-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZdydnsjM5KXnYC8/vQjY+gqcKhG8BkXlL/RgHKdk0cvUGNy2EwXu1wQDM6Rw2E5 +UT17iqV7hd9tHIbzBzCZA== 0000892569-97-002303.txt : 19970815 0000892569-97-002303.hdr.sgml : 19970815 ACCESSION NUMBER: 0000892569-97-002303 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESLEY COMPANIES /DE CENTRAL INDEX KEY: 0000878093 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 330475923 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10830 FILM NUMBER: 97663440 BUSINESS ADDRESS: STREET 1: 19 CORPORATE PLAZA CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7146406400 MAIL ADDRESS: STREET 2: 19 CORP PLAZA CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ------------------------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-18001 THE PRESLEY COMPANIES (Exact name of registrant as specified in its charter) Delaware 33-0475923 (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 19 Corporate Plaza 92660 Newport Beach, California (Zip Code) (Address of principal executive offices) (714) 640-6400 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock June 30, 1997 --------------------- -------------- Series A, par value $.01 17,838,535 Series B, restricted voting convertible, par value $.01 34,357,143 - -------------------------------------------------------------------------------- 2 THE PRESLEY COMPANIES INDEX
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets - June 30, 1997 and December 31, 1996.................................................................3 Consolidated Statements of Operations - Three and Six Months Ended June 30, 1997 and 1996............................................................4 Consolidated Statement of Stockholders' Equity - Six Months Ended June 30, 1997...............................................................5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996............................................................6 Notes to Consolidated Financial Statements............................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................................10 PART II. OTHER INFORMATION.........................................................................18 SIGNATURES..........................................................................................19
2 3 THE PRESLEY COMPANIES CONSOLIDATED BALANCE SHEETS (in thousands except number of shares and par value per share)
June 30, December 31, 1997 1996 ----------- ------------- (unaudited) ASSETS Cash and cash equivalents $ 2,546 $ 4,550 Receivables 5,415 4,225 Real estate inventories - Note 2 236,816 304,126 Property and equipment, less accumulated depreciation of $1,827 and $1,432 at June 30, 1997 and December 31, 1996, respectively 4,017 3,047 Deferred loan costs 4,385 4,347 Other assets 3,057 11,320 --------- --------- $ 256,236 $ 331,615 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 9,435 $ 18,428 Accrued expenses 21,237 20,450 Notes payable 30,379 18,524 12 1/2% Senior Notes due 2001 - Note 3 190,000 190,000 --------- --------- 251,051 247,402 --------- --------- Stockholders' equity Common stock - Note 4: Series A common stock, par value $.01 per share; 100,000,000 shares authorized; 17,838,535 issued and outstanding at June 30, 1997 and December 31, 1996, respectively 178 178 Series B restricted voting convertible common stock, par value $.01 per share; 50,000,000 shares authorized; 34,357,143 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively 344 344 Additional paid-in capital 114,599 114,599 Accumulated deficit from January 1, 1994 - Note 1 (109,936) (30,908) --------- --------- 5,185 84,213 --------- --------- $ 256,236 $ 331,615 ========= =========
3 4 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per common share amounts) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Sales Homes $ 88,494 $ 81,405 $ 155,651 $ 142,017 Lots, land and other 9,072 814 9,711 1,273 --------- --------- --------- --------- 97,566 82,219 165,362 143,290 --------- --------- --------- --------- Operating costs Cost of sales - homes (80,263) (71,413) (140,942) (125,851) Cost of sales - lots, land and other (8,424) (904) (9,071) (1,231) Impairment loss on real estate assets - Note 2 (74,000) -- (74,000) -- Sales and marketing (5,129) (5,839) (10,636) (10,683) General and administrative (4,428) (3,452) (8,361) (7,154) --------- --------- --------- --------- (172,244) (81,608) (243,010) (144,919) --------- --------- --------- --------- Operating income (loss) (74,678) 611 (77,648) (1,629) Interest expense, net of amounts capitalized (1,562) (519) (2,763) (1,279) Other income (expense), net 786 275 1,383 954 --------- --------- --------- --------- Net income (loss) $ (75,454) $ 367 $ (79,028) $ (1,954) ========= ========= ========= ========= Net income (loss) per common share - Note 1 $ (1.45) $ 0.01 $ (1.51) $ (0.04) ========= ========= ========= =========
4 5 THE PRESLEY COMPANIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1997 (in thousands) (unaudited)
