publicly traded comparable company or selected comparable acquisition
data.
FAIRNESS OPINION PROCESS. The preparation of a fairness opinion is a
complex process not susceptible to partial analysis or summary description.
Warburg Dillon Read believes that its analyses and the summary set forth above
must be considered as a whole and that selecting portions of its analyses and
the factors considered by it, without considering all analyses and factors,
could create an incomplete view of the process underlying the analysis set forth
in its opinion.
In performing its analyses, Warburg Dillon Read made numerous assumptions
with respect to industry performance, general business, financial, market and
economic and other matters, many of which are beyond the control of Presley. The
analyses Warburg Dillon Read performed are not necessarily indicative of actual
values or actual future values, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as part of Warburg Dillon Read's analysis of the fairness, from a
financial point of view, of the Transaction Consideration to be received by the
holders of Series A Common Stock, other than the Contractually Non-Tendering
Holders, after giving effect to the Transactions. The analyses do not purport to
be appraisals or to reflect the prices at which a company might actually be sold
or the prices at which any securities may trade at the present time or at any
time in the future.
FEES PAYABLE TO WARBURG DILLON READ. Pursuant to an engagement letter dated
May 5, 1998, as amended, Warburg Dillon Read will be paid:
- fees totaling $850,000 as of September 16, 1999; and
- fees totaling $1,900,000 upon consummation of the Transactions.
Presley has also agreed to reimburse Warburg Dillon Read for certain
out-of-pocket expenses and, under certain circumstances, to indemnify Warburg
Dillon Read and certain related persons against certain liabilities, including
liabilities under federal securities laws, relating to or arising out of its
engagement.
Warburg Dillon Read is an internationally recognized investment banking
firm that provides financial services in connection with a wide range of
business transactions. As part of its business, Warburg Dillon Read:
- regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and other purposes; and
- in the ordinary course of business, may actively trade securities of
Presley for its own account or for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such
securities.
36
<PAGE> 38
Warburg Dillon Read and its affiliates, including UBS AG, may have other
business relationships with Presley, William Lyon Homes and their affiliates.
The Special Committee of the Board of Directors of Presley retained Warburg
Dillon Read based on Warburg Dillon Read's familiarity with Presley as well as
its substantial experience in acting as financial advisor in connection with
extraordinary business transactions.
OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
The Special Committee of the Board of Directors of Presley retained
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. pursuant to an engagement
letter dated January 21, 1999, to render a fairness opinion, from a financial
point of view to Presley and Presley Homes, of the consideration to be paid and
obligations to be incurred by them in connection with the Acquisition. The
fairness opinion of Houlihan Lokey was obtained by the Special Committee to
satisfy a covenant in the Trust Indenture, dated as of June 29, 1994 with
respect to the Senior Notes of Presley.
Houlihan Lokey is a nationally recognized investment banking firm, and was
selected by the Special Committee based on Houlihan Lokey's reputation and
experience in investment banking in general and its recognized expertise in the
valuation of assets and businesses related to the real estate industry.
On September 16, 1999, at a meeting of the Special Committee, Houlihan
Lokey delivered to the Special Committee its written opinion, attached hereto as
Exhibit 12, that the consideration to be paid, including the assumption of
substantially all of the liabilities of William Lyon Homes, pursuant to the
asset purchase is fair to Presley and Presley Homes from a financial point of
view.
The opinion of Houlihan Lokey does not address Presley's underlying
business decision to effect the Acquisition. Houlihan Lokey has not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of Presley. Furthermore, at the request of the Special
Committee of Presley, Houlihan Lokey has not negotiated the Acquisition
contemplated by the Purchase Agreement or advised the Special Committee with
respect to alternatives to it.
Houlihan Lokey considered the following background factors and sequence of
events in preparing the fairness opinion. Houlihan Lokey did not specifically
weigh each factor considered, and some factors did not impact its determination
of fairness of the consideration to be paid pursuant to the Purchase Agreement.
Although Houlihan Lokey ultimately based its opinion on the economic analysis of
the assets purchased and liabilities assumed from William Lyon Homes, it did,
however, consider the following general background factors:
- the declining real estate markets began to affect Presley's home building
markets in California during 1989 and continued on and off since that
time;
- as a result of substantial declines in the value of certain of Presley's
real estate assets since 1992, Presley was required to write down the
book value of these real estate assets as of December 31, 1997;
- the write-down of these real estate assets caused Presley to violate a
consolidated tangible net worth covenant in its Trust Indenture pursuant
to which the Senior Notes were issued;
- this violation of the consolidated tangible net worth covenant required
Presley to offer to purchase $20 million of Senior Notes every six months
until the violation is cured, which cure has not occurred to date;
- during late 1997 and early 1998 Presley informally solicited buyers and
met with several prospects with no success;
- on May 5, 1998, Presley announced that it had engaged Warburg Dillon Read
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 Warburg Dillon Read, as Presley's
financial advisor, a Special Committee comprised of Presley's independent
directors was formed to evaluate strategic alternatives; and
37
<PAGE> 39
- Presley's actions were a direct result of the severe economic conditions
encountered during the past several years, together with Presley's highly
leveraged capital structure.
In connection with its fairness opinion, Houlihan Lokey made such reviews,
analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Houlihan Lokey:
- reviewed Presley's annual report on Form 10-K for the fiscal years ended
December 31, 1998 and quarterly report on Form 10-Q for the quarter ended
June 30, 1999;
- reviewed the Trust Indenture governing Presley's Senior Notes;
- reviewed a preliminary draft of the Proxy Statement/Prospectus;
- met with the senior management of Presley and William Lyon Homes to
discuss the Acquisition, the operations, financial condition, future
prospects and performance of Presley and William Lyon Homes;
- reviewed the letter of intent, dated May 3, 1999, between Presley and
William Lyon Homes, as amended on July 15, 1999;
- reviewed the Purchase Agreement;
- reviewed the specific project status and business plans for William Lyon
Homes' assets with the management of William Lyon Homes;
- reviewed William Lyon Homes' audited financial statements for the two
years ended December 31, 1998 and December 31, 1997, respectively;
- reviewed William Lyon Homes' forecasted business plan for the three years
ended December 31, 2001;
- reviewed the February 17, 1999 property information binders prepared by
the management of William Lyon Homes, which includes property
descriptions, historical and projected sales, pricing and absorption
figures for each of William Lyon Homes' projects;
- reviewed the William Lyon Homes materials summarizing current operations,
organizational structure, the management team and historical overview of
William Lyon Homes;
- reviewed representative market data and economic analysis for the Orange
County markets as provided by William Lyon Homes and other third party
market research organizations;
- reviewed the individual cash flow projections for each of the William
Lyon Homes projects and the resulting net present value calculations
prepared by Presley;
- reviewed the appraisal reports of William Lyon Homes' real estate assets
prepared by a nationally-recognized real estate appraisal firm;
- reviewed publicly available information on companies deemed comparable to
William Lyon Homes; and
- conducted such other analyses, studies and investigations as it deemed
appropriate under the circumstances for rendering its opinion.
Except as expressly set forth above, Houlihan Lokey was not provided with, and
did not review, any documentation, preliminary or otherwise, regarding the
valuation of the individual assets of William Lyon Homes.
Houlihan Lokey did not independently verify the accuracy and completeness
of the information supplied to it with respect to Presley, Presley Homes or
William Lyon Homes and did not assume any responsibility with respect to it.
Houlihan Lokey did not make any physical inspection or independent appraisal of
any of the properties or assets of Presley, Presley Homes or William Lyon Homes.
The Houlihan Lokey opinion is necessarily based on business, economic, market
and other conditions as they existed and could be evaluated by Houlihan Lokey at
the date of the opinion.
38
<PAGE> 40
The Houlihan Lokey opinion was prepared for the information of the Special
Committee in connection with its evaluation of the Acquisition and did not
constitute a recommendation to Presley, Presley Homes or any holder of shares of
the Common Stock of Presley as to whether to enter into the Purchase Agreement
or to take other action in connection with the Acquisition. A copy of the
opinion will be delivered, by Presley, to the Indenture Trustee in accordance
with the requirements of the Trust Indenture, dated as of June 29, 1994, with
respect to the Senior Notes. The opinion speaks only as of its date and Houlihan
Lokey is under no obligation, and did not undertake any obligation, to update
the opinion at any time after the date thereof.
Houlihan Lokey cautioned that Presley, Presley Homes and William Lyon
Homes, like other companies and any business entities analyzed by Houlihan Lokey
or which are otherwise involved in any manner in connection with this opinion,
could be materially affected by complications that may occur, or may be
anticipated to occur, in computer-related applications as a result of the year
change from 1999 to 2000, known as the Year 2000 problem. In accordance with
long-standing practice and procedure, Houlihan Lokey's services are not designed
to detect the likelihood and extent of the effect of the Year 2000 problem,
directly or indirectly, on the financial condition and/or operations of a
business. Further, Houlihan Lokey has no responsibility with regard to the
efforts of Presley, Presley Homes and William Lyon Homes to make their systems
or any other systems, including its vendors and service providers, Year 2000
compliant on a timely basis. Accordingly, Houlihan Lokey shall not be
responsible for any effect of the Year 2000 problem on the matters set forth in
the opinion.
