-----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, B1JhPXAzPfwTREKysMDFs8zpPIqdFJO02Sxz0dAVcLTmRTHqfOMSuSbXCRPtdjhw u+QPC/OlONB4ltklWysYOg== 0000892569-98-000832.txt : 19980331 0000892569-98-000832.hdr.sgml : 19980331 ACCESSION NUMBER: 0000892569-98-000832 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 001-10830 FILM NUMBER: 98577315 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-K405 1 FORM 10-K405 FOR THE YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-18001 THE PRESLEY COMPANIES (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 33-0475923 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION)
19 CORPORATE PLAZA NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 640-6400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- SERIES A COMMON STOCK, PAR VALUE $.01 PER NEW YORK STOCK EXCHANGE SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 16, 1998 was $12,711,239. (This calculation assumes that all officers and directors of the Company and subsidiaries are affiliates.) The number of shares of Series A and Series B Common Stock outstanding as of March 16, 1998 was 20,516,371 and 31,679,307, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's Proxy Statement for the Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1998 are incorporated herein by reference into Part III. ================================================================================ 2 THE PRESLEY COMPANIES INDEX
PAGE NO. -------- PART I Item 1. Business.................................................. 1 Item 2. Properties................................................ 10 Item 3. Legal Proceedings......................................... 10 Item 4. Submission of Matters to a Vote of Security Holders....... 10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................... 11 Item 6. Selected Financial Data................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 13 Item 8. Financial Statements and Supplementary Data............... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 22 PART III Item 10. Directors and Executive Officers of the Registrant........ 22 Item 11. Executive Compensation.................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 22 Item 13. Certain Relationships and Related Transactions............ 22 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.................................... 23 Index to Consolidated Financial Statements................ F-1
i 3 PART I ITEM 1. BUSINESS GENERAL The Presley Companies and subsidiaries ("Presley" or the "Company") are primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona, New Mexico and Nevada. Since its founding in 1956, Presley has sold over 40,000 homes. The Company believes that it was one of the largest homebuilders in California in terms of both sales and homes delivered in 1997. Approximately 63% of the Company's home closings were derived from its California operations. In 1997, the Company had consolidated revenues of $329.9 million and delivered 1,597 homes. Beginning in early 1996, the Company's homebuilding operations have been conducted under the name Presley Homes. The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. The Company currently markets its homes through 12 sales locations in its six master-planned communities and 28 sales locations at its other projects. In 1997, the average sales price for homes delivered was $192,000, with homes priced from $79,900 to $819,000. The Company and its unconsolidated joint ventures currently own approximately 6,527 lots and control an additional 513 lots on which to construct homes. Substantially all lots are entitled and approximately 43% are located in the Company's six master-planned communities. Prior to 1994, the Company had focused on the development of master-planned communities as a source of supply of developed lots for its homebuilding operations. As used in this Annual Report on Form 10-K, "entitled" land has a Development Agreement and/or Vesting Tentative Map, or a final recorded plat or map from the appropriate county or city government. Development Agreements and Vesting Tentative Maps generally provide for the right to develop the land in accordance with the provisions of the Development Agreement or Vesting Tentative Map unless an issue arises concerning health, safety or general welfare. Development of master-planned communities, which generally takes five to fifteen years from the date of initial land acquisition to completion, includes selecting sites and acquiring large parcels of undeveloped land, obtaining all necessary government approvals to build, and developing land, infrastructure and finished lots. The Company estimates that its current inventory of land is adequate to supply its homebuilding operations at current operating levels for approximately 2 years. Beginning in 1994, the Company's land acquisition strategy, to the extent permitted by the Company's financing arrangements, has been to undertake projects with shorter life-cycles in order to reduce development and market risk while maintaining an inventory of lots sufficient for construction of homes over a two or three year period. As part of this strategy, the Company's current plans are to: (i) acquire and develop parcels of land with up to approximately 300 lots, (ii) expand its homebuilding operations in the Southwest, particularly in its long established markets in California and Arizona, and in