Common Stock ------------------------------------------ Accumulated Series A Series B Additional Deficit from ------------------ ----------------- Paid-In January 1, Shares Amount Shares Amount Capital 1994 Total ------ ------ ------ ------ ---------- ------------- ----- Balance - December 31, 1996 17,839 $178 34,357 $344 $114,599 $(30,908) $84,213 Net loss - - - - - (79,028) (79,028) ----------------------------------------------------------------------------------------- Balance - June 30, 1997 17,839 $178 34,357 $344 $114,599 $(109,936) $ 5,185 =========================================================================================
5 6 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, -------------------------- 1997 1996 -------- -------- OPERATING ACTIVITIES Net loss $(79,028) $ (1,954) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 368 291 Impairment loss on real estate assets 74,000 -- Net changes in operating assets and liabilities: Other receivables (1,956) (1,693) Real estate inventories (6,690) 3,070 Deferred loan costs (38) 510 Other assets 8,263 (1,739) Accounts payable (8,993) (781) Accrued expenses 787 (740) -------- ------- Net cash used in operating activities (13,287) (3,036) -------- ------- INVESTING ACTIVITIES Principal payments on notes receivable 766 44 Property and equipment, net (1,338) (473) -------- ------- Net cash used in investing activities (572) (429) -------- ------- FINANCING ACTIVITIES Proceeds from borrowing on notes payable 71,388 51,639 Principal payments on notes payable (59,533) (49,296) -------- ------- Net cash provided by financing activities 11,855 2,343 -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,004) (1,122) CASH AND CASH EQUIVALENTS - beginning of period 4,550 4,217 -------- ------- CASH AND CASH EQUIVALENTS - end of period $ 2,546 $ 3,095 ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for interest, net of amounts capitalized $ 2,650 $ 1,518 ======== ======= Cash paid during the period for income taxes $ -- $ -- ======== =======
6 7 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Effective as of January 1, 1994, the Company completed a capital restructuring and quasi-reorganization. The quasi-reorganization resulted in the adjustment of assets and liabilities to estimated fair values and the elimination of an accumulated deficit effective January 1, 1994. The consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The interim consolidated financial statements have been prepared in accordance with the Company's customary accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with generally accepted accounting principles have been included. Operating results for the three and six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The consolidated financial statements include the accounts of the Company and all majority-owned or controlled subsidiaries and joint ventures. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company has less than a controlling interest are accounted for using the equity method. The accounting policies of the joint ventures are substantially the same as those of the Company. The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of June 30, 1997 and December 31, 1996 and revenues and expenses for the periods presented. Accordingly, actual results inevitably will differ from those estimates in the near-term and such differences may be material to the Company's financial statements. Net income (loss) per common share for the three and six months ended June 30, 1997 and 1996 is based on 52,195,678 of Series A and Series B common stock outstanding. 7 8 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued) NOTE 2 - IMPAIRMENT OF REAL ESTATE ASSETS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less cost of disposal. Under this pronouncement, when an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value which becomes the new cost basis of the respective asset. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions over a period of many years. Such future events and conditions include economic and market conditions during the life of the related project, as well as the availability and cost of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein. The loss for the quarter ended June 30, 1997 includes a non-cash charge of $74,000,000 as a result of the recognition of impairment losses on certain of the Company's real estate assets in accordance with Statement No. 121. The fair values utilized to calculate the impairment losses were estimated based upon discounted expected future cash flows. The impairment losses are related to three of the Company's weak performing master-planned communities. The impairment losses related to two communities located in the Inland Empire area of Southern California arose primarily due to declines in sales prices in the last few months due to continued weak economic conditions and competitive pressures in that area of Southern California. The impairment losses related to a community located in Contra Costa County in the East San Francisco Bay area of Northern California are primarily attributable to a deterioration in value of the non-residential parcels of the project which are now held for sale and to lower than expected cash flow relating to one high end residential product in this community. 