Company-Specific Valuation Considerations
According to Houlihan Lokey, analyzing company-specific factors serves as a
basis for the comparison of the subject company to other industry participants
as to which homebuilding firms are best positioned. Factors examined include
demographics, product demand, quality of management, and diversity of
operations. The best-positioned firms should exceed industry norms in both good
times and bad, while the worst positioned firms will experience sub-par
performance. Houlihan Lokey considered the following company-specific valuation
considerations:
Demographics
- The age and income levels of residents in the builder's region are the
most significant factors to consider in analyzing a homebuilder.
- A builder concentrating on locations whose population growth is supported
by strong employment and solid regional economies, regardless of overall
industry conditions, is best situated.
- According to most industry analysts, Orange County is one of the
strongest markets in terms of employment, population growth, and
affluence in the country.
- Favorable demographics could lead to much more competition.
Houlihan Lokey concluded that with its niche market presence in Orange County
and selected areas of Northern California, William Lyon Homes commands favorable
market demographics.
Product Demand
- The type of house sold by homebuilders is important to analyze.
- Different home types, for example, starter, trade-ups and luxury homes,
may meet various market receptions based on population trends, economic
trends, and the recent history of home prices.
Houlihan Lokey concluded that William Lyon Homes' current product is primarily
starter homes. Given the markets on which William Lyon Homes is focused, the
product is satisfactory.
Quality of Management
- A strong management team can often keep its company at the top of the
homebuilding universe.
- Given the cyclical business of the homebuilding industry, a strong
management team is required to stay on top of both boom and bust markets.
39
<PAGE> 41
Houlihan Lokey concluded that William Lyon Homes' management team has depth and
experience. As a result, after the pending acquisition of William Lyon Homes by
Presley Homes is consummated, the William Lyon Homes management team is expected
to exert significant influence over Presley.
Diversity of Operations
- Homebuilders can take various steps to limit their earnings cyclicality.
- Well-run supplemental operations such as mortgage capability provide
greater stability in earnings through tough industry times.
Houlihan Lokey concluded that William Lyon Homes has no diversity in its
homebuilding operations.
Access to Capital
- Homebuilding is a very capital-intensive business. The ability to raise
equity and debt capital is critical to financing construction of new
products and the continuation of the land acquisition process.
Houlihan Lokey concluded that William Lyon Homes has raised approximately $430
million in debt and $145 million in equity for the six years ended December 31,
1998. William Lyon Homes is well positioned to capitalize on existing financial
relationships to continue to fund its development and growth requirements.
Acquisition and Entitlement Process
- The ability to target and acquire new projects is a significant challenge
to homebuilders. Much of a homebuilder's profit is made on the buy and
created through the entitlement process.
Houlihan Lokey concluded that William Lyon Homes has demonstrated an ability to
acquire and entitle well-located parcels of land. Although William Lyon Homes
does not have a large "land bank," there are numerous projects in the
acquisition pipeline. Given William Lyon Homes' track record, reputation,
landowner relationships, management expertise and capital sources, William Lyon
Homes is well positioned to continue to grow through acquiring and entitling
land.
Valuation Methodology
Houlihan Lokey utilized several valuation methodologies in its analysis of
the fairness of the consideration to be paid by Presley and Presley Homes for
William Lyon Homes. These approaches are summarized below.
Appraisal Net Asset Value. In using the "Appraisal Net Asset Value"
approach, Houlihan Lokey relied on the project appraisals prepared by CB Richard
Ellis, Inc., as of December 31, 1998, and on an "as-is" basis, for the William
Lyon Homes properties. The aggregate appraisal values as of December 31, 1998
and "as-is" of $124,462,000 and $148,900,000, respectively, were based on the CB
Richard Ellis appraisals. In arriving at its control market value of equity
under this approach, Houlihan Lokey adjusted the aggregate appraisal values
upward for cash, other assets and deposits on future projects and downward for
accounts payable, accrued liabilities, notes payable, minority interests and
lender participation and applied a 20% control premium. CB Richard Ellis was
engaged by a financial institution in connection with a possible replacement of
Presley's working capital facility. Presley subsequently determined to not
replace its existing working capital facility at such time. In connection
therewith, Presley sought permission to use the appraisals for purposes of
satisfying a specific condition in the Trust Indenture governing its senior
notes. While Houlihan Lokey relied upon, without formally reviewing, the CB
Richard Ellis appraisals in connection with rendering its opinion, the
individual appraisals were not separately presented to the Special Committee.
The Special Committee did note that such appraisals must be provided to the
Trustee pursuant to the Trust Indenture and that Houlihan Lokey relied upon the
appraisals in connection with rendering its fairness opinion. Appraisals were
completed on substantially all of the properties of William Lyon Homes,
including all the properties to be acquired by Presley. The properties to be
acquired are real estate homebuilding projects located in California.
Project Level Discounted Cash Flow. In using the "Project Level Discounted
Cash Flow" approach, Houlihan Lokey discounted the individual project cash
flows, prepared by William Lyon Homes, at rates ranging from 19% to 27% to
consider the risk of the various properties and the time value of money to
arrive at a total portfolio value of $155,334,000. In arriving at its control
market value of equity under this approach,
40
<PAGE> 42
Houlihan Lokey adjusted the total portfolio value upward for cash, other assets
and deposits on future projects and downward for accounts payable, accrued
liabilities, notes payable, minority interests and lender participation and
applied a 20% control premium.
Market Comparable. In using the "Market Comparable" approach, Houlihan
Lokey applied market based multiples of comparable public companies to
representative projected earnings levels of William Lyon Homes and applied a 10%
control premium to arrive at its control market value of equity range.
Enterprise Discounted Cash Flow. In using the "Enterprise Discounted Cash
Flow" approach, Houlihan Lokey, discounted the projected earnings of William
Lyon Homes at rates ranging from 14% to 15% to consider the risk of the cash
flows and the time value of money to arrive at a range of enterprise values
between $113,677,000 and $134,853,000. In arriving at its control market value
of equity range under this approach, Houlihan Lokey adjusted the range of
enterprise values downward for debt and applied a 20% control premium.
WILLIAM LYON HOMES VALUATION SUMMARY
<TABLE>
<CAPTION>
CONTROL MARKET
VALUATION METHODOLOGY VALUE OF EQUITY
--------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Appraisal Net Asset Value Approach
- as of December 31, 1998................................. $50,990
- "As-Is"................................................. $53,146
Project Level Discounted Cash Flow Approach as of June 30,
1999...................................................... $47,248
Market Comparable Approach (Current)........................ $56,350 to $68,872
Enterprise Discounted Cash Flow Approach.................... $44,158 to $67,453
------------------
Concluded Control Market Value of Equity.................... $51,900 to $56,900
</TABLE>
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections contained in the
following section and provided to Houlihan Lokey have been reasonably prepared
and reflects the best currently available estimates of the future financial
results and condition of Presley, Presley Homes and William Lyon Homes, and that
there has been no material change in the assets, financial condition, business
or prospects of Presley, Presley Homes or William Lyon Homes since the date of
the most recent financial statements made available to us.
Houlihan Lokey concluded that the "Control Market Value of Equity" for
William Lyon Homes was approximately $51,900,000 to $56,900,000. On this basis,
Houlihan Lokey concluded that the consideration of $48,000,000 for the
acquisition of substantially all of the assets of William Lyon Homes, together
with the assumption of substantially all of the liabilities of William Lyon
Homes, is fair from a financial point of view.
The foregoing discussion of the information and factors considered and
given weight by the Special Committee is not intended to be exhaustive. In view
of the wide variety of factors considered in connection with its evaluation of
the tender offer and the transactions, the Special Committee did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determinations. In
addition, individual members of the Special Committee may have given different
weights to different factors.
FINANCIAL FORECASTS AND PROJECTION
Presley does not, as a matter of course, publicly disclose internal
budgets, plans, estimates, forecasts or projections as to future revenues,
earnings or other financial information. The forecasts and projection summarized
below were not prepared with a view to public disclosure or compliance with the
published guidelines of the Securities and Exchange Commission or the guidelines
established by the American Institute of Certified Public Accountants regarding
forecasts and projections. The internal operating forecasts and projections are,
in general, prepared solely for internal use and are subjective in many respects
and thus
41
<PAGE> 43
susceptible to various interpretations and periodic revision based on actual
experience and business developments. The forecasted and projected financial
data set forth below reflects information which was contained in the forecasts
and projection prepared by management of Presley and William Lyon Homes which
were provided to and utilized by Warburg Dillon Read and Houlihan Lokey and only
for that reason are they being included in this Schedule 14D-9. The forecasts
and projection were based upon a variety of estimates and assumptions. The
estimates and assumptions underlying the forecasts and projection involved
judgments with respect to, among other things, future economic, competitive, and
financial market conditions and future business decisions which may not be
realized and are inherently subject to significant business, economic and
competitive uncertainties, all of which are difficult to predict and many of
which are beyond the control of Presley and William Lyon Homes. While Presley
and William Lyon Homes believe that these estimates and assumptions are
reasonable, there can be no assurance that the forecasts and projection will be
accurate, and actual results may vary materially from those shown. Neither the
independent auditors of Presley and William Lyon Homes, nor any other
independent accountants, have examined or compiled the forecasts or projections
and accordingly do not provide any form of assurance with respect to such
forecasts or projections. In light of the uncertainties inherent in forward
looking information of any kind, the inclusion of the forecasts and projection
herein should not be regarded as a representation by Presley, William Lyon Homes
or any other person that the anticipated results will be achieved or that the
forecasts or projections are a reliable prediction of future events and
investors are cautioned not to place undue reliance on such information.