Nevada, where the Company entered the market in 1995 and (iii) continue to evaluate opportunities in land development and master-planned communities with the intention that any such projects would be funded in significant part by sources other than the Company. In accordance with the bond indenture agreement governing the Company's Senior Notes which are due in 2001, because the Company's Consolidated Tangible Net Worth was less than $60 million as of September 30, 1997, the Company was, effective on December 4, 1997, required to make an offer to purchase $20 million of the Senior Notes at par plus accrued interest, less the face amount of Senior Notes acquired by the Company after September 30, 1997. The Company acquired Senior Notes with a face amount of $20 million prior to December 4, 1997 and therefore was not required to make said offer. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20.0 million of Senior Notes. At December 31, 1997, the Company's Consolidated Tangible Net Worth was a deficit of $8.9 million. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying 1 4 this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. Because of the Company's obligation to offer to purchase $20 million of the Senior Notes each six months so long as the Company's Consolidated Tangible Net Worth is less than $60 million, the Company is restricted in its ability to acquire, hold and develop real estate projects. The Company changed its operating strategy during 1997 to finance certain projects in California by forming joint ventures with venture partners that would provide a substantial portion of the capital necessary to develop these projects. The Company believes that the use of joint venture partnerships will better enable it to reduce its capital investment and risk in the highly capital intensive California markets, as well as to repurchase the Company's Senior Notes as described above. The Company would generally receive, after priority returns and capital distributions to its partners, approximately 50% of the profits and losses, and cash flows from these joint ventures. As of December 31, 1997, the Company had formed four joint ventures in California which had acquired land at a cost of approximately $32 million. The Company contributed approximately $7 million to these joint ventures. In January 1998, the Company formed an additional joint venture in California which acquired land from the Company at the Company's approximate book value of $23.2 million (which also approximated the land's current market value). The Company contributed approximately $5.1 million to this joint venture and the joint venture assumed the Company's non-recourse note payable of $12.5 million relating to the purchase of this property. These projects are currently in the initial development stages and, based upon current estimates of project revenues and costs, all future development and construction costs will be funded by the Company's venture partners. The Company will continue to utilize its current inventory of lots and future land acquisitions to conduct its operating strategy which consists of: (i) offering a diverse product line at a variety of prices to suit a wide range of consumer tastes, (ii) limiting completed housing inventory exposure, (iii) emphasizing well-designed cost-effective products, (iv) utilizing market research to allow for a quick response to local market conditions, (v) maintaining budget and control systems to facilitate effective cost controls and (vi) using extensive marketing and sales efforts. The Company had total revenues from operations of $329.9 million, $319.0 million and $285.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. Homes closed by the Company were 1,597, 1,838 and 1,425 for the years ended December 31, 1997, 1996 and 1995, respectively. Presley's operations are dependent to a significant extent on debt financing and, beginning in 1997, on joint venture financing. The Company's principal credit sources are its 12 1/2% Senior Notes, a Working Capital Facility, a joint venture facility, and seller-provided financing. The Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200.0 million of 12 1/2% Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Working Capital Facility is a revolving line of credit facility with a maximum commitment of $72.0 million. The Working Capital Facility is secured by substantially all of the Company's assets. At December 31, 1997, the outstanding principal amount under the Working Capital Facility was $43.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Notes 2 and 6 of "Notes to Consolidated Financial Statements." The Company's principal executive offices are located at 19 Corporate Plaza, Newport Beach, California 92660 and its telephone number is (714) 640-6400. The Company was incorporated in the State of Delaware on August 7, 1991. 2 5 THE COMPANY'S MARKETS The Company is currently operating in six geographic regions: the Southern California Region, the San Diego Region, the Northern California Region, the New Mexico Region, the Arizona Region, and the Nevada Region. Each of the regions has responsibility for the Company's homebuilding and development operations as well as new land acquisitions within the geographic boundaries of the region. The following table sets forth sales from real estate operations attributable to each of Presley's homebuilding regions during the preceding three fiscal years:
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) ----------------------------------------------------------- 1997 1996 1995 ----------------- ----------------- ----------------- DOLLAR % OF DOLLAR % OF DOLLAR % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- Southern California(1)...... $120,641 37% $128,153 40% $113,281 39% San Diego(2)................ 30,464 9% 40,799 13% 70,161 25% Northern California(3)...... 83,171 25% 68,100 21% 84,943 30% Arizona(4).................. 50,550 15% 57,065 18% 2,778 1% New Mexico(5)............... 19,996 6% 16,180 5% 14,342 5% Nevada(6)................... 25,120 8% 8,700 3% -- 0% -------- --- -------- --- -------- --- $329,942 100% $318,997 100% $285,505 100% ======== === ======== === ======== ===
- --------------- (1) The Southern California Region consists of operations in Los Angeles, Orange, Riverside, San Bernardino and Ventura Counties. (2) The San Diego Region consists of operations in San Diego and Riverside Counties. (3) The Northern California Region consists of operations in Alameda, Contra Costa, El Dorado, Sacramento, Solano, Yolo and Santa Clara Counties. (4) The Arizona Region consists of operations in Phoenix and Tucson. (5) The New Mexico Region consists of operations in Albuquerque and Santa Fe. (6) The Nevada Region consists of operations in the Las Vegas area. HOMEBUILDING The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its markets. The Company's products include entry-level, move-up and luxury homes and lots for custom homes, although it primarily emphasizes sales to the entry-level and move-up home markets. The Company believes that this diversified product strategy enables it to mitigate some of the risks inherent in the homebuilding industry and to meet a variety of market conditions. In order to reduce exposure to local market conditions, the Company's sales locations are geographically dispersed. The Company currently has 40 sales locations, including 12 in its master-planned communities and 28 at its other projects. Because the decision as to which product to develop is based on the Company's assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Company's attached housing ranges in size from 761 to 1,575 square feet, and the Company's detached housing ranges from 814 to 4,345 square feet. Due to Presley's product and geographic diversification strategy, the prices of Presley's homes also vary substantially. Prices for Presley's attached housing range from approximately $97,000 to $210,000 and prices for detached housing range from approximately $79,900 to $819,000. The average sales price of Presley's homes for the year ended December 31, 1997 was $192,000. The Company generally standardizes and limits the number of home designs within any given product line. This standardization permits on-site mass production techniques and bulk purchasing of materials and components, thus enabling the Company to better control and sometimes reduce construction costs. 3 6 Presley contracts with a number of architects and other consultants who are involved in the design process of Presley homes. Designs are constrained by zoning requirements, building codes, energy efficiency laws and local architectural guidelines, among other factors. Engineering, landscaping, master-planning and environmental impact analysis work are subcontracted to independent firms which are familiar with local requirements. Substantially all construction work is done by subcontractors with Presley acting as the general contractor. The Company manages subcontractor activities with on-site supervisory employees and management control systems. The Company does not have long-term contractual commitments with its subcontractors or suppliers. However, the Company generally has been able to obtain sufficient materials and subcontractors during times of material shortages. The Company believes its relationships with its suppliers and subcontractors are good. DESCRIPTION OF PROJECTS During the year ended December 31, 1997, approximately 44% of the homes closed by the Company were in the Company's six master-planned communities. Presley's master-planned communities usually involve the development of hundreds of acres of raw land into a large community providing homeowners with the opportunity for employment, recreation, shopping and education within the community or in close proximity to it. The homes within these communities include a wide variety of detached and attached entry-level, move-up and luxury homes, and may also contain apartments. Within these communities Presley also may sell individual lots for custom homes, multiple lots for construction of homes by other builders and parcels for commercial, industrial and apartment development. These communities typically offer a variety of recreational amenities which may include golf courses, equestrian centers, tennis courts and swimming pools, among others. The Company's master-planned communities normally take five to fifteen years to complete depending on the project's size, economic conditions prevailing at the time, geological conditions at the site and the Company's strategy for the particular project. Presley's other homebuilding projects usually take two to five years to develop. Substantially all of the Company's master-planned communities are in the later stages of land development. The following table presents project information relating to each of the Company's homebuilding regions.