8 9 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued) NOTE 3 - SENIOR NOTES In accordance with the bond indenture agreement governing the Company's Senior Notes, which are due in 2001, if the Company's Consolidated Tangible Net Worth is less than $60,000,000 as of September 30, 1997, the Company will, effective on December 4, 1997, be required to make an offer to purchase $20,000,000 of the Senior Notes at par plus accrued interest. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the Company would be required to make similar offers to purchase Senior Notes. At June 30, 1997, the Company's Consolidated Tangible Net Worth was $800,000. In the next few weeks, the Company's management intends to initiate discussions with representatives of the holders of the Senior Notes with respect to eliminating this repurchase provision from the bond indenture agreement. Any change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes then outstanding. NOTE 4 - REGISTRATION OF ADDITIONAL SERIES A COMMON STOCK In accordance with the Registration Rights Agreement, dated as of May 20, 1994, among the Company and the holders of the Company's Series B Common Stock, the holders have requested registration under the Securities Act of 1933 of 18,145,467 shares of the Company's Series A Common Stock into which the Series B Common Stock may be converted. The Company expects to file such registration statement with the Securities and Exchange Commission on or about August 29, 1997. 9 10 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1, as well as the information presented in the Annual Report on Form 10-K for the year ended December 31, 1996. Effective on June 30, 1997, the Company has executed an amendment to the loan agreement related to its $72,000,000 revolving line of credit which eliminated certain financial covenants. Accordingly, the Company is in compliance with this loan agreement. The Company has reached verbal agreement with its other secured lender (with outstanding loan balances of approximately $7,271,000 as of June 30, 1997 as described below) to revise certain financial covenants and to repay approximately $4,500,000 of these outstanding balances. The Company will therefore be in compliance with all of its secured loan agreements upon finalizing the documentation relating to the verbal agreement. The following discussion therefore reflects the revised terms of the Company's loan agreements with its secured creditors. Financial Condition and Liquidity The Company provides for its ongoing cash requirements from internally generated funds from the sales of real estate and from outside borrowings. The Company currently maintains the following major credit facilities, which are summarized below: 12 1/2% Senior Notes (the "Senior Notes"); a secured revolving lending facility (the "Working Capital Facility"); a revolving line of credit relating to Horsethief Canyon Partners, its wholly-owned joint venture partnership; a revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned joint venture partnership (the latter two facilities collectively the "Joint Venture Facilities"); and a revolving line of credit relating to construction on certain real property located in Arizona and New Mexico (the "Other Facility"). Management believes the Company's liquidity and projected cash flow as indicated by the Company's three year business plan should be sufficient to enable the Company to acquire land in the future and continue to meet any obligations which might arise in connection with the requirement to repurchase Senior Notes as described below. Senior Notes The Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The following discussion of the Senior Notes should be read in conjunction with the Registration Statement as filed with the Securities and Exchange Commission. The 12 1/2% Senior Notes due 2001 (the "Senior Notes") were offered by The Presley Companies, a Delaware corporation ("Delaware Presley"), and are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly-owned subsidiary 10 11 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of Delaware Presley ("California Presley"). However, California Presley has granted liens on substantially all of its assets as security for its obligations under the Working Capital Facility and the Other Facility. Because the California Presley guarantee is not secured, holders of the Senior Notes are effectively junior to borrowings under the Working Capital Facility and the Other Facility with respect to such assets. Delaware Presley and its consolidated subsidiaries are referred to collectively herein as "Presley" or the "Company". Interest on the Senior Notes is payable on January 1 and July 1 of each year. Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes are not redeemable by Presley prior to July 1, 1998. Thereafter, the Senior Notes will be redeemable at the option of Delaware Presley, in whole or in part, at the redemption prices set forth in the Indenture. The Senior Notes are senior obligations of Presley and rank pari passu in right of payment to all existing and future unsecured indebtedness of Presley, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the Senior Notes. Upon a Change of Control as described in the Indenture, Presley must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. In accordance with the Indenture, if the Company's Consolidated Tangible Net Worth is less than $60,000,000 as of September 30, 1997, the Company will, effective on December 4, 1997, be required to make an offer to purchase $20,000,000 of the Senior Notes at a purchase price equal to 100% of the principal amount plus accrued interest. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the Company would be required to make similar offers to purchase Senior Notes. At June 30, 1997, the Company's Consolidated Tangible Net Worth was $800,000. In the next few weeks, the Company's management intends to initiate discussions with representatives of the holders of the Senior Notes with respect to eliminating this repurchase provision from the Indenture. Any change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. The Indenture governing the Senior Notes restricts, among other things: (i) the payment of dividends on and redemptions of capital stock by Presley, (ii) the incurrence of indebtedness by Presley or the issuance of preferred stock by Delaware Presley's subsidiaries, (iii) the creation of certain liens, (iv) Delaware Presley's ability to consolidate or merge with or into, or to transfer all or substantially all of its assets to, another person, and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions. 11 12 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Working Capital Facility The collateral for the loans provided by the Working Capital Facility includes substantially all real estate and other assets of the Company (excluding assets of partnerships and the portion of the partnership interests in Carmel Mountain Ranch partnership which are currently pledged to other lenders). The borrowing base is calculated based on specified percentages of book values of real estate assets. The borrowing base at June 30, 1997 was approximately $151,000,000; however, the maximum loan under the Working Capital Facility is limited to $72,000,000. The principal outstanding under the Working Capital Facility at June 30, 1997 was $19,000,000. The Working Capital Facility had a termination date of May 20, 1997, with two one-year extensions at the Company's option. On April 18, 1997, the Company exercised its option to extend the termination date of the Working Capital Facility for one period of twelve months from May 20, 1997 to May 20, 1998. Upon the extension of the termination date, the Company paid an extension fee of 1% of the Working Capital Facility commitment amount (in addition to the loan fee described below). The Company still holds the option to extend the termination date for an additional twelve (12) months. If the Company elects to exercise this option in the future, an additional extension fee of 1% of the Working Capital Facility commitment amount (in addition to the loan fee described below) would be incurred. Pursuant to the terms of the Working Capital Facility, outstanding advances bear interest at the prime rate plus 2%. An alternate option provides for interest based on a specified overseas base rate plus 4.44%, but not less than the prime rate option in effect at December 31, 1993 (8.00%). In addition, the Company pays a loan fee of 1% per annum, payable quarterly, on the total Working Capital Facility commitment amount. The Working Capital Facility requires certain minimum cash flow and pre-tax and pre-interest tests. The Working Capital Facility also provides for negative covenants which, among other things, place limitations on the payment of cash dividends, merger transactions, transactions with affiliates, the incurrence of additional debt and the acquisition of new land as described in the following paragraph. Under the terms of the Working Capital Facility, the Company may acquire new improved land for development of housing units of no more than 300 lots in any one location without approval from the lenders if certain conditions are satisfied. The Company may, however, acquire any new raw land or improved land provided the Company has obtained the prior written approval of lenders holding two-thirds of the obligations under the Working Capital Facility. 12 13 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Joint Venture Facilities Horsethief Canyon Partners ("HCP"), the partnership that owns the Horsethief Canyon master-planned community, is a California general partnership and is 100% owned by The Presley Companies and its wholly-owned subsidiary. Effective on October 4, 1996, HCP executed a master credit agreement with a maximum loan commitment of $10,000,000 to finance the development of lots for residential homes and the construction of single-family attached and detached production homes. At June 30, 1997, the revolving line of credit had an outstanding balance of $1,551,000. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on March 17, 1998. Availability under the line is subject to a number of limitations. The outstanding balance under this facility, together with the outstanding balances under the CMR facility and the Other facility described below, may not exceed $29,000,000. Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel Mountain Ranch master-planned community, is also a California general partnership and is 100% owned by The Presley Companies and its wholly-owned subsidiary. Effective in March 1995, the development and construction of the project has been financed through a revolving line of credit. The revolving line of credit consists of several components relating to production units, models and residential lots. At June 30, 1997, the revolving line of credit had an outstanding balance of $2,776,000. Availability under the line is subject to a number of limitations, but in any case cannot exceed $29,000,000, and is subject to further limitations, as described in the preceding and following paragraphs. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on March 17, 1998. Other Facility Effective in October 1995, the Company executed a master credit agreement with a maximum loan commitment of $5,000,000 to finance the development of lots for residential homes and the construction of single-family attached and detached production homes on certain real property located in Arizona and New Mexico. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on November 30, 1998. The outstanding balance under this facility, together with the outstanding balance under the HCP facility and the CMR facility described in the preceding paragraphs, may not exceed $29,000,000. As of June 30, 1997 the outstanding balance under this agreement was $2,944,000. Assessment District Bonds and Seller Financing In some locations in which the Company develops its projects, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company's other sources of funds and the fact that the bonds 13 14 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When Presley's homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Another potential source of financing available to the Company is seller-provided financing for land acquired by the Company. During the quarter ending June 30, 1997, the Company acquired a parcel of land in Nevada for which seller financing was provided in the amount of $2,372,000. During the few years prior to this transaction, the Company had not used this form of financing significantly. Results of Operations Overview and Recent Results Homes sold, closed and in backlog as of and for the periods presented are as follows:
As of and for As of and for the Three Months the Six Months Ended June 30, Ended June 30, ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Number of homes sold 428 478 877 1,069 Number of homes closed 467 490 829 859 Backlog of homes sold but not closed at end of period 330 526 330 526
Closings of homes in backlog generally occur within six months of the date indicated. The dollar amount of backlog of homes sold but not closed as of June 30, 1997 was $65,252,000, as compared to $93,791,000 as of June 30, 1996 and $73,360,000 as of March 31, 1997. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company's projects was approximately 22% during 1996 and approximately 18% during the first six months of 1997. The number of homes closed in the second quarter of 1997 was down 5 percent to 467 from 490 in the second quarter of 1996. Net new home orders for the quarter ended June 30, 1997 decreased 10 percent to 428 units from 478 a year ago. For the second quarter of 1997, net new orders decreased 5 percent to 428 from 449 units in the first quarter of 1997. The backlog of homes sold as of June 30, 1997 was 330, down 37 percent from 526 units a year earlier, and down 11 percent from 369 units at March 31, 1997. The Company's inventory of completed and unsold homes as of June 30, 1997 has been reduced by 19 percent to 102 units from 126 units as of March 31, 1997. 14 15 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The declines in net new home orders, closings and backlog for the second quarter are primarily the result of the completion or near completion of certain of the Company's older master-planned communities which has resulted in less product available for sale. At June 30, 1997, the Company had 14 sales locations in its master-planned communities as compared to 26 sales locations in its master-planned communities at June 30, 1996. The Company is consolidating certain operating units in order to operate more efficiently. The Company's operating units in the Inland Empire area and the Orange/Los Angeles area of Southern California will be consolidated into one operating unit based in Newport Beach. The Company's operating units in the San Francisco Bay Area and the Sacramento Area of Northern California will be consolidated into one operating unit based in the East Bay area of San Francisco. In addition, the Company's previously announced entry into the Colorado market place will be postponed to allow the Company to focus its attention on the existing market places in which it currently operates. The Company has accrued the costs related to this consolidation in the quarter ended June 30, 1997. In general, housing demand is adversely affected by increases in interest and housing costs. Interest rates, the length of time that assets remain in inventory, and the proportion of inventory that is financed affect the Company's interest cost. If the Company is unable to raise sales prices sufficiently to compensate for higher costs, which has generally been the case recently, or if mortgage interest rates increase significantly, affecting prospective buyers' ability to adequately finance home purchases, the Company's sales, gross margins and net results may be adversely impacted. To a limited extent, the