Presley and William Lyon Homes do not intend to update or otherwise revise
the information set forth below to reflect circumstances existing after the date
of the most recent information herein, or to reflect the occurrence of
unanticipated events. The information set forth below should be read together
with the information contained in Presley's Annual Report on Form 10-K/A for the
year ended December 31, 1998 and the other information included in this Schedule
14D-9 and other reports filed by Presley pursuant to the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder.
Warburg Dillon Read was provided a forecast of Presley on a stand-alone
basis. This forecast, discloses among other things, the following:
FORECASTED STAND-ALONE PRESLEY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT HOMES CLOSED AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total homes closed............................... 2,107 2,095 2,629 2,330 2,230
Sales............................................ $337.4 $256.1 $230.9 $188.9 $166.1
Gross profit..................................... $ 54.1 $ 35.5 $ 33.1 $ 27.0 $ 24.0
Net income....................................... $ 24.8 $ 18.2 $ 25.9 $ 19.9 $ 19.9
Earnings per share(1)............................ $ 2.38 $ 1.74 $ 2.48 $ 1.91 $ 1.91
Total assets..................................... $199.7 $179.6 $171.5 $170.7 $169.9
</TABLE>
Warburg Dillon Read was also provided a projection of Presley and William
Lyon Homes on a combined basis, including the effect of the acquisition of
William Lyon Homes by Presley. This projection discloses, among other things,
the following:
PROJECTED COMBINED PRESLEY AND WILLIAM LYON HOMES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT HOMES CLOSED AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total homes closed............................... 2,625 3,311 3,265 3,440 3,340
Sales............................................ $412.9 $406.4 $349.4 $299.1 $226.4
Gross profit..................................... $ 59.0 $ 52.1 $ 51.0 $ 43.2 $ 32.8
Net income....................................... $ 28.4 $ 30.2 $ 32.4 $ 35.6 $ 33.7
Earnings per share(1)............................ $ 2.72 $ 2.89 $ 3.10 $ 3.41 $ 3.23
Total assets..................................... $288.2 $290.6 $264.7 $253.5 $250.7
</TABLE>
42
<PAGE> 44
Warburg Dillon Read was also provided an updated projection dated October
4, 1999 of Presley and William Lyon Homes on a combined basis, including the
effect of the acquisition of William Lyon Homes by Presley. This updated
projection discloses, among other things, the following:
UPDATED PROJECTED COMBINED PRESLEY AND WILLIAM LYON HOMES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT HOMES CLOSED AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total homes closed............................... 2,585 3,301 3,566 3,527 3,600
Sales............................................ $417.8 $456.4 $352.7 $281.4 $256.7
Gross profit..................................... $ 63.4 $ 64.2 $ 48.3 $ 40.9 $ 37.4
Net income....................................... $ 34.4 $ 32.5 $ 34.4 $ 36.8 $ 34.6
Earnings per share(1)............................ $ 3.30 $ 3.11 $ 3.30 $ 3.53 $ 3.31
Total assets..................................... $265.3 $248.2 $243.3 $271.5 $291.3
</TABLE>
- ------------------------------
(1) Reflects the merger of Presley with and into its wholly-owned subsidiary,
Merger Sub, including one-for-five common stock exchange as if it occurred
at the beginning of the periods presented.
Houlihan Lokey was provided a forecast of William Lyon Homes on a
stand-alone basis, as if it were continuing as an independent entity, excluding
any effect of the proposed asset purchase by Presley. The forecast discloses,
among other things, the following:
FORECASTED STAND-ALONE WILLIAM LYON HOMES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 2000 2001
--------- --------- ---------
(IN MILLIONS, EXCEPT HOMES CLOSED)
<S> <C> <C> <C>
Total homes closed..................................... 835 1,263 1,497
Sales.................................................. $234.2 $394.1 $427.6
Gross profit........................................... 41.2 68.0 66.6
Net income............................................. 17.2 25.0 19.2
</TABLE>
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Presley has retained Warburg Dillon Read as its financial advisor and to
provide a written opinion that the Transaction Consideration, as defined, to be
received by the holders of Series A Common Stock (other than the Contractually
Non-Tendering Holders), after giving effect to the Transactions, is fair to the
holders of Series A Common Stock (other than the Contractually Non-Tendering
Holders) from a financial point of view, a copy of which is attached hereto as
Exhibit 11. Pursuant to an engagement letter dated May 5, 1998, as amended,
Warburg Dillon Read will be paid:
- fees totaling $850,000 as of September 16, 1999; and
- fees totaling $1,900,000 upon consummation of the Transactions.
Presley has also agreed to reimburse Warburg Dillon Read for certain
out-of-pocket expenses and, under certain circumstances, to indemnify Warburg
Dillon Read and certain related persons against certain liabilities, including
liabilities under federal securities laws, relating to or arising out of its
engagement. Presley has also agreed to indemnify Warburg Dillon Read against
certain liabilities, including legal fees and the intangible value of its
employees' time, incurred by Warburg Dillon Read in connection with its
engagement by Presley. Warburg Dillon Read has the right, in the ordinary course
of its business, to trade the securities of Presley for its own account and for
the account of its customers, and it may at any time hold a long or short
position in such securities.
The Special Committee has retained Houlihan Lokey to assist it in
connection with the Acquisition and the other transactions contemplated by the
Purchase Agreement, and to the solvency of the company surviving the Merger
after the consummation of the transactions contemplated by the Purchase
Agreement. Pursuant
43
<PAGE> 45
thereto, Houlihan Lokey has agreed to provide written opinions as to the
fairness of the consideration to be paid by Presley and Presley Homes in
connection with the Acquisition, a copy of which is attached hereto as Exhibit
12, and as to the solvency of Presley surviving the Merger, a copy of which
opinion is to be delivered prior to the closing of the transactions contemplated
by the Purchase Agreement. Pursuant to the terms of Houlihan Lokey's engagement,
Presley has paid Houlihan Lokey fees of $150,000 for its services in connection
with the engagement letter, plus reasonable out-of-pocket expenses incurred by
Houlihan Lokey in connection therewith, including reasonable fees and expenses
of its legal counsel not to exceed $2,500 except upon prior written approval by
Presley which shall not be unreasonably withheld or delayed. The quoted fee
above was offered on the condition that the accompanying engagement letter
pertaining to Houlihan Lokey's retention to provide a solvency opinion to
Presley is executed contemporaneously with the engagement letter. Partial
payment to Houlihan Lokey was made in the amount of $50,000 upon signing of the
engagement letter. The remainder of $100,000 became due and payable upon
Houlihan Lokey's delivery of the opinion as of September 16, 1999, which fees
have been paid. No portion of the fee is contingent upon the consummation of the
asset purchase or the conclusions reached in the opinion.
Except as set forth above, neither Presley nor any person acting on its
behalf has employed, retained or compensated any person to make solicitations or
recommendations to stockholders with respect to the Offer or the Transactions.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Except pursuant to the transactions contemplated by the Offer and the
Purchase Agreement, no transactions in the Series A Common Stock have been
effected during the past 60 days by Presley or, to the best of Presley's
knowledge, by any executive officer, director, affiliate or subsidiary of
Presley other than:
- On August 13, 1999, William Lyon and William Harwell Lyon 1987 Trust, on
behalf of its beneficiary William H. Lyon, sold 2,500,000 and 500,000
shares, respectively, of the Series A Common Stock for a cash price of
$0.65 per share.
(b) Pursuant to the Series B Purchase Agreements with William Lyon Homes,
each of GS Credit Partners, L.P., ING (U.S.) Capital, L.L.C. and The Chase
Manhattan Bank, as Trustee for First Plaza Group Trust, have agreed not to
tender any of the shares in the Offer. To the knowledge of Presley, none of its
executive officers, directors, or other affiliates currently intend to tender
shares of Presley's Common Stock beneficially owned by them pursuant to the
Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as described in this Schedule 14D-9, to the knowledge of Presley
no negotiation is being undertaken or is underway by Presley in response to the
Offer or the Purchase Agreement which relates to or would result in (i) an
extraordinary transaction, such as a merger or reorganization, involving Presley
or any subsidiary of Presley; (ii) a purchase, sale or transfer of a material
amount of assets by Presley or any subsidiary of Presley; (iii) a tender offer
for or other acquisition of securities by or of Presley; or (iv) any material
change in the present capitalization or dividend policy of Presley.