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT PROJECT (COUNTY) FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PRODUCT DELIVERY COMPLETION(1) 1997 1997 1997 1997(2)(4) ---------------- -------- ------------- ------------ ------------ ------------ ------------ SOUTHERN CALIFORNIA WHOLLY-OWNED: Sun Lakes Country Club (Riverside County) Previously Closed Products 1987 395 395 0 0 0 Patio-Legend 1987 582 582 0 2 0 Single Family-Resort 1987 817 817 0 4 0 Villa Duplexes 1990 176 172 4 6 0 Veranda 1994 25 23 2 3 0 Executive Series 1995 87 75 12 31 1 Promenade 1996 596 29 567 25 0 Atrium 1996 423 26 397 17 0 Terrace 1996 316 24 292 21 1 ------ ------ ----- ----- --- 3,417 2,143 1,274 109 2 ------ ------ ----- ----- --- Horsethief Canyon Ranch (Riverside County) Previously Closed Products 1989 847 847 0 0 0 Series "300" 1998 262 0 262 0 0 Series "400" 1995 474 96 378 56 12 Series "500" 1995 403 78 325 45 19 ------ ------ ----- ----- --- 1,986 1,021 965 101 31 ------ ------ ----- ----- --- The Highlands (Orange County) Previously Closed Products 1989 1,332 1,332 0 0 0 Skyline 1992 145 145 0 1 0 New Viewpointe North 1992 104 104 0 35 0 PROJECT (COUNTY) SALES PRICE PRODUCT RANGE(3) ---------------- ----------- SOUTHERN CALIFORNIA WHOLLY-OWNED: Sun Lakes Country Club (Riversi Previously Closed Products Patio-Legend $101,900-138,900 Single Family-Resort $108,900-154,900 Villa Duplexes $ 97,900-124,900 Veranda $ 89,990-125,990 Executive Series $108,900-135,900 Promenade $113,900-125,900 Atrium $129,900-142,900 Terrace $161,900-185,900 Horsethief Canyon Ranch (Rivers Previously Closed Products Series "300" $107,000-123,000 Series "400" $124,900-144,900 Series "500" $153,900-165,900 The Highlands (Orange County) Previously Closed Products Skyline $245,000-285,000 New Viewpointe North $135,000-174,000
4 7
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT PROJECT (COUNTY) FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PRODUCT DELIVERY COMPLETION(1) 1997 1997 1997 1997(2)(4) ---------------- -------- ------------- ------------ ------------ ------------ ------------ Monaco 1995 408 388 20 107 20 Legacy 1995 84 78 6 27 6 Canyon Crest 1995 98 98 0 24 0 Canyon Ridge 1996 69 69 0 29 0 ------ ------ ----- ----- --- 2,240 2,214 26 223 26 ------ ------ ----- ----- --- Beltierra (Los Angeles County) Previously Closed Products 1991 225 225 0 0 0 Andora 1991 233 233 0 1 0 Las Brisas 1995 185 124 61 51 8 ------ ------ ----- ----- --- 643 582 61 52 8 ------ ------ ----- ----- --- Fontana - (Riverside County) 1998 300 0 300 0 0 ------ ------ ----- ----- --- Boardwalk - Huntington Beach - (Orange County) 1996 58 58 0 31 0 ------ ------ ----- ----- --- Park Place - Huntington Beach - (Orange County) 1996 58 58 0 41 0 ------ ------ ----- ----- --- North Park - Valencia - (Los Angeles County) 1996 48 47 1 47 1 ------ ------ ----- ----- --- Carey Ranch - Sylmar - (Los Angeles County) 1997 138 21 117 21 7 ------ ------ ----- ----- --- Granada Hills - (Los Angeles County) 1998 37 0 37 0 0 ------ ------ ----- ----- --- Total wholly-owned 8,925 6,144 2,781 625 75 ------ ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Thousand Oaks - (Ventura County) 1998 110 0 110 0 0 ------ ------ ----- ----- --- SOUTHERN CALIFORNIA REGION TOTAL 9,035 6,144 2,891 625 75 ====== ====== ===== ===== === SAN DIEGO WHOLLY-OWNED: Bridlevale (Riverside County) Previously Closed Products 1992 377 377 0 0 0 County Glen 1992 142 142 0 3 0 Sutter Ridge 1995 134 134 0 16 0 ------ ------ ----- ----- --- 653 653 0 19 0 ------ ------ ----- ----- --- Discovery