Company hedges against increases in interest costs by acquiring interest rate protection that locks in or caps interest rates for limited periods of time for mortgage financing for prospective homebuyers. Comparison of Three Months Ended June 30, 1997 to Three Months Ended June 30, 1996 Sales (which represent recorded revenues from closings) for the three months ended June 30, 1997 were $97.6 million, an increase of $15.4 million (18.7%) from sales of $82.2 million for the three months ended June 30, 1996. Revenue from sales of homes increased $7.1 million to $88.5 million in the 1997 period from $81.4 million in the 1996 period. This increase was due primarily to an increase in the average sales prices of homes to $189,000 in the 1997 period from $166,000 in the 1996 period, primarily as a result of changes in the mix of product, and, to a lesser extent, some price increases in certain markets, offset by a reduction in the number of homes closed in the 1997 period compared to the 1996 period. Revenue from lots, land and other increased $8.3 million to $9.1 million in the 1997 period from $0.8 million in the 1996 period. Total operating income (loss), excluding the impairment loss on real estate assets, changed from an income of $0.6 million in the 1996 period to a loss of $0.7 million in the 1997 period. The excess of revenue from sales of homes over the related cost of sales decreased by $1.8 million, to $8.2 million in the 1997 15 16 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) period from $10.0 million in the 1996 period. These decreases were primarily due to increases in house construction costs and other development costs which could not be entirely recovered from increased sales prices. Impairment losses on real estate assets amounting to $74.0 million were recorded in the 1997 period, with no corresponding charge in the comparable period for 1996. As a result of the impairment losses, gross margins on the affected projects are expected to be higher in the future. Sales and marketing expenses decreased by $0.7 million to $5.1 million in the 1997 period from $5.8 million in the 1996 period primarily as a result of decreased advertising in the 1997 period compared to the 1996 period, offset by increased direct sales expenses related to the increased sales volume. General and administrative expenses increased by $0.9 million to $4.4 million in the 1997 period from $3.5 million in the 1996 period, primarily as a result of start-up operations in Nevada and a charge of approximately $0.7 million for expenses related to the closing and consolidation of certain operating units. Total interest incurred increased $0.1 million (1.3%) from $7.9 million in the 1996 period to $8.0 million in the 1997 period as a result of an increase in interest rates. Net interest expense increased to $1.5 million in the 1997 period from $0.5 million for the 1996 period. This increase was due primarily to a reduction in real estate assets which qualify for interest capitalization. Interest expense will increase in the future due to a decrease in real estate assets which qualify for interest capitalization resulting from the impairment losses described above. Other (income) expense, net increased to $0.8 million in the 1997 period from $0.3 million in the 1996 period primarily as a result of increased income from design center operations and recreational facilities. Comparison of Six Months Ended June 30, 1997 to Six Months Ended June 30, 1996 Sales (which represent recorded revenues from closings) for the six months ended June 30, 1997 were $165.4 million, an increase of $22.1 million (15.4%), from sales of $143.3 million for the six months ended June 30, 1996. Revenue from sales of homes increased $13.7 million to $155.7 million in the 1997 period from $142.0 million in the 1996 period. This increase was due primarily to an increase in the average sales prices of homes to $188,000 in the 1997 period from $165,000 in the 1996 period, primarily as a result of changes in the mix of product and, to a lesser extent, some price increases in certain markets, offset by a reduction in the number of homes closed in the 1997 period compared to the 1996 period. Revenue from lots, land and other increased $8.4 million to $9.7 million in the 1997 period from $1.3 million in the 1996 period. Total operating loss, excluding the impairment loss on real estate assets, increased from a loss of $1.6 million in the 1996 period to a loss of $3.6 million in the 1997 period. The excess of revenue from sales of homes over the related cost of sales decreased by $1.4 million, to $14.8 million in the 1997 period from $16.2 million in the 1996 period. These decreases were primarily due to increases in house construction costs and other development costs which could not be entirely recovered from increased sales prices. 