(b) Except as described in this Schedule 14D-9, there are no transactions,
board resolutions, agreements in principle or signed contracts in response to
the Offer or the Purchase Agreement which relate to or would result in one or
more of the matters referred to in clauses (i) through (iv) of paragraph (a) of
this item 7.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This Schedule 14D-9 contains certain forward-looking statements with
respect to the financial condition, results of operations and business of each
of Presley, Merger Sub and William Lyon Homes. These statements may be made
directly in this document or may be "incorporated by reference" from other
documents filed
44
<PAGE> 46
with the SEC and may include statements for the period following the completion
of the Merger. Many of these statements can be found by looking for such words
as "believes," "expects," "anticipates," "estimates," "contemplates" or similar
expressions in this Schedule 14D-9 or as otherwise incorporated herein.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ from those
contemplated by the forward-looking statements, include, among others, the
following possibilities:
- Competitive pressures in the real estate industry may increase
significantly.
- Changes in interest rates could reduce demand for new homes, reduce
revenues or increase the amount Presley pays in interest.
- General economic or business conditions, both local and national, may be
less favorable than expected, resulting in, among other things, lower
demand for new homes and reduced revenues.
- Adverse weather conditions could cause delays in the completion of new
homes.
- Labor shortages could cause delays in the completion of new homes.
- Changes in tax laws or the occurrence of an ownership change could limit
the tax benefits associated with Presley's current tax net operating loss
carryforwards.
- The prices Presley pays for homebuilding materials could change.
- Landslides, soil subsidence, earthquakes and other events that are not
insurable, economically insurable or subject to effective indemnification
arrangements could occur.
- Changes in governmental laws and regulations may increase expenses, limit
the number of homes that Presley can build or delay completion of
projects.
- Presley may not be able to refinance its outstanding senior notes and
working capital facilities when they mature.
- The asset purchase from William Lyon Homes may not be completed.
- The tender offer by William Lyon and his son may not be completed.
- Land for future growth may become more costly or unavailable.
- The possibility of construction defect, soil subsidence or other building
related litigation may adversely affect the business.
- Presley's ability to obtain entitlements.
- Presley's access to additional capital.
- A lack of liquidity in Presley's common stock.
- The IRS may challenge the amount of Presley's NOLs.
Because these statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by forward-looking
statements. Stockholders are cautioned not to place undue reliance on these
statements, which speak only as of the date of this Schedule 14D-9, or in the
case of documents incorporated by reference, the date of the document.
All subsequent written and oral forward-looking statements attributable to
Presley or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements contained and referred to in this section.
Presley does not undertake to release publicly any revisions to the
forward-looking statements to reflect events or circumstances after the date of
this Schedule 14D-9 or to reflect the occurrence of unanticipated events.
45
<PAGE> 47
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<S> <C>
Exhibit 1 Offer to Purchase, dated October 7, 1999, incorporated by
reference to the Schedule 14D-1.*
Exhibit 2 Letter of Transmittal, dated October 7, 1999, incorporated
by reference to the Schedule 14D-1.*
Exhibit 3 Letter to Stockholders of The Presley Companies, dated
October 7, 1999.*
Exhibit 4 Press Release, dated October 7, 1999, issued by Presley.
Exhibit 5 Purchase Agreement and Escrow Instructions (the Purchase
Agreement), dated as of October 7, 1999, by and among
William Lyon Homes, the Lyons, Presley and Presley Homes,
incorporated by reference to the Schedule 14D-1.
Exhibit 6 Stock Purchase and Sale Agreements, entered into as of July
6, 1999, between William Lyon Homes and three of the holders
of Series B Common Stock of Presley, incorporated by
reference to the Schedule 14D-1.
Exhibit 7 Confidentiality Agreement, dated as of November 17, 1998,
entered into by and between William Lyon Homes and Presley,
incorporated by reference to the Schedule 14D-1.
Exhibit 8 Form of Severance Agreement, effective September 24, 1998,
between Presley and certain of its key management personnel.
Exhibit 9 Fifth Amended and Restated Loan Agreement, dated as of July
16, 1998, incorporated by reference to Presley's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998.
Exhibit Form of Indemnification Agreement, entered into between
10 Presley and each of its directors and executive officers,
and each of the directors and officers of its subsidiaries,
incorporated by reference to Presley's Registration
Statement on Form S-1, and amendments thereto (Registration
No. 33-42161).
Exhibit Opinion of Warburg Dillon Read LLC, dated September 16,
11 1999.*
Exhibit Opinion of Houlihan Lokey Howard & Zukin Financial Advisors,
12 Inc. dated September 16, 1999.*
Exhibit 1998 Incentive Compensation Plan, incorporated by reference
13 to Presley's Annual Report on Form 10-K for the year ended
December 31, 1998.
Exhibit 1991 Stock Option Plan, as amended, incorporated by
14 reference to Presley's Proxy Statement for Annual Meeting of
Stockholders held on May 20, 1994.
</TABLE>
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* Included in copies mailed to stockholders.
46
<PAGE> 48
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
THE PRESLEY COMPANIES
By: /s/ WADE H. CABLE
------------------------------------
Name: Wade H. Cable
Title: President and Chief Executive
Officer
Dated: October 7, 1999
47
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1 Offer to Purchase, dated October 7, 1999, incorporated by
reference to the Schedule 14D-1.*
2 Letter of Transmittal, dated October 7, 1999, incorporated
by reference to the Schedule 14D-1.*
3 Letter to Stockholders of The Presley Companies, dated
October 7, 1999.*
4 Press Release, dated October 7, 1999, issued by Presley.
5 Purchase Agreement and Escrow Instructions (the Purchase
Agreement), dated as of October 7, 1999, by and among
William Lyon Homes, the Lyons, Presley and Presley Homes,
incorporated by reference to the Schedule 14D-1.
6 Stock Purchase and Sale Agreements, entered into as of July
6, 1999, between William Lyon Homes and three of the holders
of Series B Common Stock of Presley, incorporated by
reference to the Schedule 14D-1.
7 Confidentiality Agreement, dated as of November 17, 1998,
entered into by and between William Lyon Homes and Presley,
incorporated by reference to the Schedule 14D-1.
8 Form of Severance Agreement, effective September 24, 1998,
between Presley and certain of its key management personnel.
9 Fifth Amended and Restated Loan Agreement, dated as of July
16, 1998, incorporated by reference to Presley's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998.
10 Form of Indemnification Agreement, entered into between
Presley and each of its directors and executive officers,
and each of the directors and officers of its subsidiaries,
incorporated by reference to Presley's Registration
Statement on Form S-1, and amendments thereto (Registration
No. 33-42161).
11 Opinion of Warburg Dillon Read LLC, dated September 16,
1999.*
12 Opinion of Houlihan Lokey Howard & Zukin Financial Advisors,
Inc. dated September 16, 1999.*
13 1998 Incentive Compensation Plan, incorporated by reference
to Presley's Annual Report on Form 10-K for the year ended
December 31, 1998.
14 1991 Stock Option Plan, as amended, incorporated by
reference to Presley's Proxy Statement for Annual Meeting of
Stockholders held on May 20, 1994.
</TABLE>
- ---------------
* Included in copies mailed to stockholders.
<PAGE> 1
THE PRESLEY COMPANIES LETTERHEAD EXHIBIT 3
Dear Stockholders:
On behalf of The Presley Companies ("Presley"), I am pleased to inform you
that on October 7, 1999, Presley and its wholly-owned subsidiary, Presley Homes
entered into a definitive Purchase Agreement and Escrow Instructions (the
"Purchase Agreement") with William Lyon Homes, Inc. ("William Lyon Homes"),
William Lyon and his son William H. Lyon (collectively, the "Lyons"), pursuant
to which the Lyons have commenced a tender offer (the "Offer") to purchase up to
10,678,792 shares of Presley's Series A Common Stock at $0.655 per share (the
"Offer Price") in cash.
The Purchase Agreement provides for the purchase (the "Acquisition") of
substantially all of the assets of William Lyon Homes for a cash purchase price
of $48 million (subject to adjustment) and the assumption by Presley Homes of
all or substantially all of the liabilities of William Lyon Homes (the "Purchase
Price"). The closing of the Acquisition is conditioned, among other things, upon
the approval by Presley's stockholders of a merger of Presley with and into a
wholly-owned subsidiary with the subsidiary being the surviving corporation (the
"Merger"). The principal purpose of the Merger is to implement restrictions on
the transfer of Presley's common stock that are intended to reduce, but not
eliminate, the risk that an ownership change will occur that would limit the use
of Presley's substantial tax net operating loss carryforwards. The Offer is
conditioned, among other things, on the closing of the Acquisition and
stockholder approval of the Merger.