Hills (San Diego County) Previously Closed Products 1991 343 343 0 0 0 Glen Arbor 1993 269 269 0 32 0 Woodwind 1994 122 122 0 12 0 Discovery Meadows 1997 143 53 90 53 21 ------ ------ ----- ----- --- 877 787 90 97 21 ------ ------ ----- ----- --- Carmel Mountain Ranch (San Diego County) Previously Closed Products 1986 5,044 5,044 0 0 0 The Summit 1997 86 0 86 0 9 The Bluffs 1997 114 6 108 6 31 ------ ------ ----- ----- --- 5,244 5,050 194 6 40 ------ ------ ----- ----- --- Sycamore Ranch (Riverside County) 1997 195 6 189 6 12 ------ ------ ----- ----- --- Stonecrest (San Diego County) 1998 110 0 110 0 0 ------ ------ ----- ----- --- Total wholly-owned 7,079 6,496 583 128 73 ------ ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Torrey Unit I (San Diego County) 1998 107 0 107 0 0 ------ ------ ----- ----- --- Torrey Unit 4 (San Diego County) 1998 59 0 59 0 0 ------ ------ ----- ----- --- Mercy Road (San Diego County) 1999 113 0 113 0 0 ------ ------ ----- ----- --- PROJECT (COUNTY) SALES PRICE PRODUCT RANGE(3) ---------------- ----------- Monaco $ 97,000-157,000 Legacy $380,000-445,000 Canyon Crest $239,900-271,900 Canyon Ridge $275,000-315,000 Beltierra (Los Angeles County) Previously Closed Products Andora $ 92,500-114,500 Las Brisas $197,900-229,900 Fontana - (Riverside County) $132,000-150,000 Boardwalk - Huntington Beach - (Orange County) $280,000-330,000 Park Place - Huntington Beach - (Orange County) $280,000-330,000 North Park - Valencia - (Los Angeles County) $225,990-240,900 Carey Ranch - Sylmar - (Los Angeles County) $197,900-229,900 Granada Hills - (Los Angeles County) $415,000-485,000 Total wholly-owned UNCONSOLIDATED JOINT VENTURES: Thousand Oaks - (Ventura County) $265,000-300,000 SOUTHERN CALIFORNIA REGION TOTAL SAN DIEGO WHOLLY-OWNED: Bridlevale (Riverside County) Previously Closed Products County Glen $ 95,900-119,900 Sutter Ridge $122,900-169,900 Discovery Hills (San Diego County) Previously Closed Products Glen Arbor $153,900-187,900 Woodwind $133,900-147,900 Discovery Meadows $157,900-186,900 Carmel Mountain Ranch (San Dieg Previously Closed Products The Summit $304,200-338,900 The Bluffs $229,400-253,400 Sycamore Ranch (Riverside County) $283,000-338,000 Stonecrest (San Diego County) $187,000-218,000 Total wholly-owned UNCONSOLIDATED JOINT VENTURES: Torrey Unit I (San Diego County) $276,000-306,000 Torrey Unit 4 (San Diego County) $351,000-374,000 Mercy Road (San Diego County) $177,900-199,900
5 8
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT PROJECT (COUNTY) FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PRODUCT DELIVERY COMPLETION(1) 1997 1997 1997 1997(2)(4) ---------------- -------- ------------- ------------ ------------ ------------ ------------ Total unconsolidated joint ventures 279 0 279 0 0 ------ ------ ----- ----- --- SAN DIEGO REGION TOTAL 7,358 6,496 862 128 73 ====== ====== ===== ===== === NORTHERN CALIFORNIA WHOLLY-OWNED: Oakhurst Country Club (Contra Costa County) Previously Closed Products 1989 558 558 Black Diamond 1989 226 226 0 1 0 Falcon Ridge 1996 145 63 82 48 7 Diablo Ridge 1994 136 136 0 21 0 Oak Hollow 1994 143 143 0 7 0 Peacock Creek 1996 142 57 85 25 5 Town Center 1999 40 0 40 0 0 ------ ------ ----- ----- --- 1,390 1,183 207 102 12 ------ ------ ----- ----- --- Prominence (Alameda County) 1991 151 151 0 19 0 ------ ------ ----- ----- --- The Preserve (Alameda County) 1997 100 8 92 8 9 ------ ------ ----- ----- --- Twin Cities Heritage (Sacramento County) 1992 107 107 0 4 0 ------ ------ ----- ----- --- Twin Cities Mill Creek (Sacramento County) 