16 17 THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Impairment losses on real estate assets amounting to $74.0 million were recorded in the 1997 period, with no corresponding charge in the comparable period for 1996. As a result of the impairment losses, gross margins on the affected projects are expected to be higher in the future. Sales and marketing expenses remained consistent from the 1996 period to the 1997 period, which is the result of decreased advertising in the 1997 period compared to the 1996 period, offset by increased direct sales expenses related to the increased sales volume. General and administrative expenses increased by $1.2 million to $8.4 million in the 1997 period from $7.2 million in the 1996 period, primarily as a result of increased overhead from start-up operations in Nevada and a charge of approximately $0.7 million for expenses related to the closing and consolidation of certain operating units. Total interest incurred increased $0.5 million (3.2%) from $15.6 million in the 1996 period to $16.1 million in the 1997 period as a result of increased interest rates. Net interest expense increased to $2.8 million in the 1997 period from $1.3 million for the 1996 period. This increase was due primarily to a reduction in real estate assets which qualify for interest capitalization. Interest expense will increase in the future due to a decrease in real estate assets which qualify for interest capitalization resulting from the impairment losses described above. Other (income) expense, net increased $0.4 million to a net income of $1.4 million in the 1997 period from a net income of $1.0 million in the 1996 period primarily as a result of increased income from design operations. Cash Flows - Comparison of Six Months Ended June 30, 1997 to Six Months Ended June 30, 1996 Net cash used in operating activities increased from $3.0 million in the 1996 period to $13.3 million in the 1997 period. This change was primarily as a result of increased land acquisition and construction activity. Net cash used in investing activities increased by $0.2 million in the 1997 period as compared to the 1996 period primarily as a result of purchases of fixed assets, partially offset by increased principal collections on notes receivable. Net cash provided by financing activities increased by $9.6 million in the 1997 period as compared to the 1996 period as a result of an increase in net borrowings activity. * * * * * Certain statements contained herein that are not historical information contain forward-looking statements. The forward-looking statements involve risks and uncertainties and actual results may differ materially from those projected or implied. Further, certain forward-looking statements are based on assumptions of future events which may not prove to be accurate. Factors that may impact such forward-looking statements include, among others, changes in general economic conditions and in the markets in which the Company competes, changes in interest rates and competition. 17 18 THE PRESLEY COMPANIES PART II. OTHER INFORMATION ITEMS 1, 2, 3, 4 AND 5. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. 10.1 Sixth Amendment to Fourth Amended and Restated Loan Agreement, dated for reference purposes June 30, 1997, by and among (i) Presley Homes, formerly The Presley Companies, a California corporation, as the Borrower, (ii) Foothill Capital Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Internationale Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust-1994 (Continental Stock & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994), as the Lenders, and Foothill Capital Corporation, as the Agent for the Lenders. 27 Financial Data Schedule (b) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K during the three months ended June 30, 1997. 18 19 THE PRESLEY COMPANIES SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1997 By: /s/ David M. Siegel -------------------------------------- DAVID M. SIEGEL Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: August 14, 1997 By: /s/ W. Douglass Harris -------------------------------------- W. DOUGLASS HARRIS Vice President, Corporate Controller (Principal Accounting Officer) 19 EX-10.1 2 SIXTH AMENDMENT TO FOURTH AMENDED LOAN AGREEMENT 1 EXHIBIT 10.1 SIXTH AMENDMENT TO FOURTH AMENDED AND RESTATED LOAN AGREEMENT This SIXTH AMENDMENT to FOURTH AMENDED AND RESTATED LOAN AGREEMENT ("Amendment"), dated for reference purposes June 30, 1997, is entered into by and among (i) PRESLEY HOMES, formerly The Presley Companies, a California corporation, as the borrower (the "Borrower"), (ii) FOOTHILL CAPITAL CORPORATION ("Foothill"), FIRST PLAZA GROUP TRUST (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION, and WHIPPOORWILL/PRESLEY OBLIGATIONS TRUST - 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994), as the lenders, and Foothill, as the Agent (in such capacity, the "Agent") for the Lenders, the Issuing Banks (other than any Third Party Issuer) and the LC Guarantor under the Loan Documents (in each case as defined in the Existing Loan Agreement described below). PRELIMINARY STATEMENTS ---------------------- A. The Borrower, the Lenders and the Agent are parties to a Fourth Amended and Restated Loan Agreement dated as of March 25, 1994 (the "Original Agreement"), which agreement was amended by that certain First Amendment to the Fourth Amended and Restated Loan Agreement and Second Amendment to the Agreement to Issue and Purchase Stock dated as of May 20, 1994, that certain Second Amendment dated May 31, 1994, that certain Third Amendment dated June 30, 1994, that certain modification letter agreement dated May 8, 1995 and that certain Fifth Amendment dated June 30, 1995, all among the parties set forth above (the Original Agreement, as so amended, herein referred to as the "Existing Loan Agreement"). B. The Borrower and the Lenders desire to amend the Existing Loan Agreement in certain respects. C. Terms defined in the Existing Loan Agreement are used herein with the same meaning unless expressly provided otherwise. The Borrower and the Lenders hereby agree as follows: 1. Amendments and Acknowledgement. 