THE SPECIAL COMMITTEE OF YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED
THE PURCHASE AGREEMENT AND DETERMINED THAT THE PURCHASE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO AND IN THE BEST INTERESTS OF
PRESLEY AND ITS STOCKHOLDERS AND, IN FURTHERANCE OF THE TRANSACTIONS
CONTEMPLATED IN THE PURCHASE AGREEMENT, RECOMMENDS THAT THE HOLDERS OF THE
SERIES A COMMON STOCK (OTHER THAN THE LYONS AND THE HOLDERS OF PRESLEY'S SERIES
B COMMON STOCK WHICH ARE PARTIES TO PRIVATE SERIES B PURCHASE AGREEMENTS WITH
WILLIAM LYON HOMES (THE "NON-TENDERING HOLDERS")) ACCEPT THE OFFER AND TENDER
THEIR SHARES PURSUANT TO THE OFFER, PROVIDED THAT EACH HOLDER IS ADVISED TO
CONSULT WITH HIS OR HER FINANCIAL AND TAX ADVISORS PRIOR TO TENDERING HIS, HER
OR ITS SHARES.
In arriving at its recommendation, the Special Committee gave careful
consideration to the factors described in the enclosed
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9"),
which is being filed with the Securities and Exchange Commission, including,
among other things, the opinion dated September 16, 1999 and confirmed on
October 7, 1999 of Warburg Dillon Read LLC, the Special Committee's financial
advisor, to the effect that, after giving effect to the transactions
contemplated by the Purchase Agreement, the merger consideration and the tender
offer consideration are fair to the holders of Presley's Series A Common Stock
(other than the Non-Tendering Holders) from a financial point of view. The
Special Committee also considered the opinion of Houlihan, Lokey, Howard & Zukin
Financial Advisors, Inc., dated as of September 16, 1999, to the effect that the
consideration to be paid by Presley and Presley Homes in connection with the
purchase of substantially all of the assets of William Lyon Homes was fair to
Presley and Presley Homes from a financial point of view.
Accompanying this letter and the Schedule 14D-9 is the Offer to Purchase
and related materials, including Letters of Transmittal to be used for tendering
your shares of Series A Common Stock. These documents describe the terms and
conditions of the Offer and provide instructions regarding how to tender your
shares of Series A Common Stock. We urge you to read the enclosed materials
carefully.
Sincerely,
/s/ WADE H. CABLE
Wade H. Cable,
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 4
PRESLEY PRESS RELEASE
<TABLE>
<S> <C> <C> <C>
Contact: Investor Relations Media Relations
W. Douglass Harris Steven D. Stern
The Presley Companies Pondel/Wilkinson Group
(949) 640-6400 (310) 207-9300
</TABLE>
THE PRESLEY COMPANIES AGREES TO PURCHASE SUBSTANTIALLY
ALL OF THE ASSETS OF WILLIAM LYON HOMES, INC.
WILLIAM LYON AND WILLIAM H. LYON AGREE TO COMMENCE
TENDER OFFER FOR UP TO 10,678,792 SHARES
OF PRESLEY'S SERIES A COMMON STOCK
NEWPORT BEACH, CA -- October 7, 1999 -- The Presley Companies ("Presley") (NYSE:
PDC) announced today that after unanimous approval by a Special Committee
comprised of independent members of its Board of Directors, it has entered into
a Purchase Agreement with William Lyon Homes, Inc. ("William Lyon Homes"),
William Lyon and his son, William H. Lyon (collectively, the "Lyons"). Pursuant
to the Purchase Agreement, Presley Homes, a wholly owned subsidiary of Presley,
has agreed to purchase substantially all of the assets of William Lyon Homes for
a cash purchase price of $48 million (subject to certain adjustments set forth
in the Purchase Agreement) and the assumption of substantially all of the
liabilities of William Lyon Homes. The Lyons have agreed pursuant to the
Purchase Agreement to commence a tender offer to purchase up to 10,678,792
shares of Presley's outstanding Series A Common Stock.
The closing of the purchase of the assets of William Lyon Homes is subject
to various conditions, including but not limited to the following: the accuracy
of representations and warranties and performance of covenants by the parties;
receipt of regulatory approvals and third party consents; the absence of
litigation or material adverse changes; satisfaction of the conditions to the
tender offer by William Lyon and his son; approval by Presley's stockholders of
the previously announced proposal to merge Presley with and into a wholly-owned
subsidiary for the purpose of helping to preserve Presley's tax benefits
associated with its net operating loss carryforwards by implementing certain
restrictions on the transfer of its common stock; each of the stock purchase
agreements between William Lyon Homes and three holders of Presley's Series B
Common Stock remaining in full force and effect; cancellation by William Lyon of
all of his outstanding options to purchase 750,000 shares of Presley's Series A
Common Stock; the release of William Lyon Homes from the contracts and
obligations assumed by Presley; and determinations that the purchases of shares
pursuant to the tender offer and the Series B purchase agreements described
below will not result in an ownership change of Presley for federal tax
purposes.
The tender offer is expected to be completed by November 8, 1999. The
tender offer is subject to the closing of the purchase by Presley of
substantially all of the assets of William Lyon Homes; a minimum condition that
there shall be validly tendered and not withdrawn 1,989,180 shares; the approval
by Presley's stockholders of the merger of Presley with and into its wholly
owned subsidiary; and other customary conditions.
The Special Committee approved the Purchase Agreement and the transactions
contemplated thereby after receiving an opinion from Warburg Dillon Read LLC to
the effect that after giving effect to the asset acquisition, tender offer, the
merger and the Series B Stock Purchase Agreements, the shares of common stock to
be issued in the merger to Presley's stockholders and/or, to the extent that any
holders of Series A Common Stock (other than the Lyons and the Series B
stockholders which have entered into Series B Stock Purchase Agreements) tenders
shares, the cash that may be received by each such tendering holder, subject to
the proration provisions of the tender offer, is fair to the holders of the
Series A Common Stock (other than the Lyons and those holders of Series B Common
Stock) from a financial point of view. The Special Committee's approval was also
made after receiving an opinion from Houlihan Lokey Howard & Zukin
<PAGE> 2
Financial Advisors, Inc. as to the fairness of the consideration to be paid by
the Company and Presley Homes in connection with Presley Homes' purchase of
assets from William Lyon Homes. The closing of the purchase of assets under the
Purchase Agreement is also conditioned upon the receipt of an opinion from
Houlihan Lokey as to the solvency of Presley after consummation of the
transactions contemplated in the Purchase Agreement.
On July 6, 1999, William Lyon Homes and three holders of Presley's Series B
Common stock executed stock purchase and sale agreements. Pursuant to these
agreements, the Series B stockholders have agreed to sell shares of Presley's
Series B Common Stock to William Lyon Homes such that each holder will own less
than 5% of the aggregate number of shares of Presley's Common Stock outstanding.
If the proposed tender offer to the holders of Presley's Series A Common Stock
is undersubscribed, the holders of Series B Common Stock are obligated to sell
an additional number of shares pro rata at $0.655 per share in order to enable
William Lyon Homes and the Lyons to own up to 49.9% of the outstanding shares of
Presley's Common Stock after consummation of the tender offer. Neither Presley
nor Presley Homes is a party to the Series B stock purchase agreements.
Presley is not soliciting proxies with respect to the merger at this time
and the offering of the new shares in connection with the merger will be made
under the federal securities laws only pursuant to a registration statement
declared effective by the Securities and Exchange Commission.
This press release (as well as oral statements or other written statements
made or to be made by Presley) may be deemed to contain certain forward-looking
statements with respect to the financial condition of Presley, which involve
risks and uncertainties including but not limited to the matters disclosed in
Presley's periodic and other reports filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended.
William Lyon Homes is a California-based homebuilder and real estate
developer with 15 sales locations in Northern and Southern California. William
Lyon is the current Chairman of the Board of Presley.
The Presley Companies is one of the oldest and largest homebuilders in the
Southwest with development communities in California, Arizona, New Mexico and
Nevada. Founded in 1956, The Presley Companies has built and sold more than
48,000 homes and currently has 38 sales locations. Presley's corporate
headquarters are located in Newport Beach, California.
<PAGE> 1
EXHIBIT 8
SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of September 24, 1998, is made by and between The
Presley Companies, a Delaware corporation (the "Company"), and ________________
(the "Employee").
WHEREAS, the Board of Directors (the "Board") of the Company considers it
in the best interests of its stockholders to foster the continued employment of
key management personnel of the Company; and
WHEREAS, the Board recognizes that the possibility of a change of control
with respect to the Company exists and that such possibility, and the
uncertainty and questions which such event may raise among management, may
result in the departure or distraction of management personnel to the detriment
of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be taken
to reinforce and encourage the continued dedication of members of the Company's
management, including the Employee, to their assigned duties without
distraction arising from the possibility of a change of control with respect to
the Company;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Employee hereby agree as follows:
1. Defined Terms.
Unless otherwise defined herein, the definitions of capitalized terms
used in this Agreement are provided in the last Section hereof.