1996 116 46 70 34 4 ------ ------ ----- ----- --- Mira Lago (Sacramento County) 1995 57 57 0 19 0 ------ ------ ----- ----- --- Marina Woods (El Dorado County) 1996 79 67 12 38 6 ------ ------ ----- ----- --- Eagle Ridge (Solano County) 1997 364 0 364 0 22 ------ ------ ----- ----- --- Mace Ranch - Classics (Yolo County) 1997 121 18 103 18 11 ------ ------ ----- ----- --- Mace Ranch - Affordables (Yolo County) 1997 28 5 23 5 5 ------ ------ ----- ----- --- Cerro Plata (Santa Clara County)(5) 2000 550 0 550 0 0 ------ ------ ----- ----- --- NORTHERN CALIFORNIA REGION TOTAL 3,063 1,642 1,421 247 69 ====== ====== ===== ===== === ARIZONA WHOLLY-OWNED: Settler's Point (Maricopa County) 1995 103 102 1 37 0 ------ ------ ----- ----- --- McDowell Mt. Ranch (Maricopa County) 1995 75 74 1 4 0 ------ ------ ----- ----- --- Tatum Highlands 14 (Maricopa County) 1995 125 125 0 24 0 ------ ------ ----- ----- --- Tatum Highlands 17 (Maricopa County) 1995 87 87 0 37 0 ------ ------ ----- ----- --- Estrella (Maricopa County) 1995 113 61 52 31 14 ------ ------ ----- ----- --- Eagle Mountain (Maricopa County) 1996 101 45 56 33 11 ------ ------ ----- ----- --- Continental Ranch (Pima County) 1995 97 67 30 29 5 ------ ------ ----- ----- --- Legend Trail (Maricopa County) 1996 102 27 75 25 10 ------ ------ ----- ----- --- Williams Centre - Haciendas (Pima County) 1996 50 17 33 16 7 ------ ------ ----- ----- --- Williams Centre - Las Villas (Pima County) 1997 46 0 46 0 12 ------ ------ ----- ----- --- PROJECT (COUNTY) SALES PRICE PRODUCT RANGE(3) ---------------- ----------- Total unconsolidated joint ventures SAN DIEGO REGION TOTAL NORTHERN CALIFORNIA WHOLLY-OWNED: Oakhurst Country Club (Contra Costa County) Previously Closed Products Black Diamond Falcon Ridge $331,450-375,450 Diablo Ridge $154,900-210,000 Oak Hollow $230,900-270,900 Peacock Creek $391,500-492,500 Town Center $205,900-253,900 Prominence (Alameda County) $355,000-428,000 The Preserve (Alameda County) $692,600-819,000 Twin Cities Heritage (Sacramento County) $118,000-154,000 Twin Cities Mill Creek (Sacramento County) $109,900-129,900 Mira Lago (Sacramento County) $179,900-239,900 Marina Woods (El Dorado County) $243,900-292,900 Eagle Ridge (Solano County) $188,300-248,000 Mace Ranch - Classics (Yolo County) $179,900-219,900 Mace Ranch - Affordables (Yolo County) $118,300-135,500 Cerro Plata (Santa Clara County)(5) $325,000-720,000 NORTHERN CALIFORNIA REGION TOTAL ARIZONA WHOLLY-OWNED: Settler's Point (Maricopa County) $125,900-156,900 McDowell Mt. Ranch (Maricopa County) $195,900-234,700 Tatum Highlands 14 (Maricopa County) $116,400-143,900 Tatum Highlands 17 (Maricopa County) $143,500-188,100 Estrella (Maricopa County) $121,900-149,900 Eagle Mountain (Maricopa County) $210,900-243,900 Continental Ranch (Pima County) $133,900-163,200 Legend Trail (Maricopa County) $164,900-177,900 Williams Centre - Haciendas (Pima County) $170,900-193,900 Williams Centre - Las Villas (Pima County) $124,000-137,400
6 9
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT PROJECT (COUNTY) FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PRODUCT DELIVERY COMPLETION(1) 1997 1997 1997 1997(2)(4) ---------------- -------- ------------- ------------ ------------ ------------ ------------ McDowell Mt. Ranch "P" (Maricopa County) 1997 69 26 43 26 7 ------ ------ ----- ----- --- Lone Mountain (Maricopa County) 1997 57 3 54 3 11 ------ ------ ----- ----- --- Manzanita Heights (Maricopa County) 1997 73 18 55 18 18 ------ ------ ----- ----- --- Crystal Gardens (Maricopa County) 1997 157 7 150 7 