1.1 Sections 6.16, 8.11, 8.12 and 8.13, and the defined term "Solvent" in Section 1.1, of the Existing Loan Agreement as each hereby deleted in their entirety and shall have no further force or effect. 2 1.2 Lenders acknowledge that the Borrower may be recognizing a substantial loss in reporting the results of its operations at June 30, 1997, and that the amount of the loss may exceed Borrower's net worth. Lenders acknowledge that for the purposes of the Existing Loan Agreement, as amended hereby, such loss shall not constitute (i) a Default or Event of Default, or (ii) the failure of any condition precedent for any future Advances under Article 10. 2. Loan Documents. To the extent inconsistent with this Amendment, the Loan Documents are amended hereby to be consistent with this Amendment, effective as of the Effective Time. 3. Fee. Upon execution and delivery of this Amendment by all of the Lenders, Agent and Borrower, Borrower shall pay to the Agent, for the benefit of the Lenders, a fee of $100,000 in consideration of the execution and delivery by the Lenders of this Amendment. Said fee shall be additional consideration to the Lenders and shall not be an offset, credit or other reduction of any amount owed by the Borrower under the Loan Documents. 4. Effectiveness. This Amendment shall become effective upon being executed by Borrower and by the Agent and all of the Lenders (the "Effective Time"). 5. Counterparts. This Amendment may be executed in any number of counterparts and by any combination of the parties hereto in separate counterparts, each of which counterpart shall be an original and all of which taken together shall be an original and all of which taken together shall constitute one and the same amendment. 6. Amendments. Except as expressly amended hereby, the Existing Loan Agreement and the other Loan Documents shall remain in full force and effect in accordance with their respective terms. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. PRESLEY HOMES, a California corporation By: /s/ David M. Siegel ------------------------------------ Name: David M. Siegel Title: Senior Vice President-Chief Financial Officer By: /s/ W. Douglass Harris ------------------------------------ Name: W. Douglass Harris Title: Vice President-Controller 2 3 FOOTHILL CAPITAL CORPORATION, individually and as Agent By: /s/ M. E. Stearns ------------------------------- Title: Vice President FIRST PLAZA GROUP TRUST (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation) By: /s/ Charles Froland ------------------------------- Title: Continental Stock Transfer & Trust Company, solely in its capacity as trustee for the WHIPPOORWILL/ PRESLEY OBLIGATIONS TRUST - 1994 under that certain trust agreement, dated as of January 11, 1994, and not in its individual capacity By: /s/ Michael J. Nelson ------------------------------- Title: President INTERNATIONAL NEDERLANDEN (U.S.) CAPITAL CORPORATION By: ------------------------------- Title: 3 4 CONSENT OF THE GUARANTOR AND THE PLEDGOR Dated as of June 30, 1997 The undersigned, The Presley Companies, a Delaware corporation, as Pledgor under the Amended and Restated Pledge Agreement dated as of May 20, 1994 (the "Pledge Agreement") in favor of the Agent for the Lender parties to the Loan Agreement referred to in the foregoing Sixth Amendment and as Guarantor under the Amended and Restated Guaranty dated as of May 20, 1994 (the "Guaranty"), in favor of the Lender parties to the Loan Agreement and the Agent for the Lenders, as each is referred to in the foregoing Sixth Amendment, hereby consents to the said Sixth Amendment and hereby confirms and agrees that (i) the Pledge Agreement and the Guaranty are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, the said Sixth Amendment, each reference in the Pledge Agreement or the Guaranty to the Loan Documents or any "thereunder", "thereof" or words of like import shall mean and be a reference to the Loan Documents or such Loan Document as amended by the said Sixth Amendment and (ii) the Pledge Agreement, all of the Pledged Collateral described therein, and the Guaranty do, and shall continue to, secure the payment of all of the Obligations (as defined therein). THE PRESLEY COMPANIES, a Delaware corporation By: /s/ David M. Siegel ------------------------------- Name: David M. Siegel Title: Senior Vice President-Chief Financial Officer By: /s/ W. Douglass Harris ------------------------------- Name: W. Douglass Harris Title: Vice President-Controller 4 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997. 1,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 2,546 0 5,415 0 236,816 0 4,017 1,827 256,236 0 30,379 0 0 522 4,663 256,236 97,566 97,566 88,687 88,687 83,557 0 1,562 (75,454) 0 0 0 0 0 (75,454) (1.45) 0
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