2. Term of Agreement.
The term of this Agreement shall commence on the date hereof and
shall continue in effect through December 31, 1999, unless a Change of Control
shall have occurred on or prior to such date (the "Term").
3. Severance Payments.
Subject to Section 4 hereof, if the Employee's employment is
terminated within twelve months following a Change of Control and during the
Term, other than (A) by the Company for Cause, (B) by reason of death or
Disability of the Employee, or (C) by the Employee without Good Reason, then
the Company shall pay the Employee in lieu of any further salary payments to
the Employee for periods subsequent to the Date of Termination and in lieu of
any severance benefit otherwise payable to the Employee, a lump sum severance
payment, in cash, equal to the amount set forth on Schedule A attached hereto
(the "Severance Payment") plus any accrued but unused vacation or sick pay as
of the Date of Termination.
<PAGE> 2
4. 280G Cap.
Notwithstanding any other provisions of this Agreement, in the event
that any payment or benefit ("Total Payments") received or to be received by the
Employee in connection with a Change of Control or the termination of the
Executive's employment would not be deductible (in whole or part) by the Company
as a result of section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), then, to the extent necessary to make such portion of the Total
Payments deductible by the Company (and after taking into account any reduction
in the Total Payments provided by reason of section 280G of the Code in such
other plan, arrangement or agreement), the Severance Payment shall be reduced to
the extent necessary to make such payment deductible to the Company.
5. Timing of Payments.
The Severance Payment shall be made not later than the fifth business
day following the Date of Termination; provided, however, that if the amount of
such payment, and the limitation on such payments set forth in Section 4 hereof,
cannot be finally determined on or before such day, the Company shall pay to the
Employee on such day an estimate, as determined in good faith by the Company, of
the minimum amount of such payments to which the Employee is clearly entitled
and shall pay the remainder of such payments as soon as the amount thereof can
be determined but in no event later than the 30th day after the Date of
Termination. The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Employee's existing rights, or rights which would accrue solely as
a result of the passage of time, under any stock option, stock appreciation or
other securities incentive plan, incentive or bonus plan, or group life,
medical, dental, or accident and disability plan.
6. Termination Procedures.
a. Notice of Termination. Within twelve months following a Change of
Control and during the Term, any termination of the Employee's employment (other
than by reason of death) shall be communicated by written notice of termination
from one party hereto to the other party hereto in accordance with Section 14
hereof ("Notice of Termination"). For purposes of this Agreement, a Notice of
Termination shall mean a notice which shall indicate with respect to a
termination by Employee for Good Reason the specific provision in this Agreement
relied upon and the Date of Termination. Notwithstanding the foregoing, the
failure by the Company to deliver a Notice of Termination shall not relieve the
Company from its obligations to pay to Employee the Severance Payment.
b. Date of Termination. "Date of Termination," with respect to any
termination of the Employee's employment within twelve months following a Change
of Control and during the Term, shall mean the date on which the Employee's
employment with the Company is terminated by the Company or the Employee.
Notwithstanding the foregoing, if the Date of Termination relates to a
termination by Employee for Good Reason as a result of any act or failure to act
by the Company described in paragraph (1), (5), or (6) of Section 15.d. below,
then the Date of Termination shall be no less than 15 days from the date such
Notice of Termination is given.
-2-
<PAGE> 3
7. No Mitigation.
The Company agrees that, if the Employee's employment with the
Company terminates during the Term, the Employee is not required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Employee by the Company. Further, the amount of any payment or benefit provided
for in this Agreement shall not be reduced by any compensation earned by the
Employee as a result of employment by another employer, by retirement benefits,
by offset against any amount claimed to be owed by the Employee to the Company,
or otherwise.
8. Arbitration as the Exclusive Remedy.
Any controversy or claim arising out of or relating to this
Agreement shall be settled by arbitration in Orange County, California, in
accordance with the employment dispute arbitration rules of the American
Arbitration Association (the "Association") then in effect. Any claim arising
out of or relating to this Agreement must be presented by the Employee within
three months of the Date of Termination. Unless the party against whom any claim
is asserted waives the time limits set forth above, any claim not brought within
the time period specified shall be waived and forever barred.
The Employee and the Company shall each appoint one arbitrator from
a list provided by the Association (the "List") within 15 days after the List is
delivered to Employee or the Company. If, within such 15 day period, either the
Company or the Employee has failed to appoint an arbitrator, the arbitration
shall be conducted by the arbitrator appointed by the other of them. Within ten
days after each of the Employee and the Company has timely appointed an
arbitrator, the two arbitrators together shall appoint a third arbitrator from
the List. In the event that the arbitrator selected by the Company and the
arbitrator selected by the Employee are unable to agree upon a third arbitrator,
then the third arbitrator shall be selected from the List, with the Company and
Employee striking names in order and the party striking first to be determined
by the flip of a coin. In consideration of each party's agreement to submit to
arbitration all disputes with regard to this Agreement, and in consideration of
the anticipated expedition and the minimizing of expense of this arbitration
remedy, each agrees that the arbitration provisions of this Agreement shall
provide it with its exclusive remedy and each party expressly waives any right
it might have to seek redress in any other forum except as provided herein. The
expenses of the neutral arbitrator (or of the one arbitrator if only one party
timely appoints an arbitrator) and of a transcript of any arbitration proceeding
shall be divided equally between the Company and the Employee. Each party shall
bear the expense of the arbitrator selected by it (if the arbitration is
conducted by three arbitrators) and of any witnesses it calls.
Any decision or order of the majority of the arbitrator(s) shall be
binding upon the parties hereto and judgment thereon may be entered in the
Superior Court of the State of California or any other court having
jurisdiction.
-3-
<PAGE> 4
9. Attorneys' Fees.
In the event that any party to this Agreement institutes an
arbitration action under Section 8 of this Agreement, the prevailing party in
such arbitration action shall be entitled to recover from the non-prevailing
party its reasonable attorneys' fees, costs and expenses.
10. Assignment.
The rights and obligations under this Agreement shall inure to and be
binding upon the parties hereto and their respective heirs, successors and
assigns.
11. Entire Agreement.
This Agreement shall supersede any and all prior written or oral
agreements and discussions between the Employee and the Company and contains
the entire understanding of the parties hereto with respect to the matters
contained herein.
12. Severability.
In the event that any portion of this Agreement should be held to be
void, voidable, unlawful, or, for any reason, unenforceable, the remaining
portions hereto shall remain in full force and effect.
13. Governing Law.
This Agreement is executed and delivered in the State of California
and shall be construed and enforced in accordance with the internal laws of the
State of California without regard to the principles of conflict of laws.
14. Notices.
All notices and other communications provided for hereunder must be
in writing and must be mailed or delivered, if to Employee to the address set
forth on the records of the Company, and if to the Company, at 19 Corporate
Plaza, Newport Beach, California 92660 or at any other address (other than a
post office box) as may be designated by the Employee or the Company in a
written notice sent to the other party. If any notice or other communication
required or permitted by this Agreement is given by mail it will be effective
on the earlier of receipt or the third business day after deposit in the United
States mail with first class postage prepaid; or if given by personal delivery,
when delivered.
15. Definitions.
For purposes of this Agreement, the following terms shall have the
meanings indicated below:
a. "Cause" means (i) Employee's commission of a material act of
dishonesty or fraud against the Company or The Presley Companies, a California
corporation ("California Presley"), (ii) Employee's commission of a criminal
felony, (iii) Employee's rendering of services to another entity other than as
an incident to Employee's employment by the Company or Presley California, as
the case may be, or (iv) the failure of Employee to be available to the Company
or Presley California, as the case may be, for the number of hours during the
normal business day of such entity (subject to such entity's customary policies
regarding vacation time) comparable to the number of hours Employee spent
during the course of employment preceding the date of this Agreement, if such
failure
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<PAGE> 5
continues for ten consecutive days or for a total of 20 days, unless such
failure is due to disability, ill health, death or termination by Employee for
Good Reason.
b. A "Change of Control" means the occurrence of any of the following: (i)
the Company shall cease to own the number of outstanding shares of the
California Presley's capital stock necessary to elect a majority of the Board of
Directors of California Presley; (ii) the sale, lease, exchange or transfer, in
one or a series of transactions (any such sale, lease, exchange or transfer
herein a "Disposition") of all or substantially all of the Company's or
California Presley's assets to any "person" or "group" of persons (as such terms
are used for the purposes of Section 13(d) and Section 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the regulations
thereunder) such that any person or group (other than a group of which 70% or
more of the voting power of the voting stock referred to below held by such
group is owned beneficially by one or more Permitted Holders or their Related
Parties if the person or persons to which the Disposition is made assume this
Agreement) owns, controls or acquires a direct or indirect interest in more than
50% of the voting power of the voting stock of the person or persons that
acquire such assets by a Disposition, (iii) the acquisition by any person or
group (as defined above) (other than a group of which 70% or more of the voting
power of the voting stock of the Company held by such group is owned
beneficially by one or more Permitted Holders of their Related Parties) of a
direct or indirect beneficial interest in more than 50% of the voting power of
the voting stock of the Company by way of merger or consolidation or otherwise,
(iv) the consummation of any transaction the result of which is that any person
or group (as defined above) (other than a group of which 70% or more of the
voting power of the voting stock of the Company held by such group is owned
beneficially by one or more Permitted Holders or their Related Parties) owns,
directly or indirectly, more than 50% of the voting power of the voting stock of
the Company, or (v) if at any time during the Term of this Agreement,
individuals who on the date hereof were directors of the Company cease for any
reason to constitute a majority of the Board of Directors of the Company unless
the persons replacing such individuals were nominated by a majority of the Board
of Directors of the Company.