9 ------ ------ ----- ----- --- Monument Vista (Pima County) 1997 106 2 104 2 12 ------ ------ ----- ----- --- ARIZONA REGION TOTAL 1,361 661 700 292 116 ====== ====== ===== ===== === NEW MEXICO WHOLLY-OWNED: Summerfield (Bernalillo County) 1995 289 114 175 31 23 ------ ------ ----- ----- --- Tuscany (Bernalillo County) 1996 87 51 36 21 3 ------ ------ ----- ----- --- Tierra Colinas (Santa Fe County) 1996 21 16 5 9 0 ------ ------ ----- ----- --- Tuscany Hills (Bernalillo County) 1996 30 4 26 3 1 ------ ------ ----- ----- --- Rancho del Sol (Santa Fe County) 1996 195 62 133 54 5 ------ ------ ----- ----- --- The Courtyards at Park West (Bernalillo County) 1996 100 20 80 20 6 ------ ------ ----- ----- --- Ventana (Bernalillo County) 1997 81 2 79 2 5 ------ ------ ----- ----- --- NEW MEXICO REGION TOTAL 803 269 534 140 43 ====== ====== ===== ===== === NEVADA WHOLLY-OWNED: Mountainside (Clark County) 1996 158 136 22 81 9 ------ ------ ----- ----- --- Prominence (Clark County) 1996 100 47 53 39 5 ------ ------ ----- ----- --- Camden Park (Clark County) 1997 150 21 129 21 11 ------ ------ ----- ----- --- Monte Nero (Clark County) 1997 193 24 169 24 2 ------ ------ ----- ----- --- Royal Woods (Clark County) 1998 142 0 142 0 0 ------ ------ ----- ----- --- Deer Springs Ranch (Clark County) 1998 117 0 117 0 0 ------ ------ ----- ----- --- NEVADA REGION TOTAL 860 228 632 165 27 ====== ====== ===== ===== === GRAND TOTALS: WHOLLY-OWNED 22,091 15,440 6,651 1,597 403 UNCONSOLIDATED JOINT VENTURES 389 0 389 0 0 ------ ------ ----- ----- --- 22,480 15,440 7,040 1,597 403 ====== ====== ===== ===== === PROJECT (COUNTY) SALES PRICE PRODUCT RANGE(3) ---------------- ----------- McDowell Mt. Ranch "P" (Maricopa County) $199,300-235,300 Lone Mountain (Maricopa County) $225,900-274,900 Manzanita Heights (Maricopa County) $ 79,900-92,900 Crystal Gardens (Maricopa County) $ 96,900-117,900 Monument Vista (Pima County) $184,000-237,000 ARIZONA REGION TOTAL NEW MEXICO WHOLLY-OWNED: Summerfield (Bernalillo County) $ 96,150-121,900 Tuscany (Bernalillo County) $103,900-122,900 Tierra Colinas (Santa Fe County) $146,500-262,900 Tuscany Hills (Bernalillo County) $118,900-185,000 Rancho del Sol (Santa Fe County) $ 93,900-161,900 The Courtyards at Park West (Bernalillo County) $122,900-164,900 Ventana (Bernalillo County) $123,900-159,900 NEW MEXICO REGION TOTAL NEVADA WHOLLY-OWNED: Mountainside (Clark County) $121,990-150,500 Prominence (Clark County) $146,800-174,500 Camden Park (Clark County) $173,000-199,000 Monte Nero (Clark County) $133,990-167,500 Royal Woods (Clark County) $147,000-179,000 Deer Springs Ranch (Clark County) $115,990-141,990 NEVADA REGION TOTAL GRAND TOTALS: WHOLLY-OWNED UNCONSOLIDATED JOINT VENTURES
- --------------- (1) The estimated number of homes to be built at completion is subject to change, and there can be no assurance that the Company will build these homes. (2) Backlog consists of homes sold under sales contracts that have not yet closed, and there can be no assurance that closings of sold homes will occur. (3) Sales price range reflects base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project. (4) Of the total homes subject to pending sales contracts as of December 31, 1997, 310 represent homes completed or under construction and 93 represent homes not yet under construction. (5) Effective in January 1998, the Company and an outside financial partner formed a joint venture which acquired the Cerro Plata project from the Company. 