"Permitted Holders" means either of (a) William Lyon, or (b) any of
Foothill Capital Corporation, Pearl Street, L.P., International Nederlanden
(U.S.) Capital Corporation, First Plaza Group Trust, and Whippoorwill/Presley
Obligation Trust - 1994.
"Related Party" means with respect to any Permitted Holder (A) any person
(as defined above in Change of Control) which owns, directly or indirectly, more
than 80% of the securities entitled to elect a majority of the board of
directors, or other comparable governing group, of the Permitted Holder; any
corporation, association or other business entity of which more than 80% of the
securities entitled to elect a majority of the board of directors, or other
comparable governing group of such entity, is owned, directly or indirectly, by
a Permitted Holder; or in the case of an individual, any spouse or immediate
family member of such Permitted Holder; or (B) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partner, owners or
persons beneficially holding 80% or more controlling interest of which consist
of such Permitted Holder and/or such other persons referred to in the
immediately preceding clause (A).
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<PAGE> 6
c. "Disability" means the inability of Employee because of ill
health or physical or mental condition to perform the duties and
responsibilities in the ordinary and usual manner required of a person in
Employee's position for 90 consecutive days.
d. "Good Reason" for termination by the Employee of the Employee's
employment shall mean the occurrence within twelve months (without the
Employee's express written consent) after any Change of Control, of any one of
the following acts by the Company, or failures by the Company to act, unless,
in the case of any act or failure to act described in paragraph (1), (5), or
(6) below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect thereof:
(1) the assignment to the Employee of any duties
inconsistent with the Employee's position with the Company prior to
the Change of Control or a substantial adverse alteration in the
nature or status of the Employee's responsibilities from those in
effect immediately prior to the Change of Control, except in either
case as a result of the Company no longer being a publicly held or
reporting company;
(2) a reduction by the Company in the Employee's annual
base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all similarly situated employees of the
Company;
(3) the relocation of the Employee's principal place of
employment to a location more than 50 miles from the Employee's
principal place of employment immediately prior to the Change of
Control or the Company's requiring the Employee to be based anywhere
other than such principal place of employment (or permitted relocation
thereof) except for required travel on the Company's business to an
extent substantially consistent with the Employee's business travel
obligations immediately prior to the Change of Control;
(4) the failure by the Company to pay to the Employee any
portion of the Employee's current compensation except pursuant to an
across-the-board compensation deferral similarly affecting all
similarly situated employees of the Company;
(5) the failure by the Company to continue in effect any
compensation plan in which the Employee participates immediately prior
to the Change of Control which is material to the Employee's total
compensation, including but not limited to the Company's stock option,
bonus and other plans or any substitute plans adopted prior to the
Change of Control, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to
such plan, or the failure by the Company to continue the Employee's
participation therein (or in such substitute or alternative plan) on a
basis not materially less favorable, both in terms of the amount or
timing of payment of benefits provided and the level
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<PAGE> 7
of the Employee's participation relative to other participants, as existed
immediately prior to the Change of Control;
(6) the failure by the Company to continue to provide the Employee with
benefits substantially similar to those enjoyed by the Employee under any of
the Company's pension, savings, life insurance, medical, health and accident,
or disability plans in which the Employee was participating immediately prior
to the Change of Control (except for across-the-board changes similarly
affecting all similarly situated employees of the Company and all similarly
situated employees of any person or entity in control of the Company);
(7) the failure by the Company to obtain the written assumption of this
Agreement by any successor assign of the Company; or
(8) the failure by the Company to provide the Employee with the number
of paid vacation days to which Employee is entitled at the time of the Change
of Control.
THE PRESLEY COMPANIES
By:
-----------------------------
Name:
Title:
--------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
(Please print carefully)
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<PAGE> 1
[WARBURG DILLON READ LETTERHEAD]
September 16, 1999
Special Committee of the Board of Directors
The Presley Companies
19 Corporate Plaza
Newport Beach, California 92660
Dear Members of the Special Committee:
We understand that The Presley Companies, a Delaware corporation
("Presley"), is considering a transaction whereby (i) Presley Homes, a
California corporation and a wholly-owned subsidiary of Presley (the "Buyer"),
will purchase (the "Acquisition") substantially all of the real estate assets
and certain other assets relating thereto (the "Acquired Assets") of William
Lyon Homes, Inc., a California corporation (the "Seller"), and of certain
partnerships (the "Partnerships") as identified in the Acquisition Agreement (as
defined below) for consideration (the "Asset Purchase Consideration") of (a)
$48.0 million (subject to adjustment as provided in the Acquisition Agreement)
in cash and (b) the assumption by the Buyer of substantially all of the
liabilities of the Seller and the Partnerships relating to the Acquired Assets
(the "Assumed Liabilities"), (ii) William Lyon and William H. Lyon (together,
the "Lyons") will make a cash tender offer (the "Series A Offer") to acquire up
to 10,678,792 shares (subject to adjustment as provided in the Acquisition
Agreement) of Series A Common Stock of Presley for a cash purchase price of
$0.655 per share, (iii) Seller will purchase an aggregate of 9,434,813 shares
(subject to adjustment as provided in the Acquisition Agreement) of Series B
Common Stock of Presley for a cash purchase price of $0.655 per share pursuant
to those certain Stock Purchase and Sale Agreements dated as of July 6, 1999
(collectively, the "Selling Series B Purchase Agreements") with each of GS
Credit Partners, L.P., ING (U.S.) Capital, L.L.C. and The Chase Manhattan Bank,
as Trustee for First Plaza Group Trust (collectively, the "Selling Series B
Stockholders"), and (iv) Presley will merge with and into one of its
wholly-owned subsidiaries (the "Surviving Corporation"), in accordance with the
terms set forth in the Acquisition Agreement (the "Merger"), which Merger will
result in the implementation of certain transfer restrictions to reduce the risk
of an ownership change for purposes of preserving Presley's tax net operating
losses. The transactions set forth in clauses (i) through (iv) above are
collectively referred to herein as the "Transactions." The terms and conditions
of the Acquisition, the Series A Offer and the Merger are more fully set forth
in the Purchase Agreement and Escrow Instructions (the "Acquisition Agreement")
proposed to be entered into by and among the Seller, the Lyons, the Buyer and
Presley.
After consummation of the Transactions, the holders of the Series A Common
Stock will receive one share of Surviving Corporation Common Stock for each five
shares of Series A Common Stock and, to the extent any such holder of Series A
Common Stock (other than the Lyons and the Selling Series B Stockholders (the
"Contractually Non-Tendering Holders")) tenders shares of Series A Common Stock
in the Series A Offer, cash for such shares, subject to the pro ration
provisions of the Series A Offer (the shares of Surviving Corporation Common
Stock and/or cash that may be received by each such holder of Series A Common
Stock (other than the Contractually Non-Tendering Holders) after giving effect
to the
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<PAGE> 2
Transactions is referred to herein as the "Transaction Consideration"). You have
informed us that the Seller is an entity controlled by William Lyon, the
Chairman of the Board of Presley.
You have requested our opinion as to the fairness, from a financial point
of view, of the Transaction Consideration to be received by the holders of
Series A Common Stock (other than the Contractually Non-Tendering Holders) after
giving effect to the Transactions.
For purposes of our opinion as expressed herein, we have assumed, with your
consent, that (i) the Asset Purchase Consideration is fair to Presley and Buyer
from a financial point of view, (ii) the consummation of the Transactions will
not restrict or adversely affect the utilization by Presley of its tax net
operating losses and (iii) after giving effect to the Transactions, the Common
Stock of the Surviving Corporation will remain eligible for listing on the New
York Stock Exchange.
Warburg Dillon Read LLC ("WDR") has acted as financial advisor to the
Special Committee of the Board of Directors of Presley in connection with the
Transactions and will receive a fee upon the consummation thereof. In the
ordinary course of business, WDR, its successors and affiliates may trade
securities of Presley for their own accounts and for the accounts of their
customers and, accordingly, may at any time hold a long or short position in
such securities. In connection with our engagement as financial advisor, at your
direction, we contacted a number of third parties regarding their interest in
making proposals for potential business combinations involving Presley, and held
discussions with certain of these parties prior to the date hereof.
Our opinion does not address Presley's underlying business decision to
effect the Transactions or constitute a recommendation to any stockholder of
Presley as to how such stockholder should vote with respect to the Merger or as
to whether any stockholder should tender shares of Series A Common Stock in the
Series A Offer. With your consent, we have not been asked to, nor do we, offer
any opinion as to the material terms of the Selling Series B Purchase Agreements
or, except as provided herein, the Acquisition Agreement or the form of any of
the Transactions. In rendering this opinion, we have assumed, with your consent,
that the final executed form of the Acquisition Agreement will not differ in any
material respect from the draft that we have examined, that each party to the
Selling Series B Purchase Agreements and the Acquisition Agreement complies in
all material respects with its respective obligations thereunder, that the
transactions contemplated by the Selling Series B Purchase Agreements and the
Acquisition Agreement will be consummated in accordance with the respective
terms thereof, with no modification or waiver of any material term or condition
thereunder (including the conditions to the Series A Offer) and that
consummation of the Transactions in the manner contemplated by the Selling
Series B Purchase Agreements and the Acquisition Agreement complies with all
applicable laws. In rendering this opinion, we are not rendering any opinion as
to the trading price of the common stock of Surviving Corporation following the
Transactions.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to Presley, (ii) reviewed certain internal financial information and
other data provided to us by Presley and Seller that is not publicly available
relating to the business and financial prospects of Presley and the Acquired
Assets and Partnerships, including estimates and financial projections prepared
by the management of Presley and the Seller, (iii) conducted discussions with
members of the senior management of Presley and the Seller, (iv) reviewed
publicly available financial and stock market data with respect to certain other
companies in lines of business we believe to be generally comparable to those of
Presley (the "Comparables"), (v) considered certain pro forma effects of the
Transactions on Presley's financial statements, (vi) reviewed the historical
market prices and trading volumes of the Series A Common Stock and the common
stocks of the Comparables, (vii) reviewed the Selling Series B Purchase
Agreements and drafts of the
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<PAGE> 3
Acquisition Agreement and other ancillary documents, (viii) considered the
results of solicitations of interest from and discussions with third parties
regarding potential business combinations involving Presley and (ix) conducted
such other financial studies, analyses and investigations, and considered such
other information as we deemed necessary or appropriate.
In connection with our review, with your consent, we have not assumed any
responsibility for independent verification of any of the foregoing information
reviewed by us for the purpose of this opinion and have, with your consent,
relied on such information being complete and accurate in all material respects.
In addition, with your consent, we have not made any independent evaluation or
appraisal of any of the assets or liabilities (contingent or otherwise) of
Presley, the Acquired Assets or the Partnerships. With respect to the financial
projections referred to above, we have assumed, with your consent, that they
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the managements of Presley and the Seller, as
applicable, as to the future financial performance of Presley and the Acquired
Assets and Partnerships. Further, our opinion is based on economic, monetary,
market and other conditions as in effect on, and the information made available
to us as of, the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Transaction Consideration to be received by the holders of
Series A Common Stock (other than the Contractually Non-Tendering Holders),
after giving effect to the Transactions, is fair to the holders of Series A
Common Stock (other than the Contractually Non-Tendering Holders) from a
financial point of view.
Very truly yours,
Warburg Dillon Read LLC
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<PAGE> 1
HOULIHAN LOKEY HOWARD & ZUKIN LETTERHEAD
September 16, 1999
To the Special Committee of the Board of Directors of
The Presley Companies
19 Corporate Plaza
Newport Beach, CA 92660
Dear Special Committee Members:
We understand that The Presley Companies, a Delaware Corporation (the
"Company"), and Presley Homes, a California Corporation ("Buyer") and a wholly
owned subsidiary of the Company, are considering entering into a purchase
agreement and escrow instructions (substantially in the form of the draft dated
September 7, 1999 and hereinafter referred to as the "Purchase Agreement") with
William Lyon Homes, Inc. ("Lyon"), which would provide for the acquisition by
the Company of substantially all of the assets of Lyon for a cash purchase price
of $48 million, as adjusted pursuant to the Purchase Agreement, and the
assumption of substantially all of the liabilities of Lyon (the "Consideration",
and collectively, the "Transaction"). It is our understanding that the Company
has formed a Special Committee comprised of independent directors of the
Company's Board of Directors (the "Committee") to consider certain matters
relating to the Transaction.
The Committee has requested our opinion (the "Opinion") as to the matters
set forth below. The Opinion does not address the Company's underlying business
decision to effect the Transaction. We have not been requested to, and did not,
solicit third party indications of interest in acquiring all or any part of the
Company. Furthermore, at your request, we have not negotiated the Transaction or
advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports on Form 10-K for the fiscal
years ended December 31, 1998 and quarterly reports on Form 10-Q for the
quarter ended June 30, 1999;
2. reviewed the Indenture Agreement governing the Company's 12.5%
Senior Notes;
3. reviewed the Preliminary Proxy Statement Schedule 14A Information
(Amendment No. 1);
4. met with the Company's and Lyon's senior management to discuss the
Transaction, the operations, financial condition, future prospects and
performance of the Company and Lyon;
5. reviewed the Letter of Intent, dated May 3, 1999, between the
Company and Lyon, as amended on July 15, 1999;
6. reviewed the Purchase Agreement between the Company and Lyon;
7. reviewed the specific project status and business plans for Lyon's
assets with the management of Lyon;
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<PAGE> 2
The Special Committee Members of
The Presley Companies
September 16, 1999
Page 2
8. reviewed Lyon's audited financial statements for the two years
ended December 31, 1998 and December 31, 1997, respectively;
9. reviewed Lyon's forecasted business plan for the three years ended
December 31, 2001;
10. reviewed the February 17, 1999 Property Information Binders
prepared by management of Lyon, which includes property descriptions and
historical and projected sales pricing and absorption figures for each of
Lyon's projects;
11. reviewed the Lyon materials summarizing current operations,
organizational structure, the management team and historical overview;
12. reviewed representative market data and economic analysis for the
Orange County markets as provided by Lyon and other third party market
research organizations;
13. reviewed the individual cash flow projections for each of the Lyon
assets and the resulting net present value calculations prepared by the
Company;
14. reviewed the appraisal reports of Lyon's real estate assets
prepared by a nationally-recognized real estate appraisal firm;
15. reviewed publicly available information on companies we deemed
comparable to Lyon; and
16. conducted such other studies analyses, studies and investigations
as we deemed appropriate under the circumstances for rendering the opinion
expressed herein.
Except as expressly set forth above, we were not provided and did not review any
documentation, preliminary or otherwise, regarding the valuation of the
individual assets of Lyon.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, Buyer and Lyon, and that there has been no
material change in the assets, financial condition, business or prospects of the
Company, Buyer or Lyon since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company, Buyer or Lyon and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company, Buyer or Lyon. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
It is understood that this Opinion is for the information of the Committee
in connection with its evaluation of the Transaction and does not constitute a
recommendation to the Company, Buyer or any holder of shares of common stock of
the Company as to whether to enter into the Purchase Agreement or to take other
action in connection with the Transaction. This Opinion is delivered to you
subject to the conditions, scope of engagement, limitations and understandings
set forth in this Opinion and our engagement letter dated January 21, 1999 (the
"Engagement Letter") with the Committee, and subject to the understanding that
the obligations of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan Lokey")
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<PAGE> 3
The Special Committee Members of
The Presley Companies
September 16, 1999
Page 3
in the transaction are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person of Houlihan Lokey shall be
subjected to any personal liability whatsoever to any person, nor will any such
claim be asserted by or on behalf of you or your affiliates unless permitted by
the Engagement Letter. It is also understood that a copy of this Opinion will be
delivered, by the Company, to the Indenture Trustee in accordance with the
requirements of the Trust Indenture, dated as of June 29, 1994, with respect to
the Company's 12.5% Senior Notes. This letter speaks only as of its date and we
are under no obligation and do not undertake any obligation to update the
Opinion at any time after the date hereof.
The Company, Buyer and Lyon, like other companies and any business entities
analyzed by Houlihan Lokey or which are otherwise involved in any manner in
connection with this Opinion, could be materially affected by complications that
may occur, or may be anticipated to occur, in computer-related applications as a
result of the year change from 1999 to 2000 (the "Y2K Issue"). In accordance
with long-standing practice and procedure, Houlihan Lokey's services are not
designed to detect the likelihood and extent of the effect of the Y2K Issue,
directly or indirectly, on the financial condition and/or operations of a
business. Further, Houlihan Lokey has no responsibility with regard to the
Company's, Buyer's or Lyon's efforts to make its systems, or any other systems
(including its vendors and service providers), Year 2000 compliant on a timely
basis. Accordingly, Houlihan Lokey shall not be responsible for any effect of
the Y2K Issue on the matters set forth in this Opinion.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the Consideration to be paid by the Company and Buyer in connection with the
Transaction is fair to the Company and Buyer from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
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