7 10 SALES AND MARKETING The management team responsible for a specific project develops marketing objectives, formulates pricing and sales strategies and develops advertising and public relations programs for approval of senior management. The Company makes extensive use of advertising and other promotional activities, including newspaper advertisements, brochures, television and radio commercials, direct mail and the placement of strategically located sign boards in the immediate areas of its developments. In general, the Company's advertising emphasizes Presley's strengths with respect to the quality and value of its products. The Company normally builds, decorates, furnishes and landscapes three to five model homes for each product line and maintains on-site sales offices, which typically are open seven days a week. Management believes that model homes play a particularly important role in the Company's marketing efforts. Consequently, the Company expends a significant amount of effort in creating an attractive atmosphere at its model homes. Interior decorations vary among the Company's models and are carefully selected based upon the lifestyles of targeted buyers. Structural changes in design from the model homes are not generally permitted, but home buyers may select various other optional construction and design amenities. Presley employs in-house commissioned sales personnel and, on a limited basis, outside brokers in the selling of its homes. Presley typically engages its sales personnel on a long-term, rather than a project-by-project basis, which it believes results in a more motivated sales force with an extensive knowledge of the Company's operating policies and products. Sales personnel are trained by the Company and attend weekly meetings to be updated on the availability of financing, construction schedules and marketing and advertising plans. The Company strives to provide a high level of customer service during the sales process and after a home is sold. The participation of the sales representatives, on-site construction supervisors and the post-closing customer service personnel, working in a team effort, is intended to foster the Company's reputation for quality and service, and ultimately lead to enhanced customer retention and referrals. In the past, and more so during the recent California recession, Presley has used a variety of incentives in order to attract buyers. Sales incentives may include upgrades in interior design features such as carpet or fixtures, or added amenities such as a fireplace or an outdoor deck. The use of incentives depends largely on prevailing economic conditions and the Company's success in marketing its products. The Company's homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyer's ability to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at Presley's projects was approximately 18% during 1997. The Company believes its cancellation rate compares favorably to that of its competitors. The Company generally provides a one-year limited warranty of workmanship and materials with each of its homes. From January 1, 1992 through March 31, 1995, the Company provided a five-year limited warranty for certain homes in the Company's Southern California Region. This five-year warranty exceeded the warranty offered by competitors and served as a marketing tool for the Company. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. The Company's historical experience is that one-year warranty claims generally fall within the one percent reserve. In addition, California law provides that consumers can seek redress for patent defects in new homes within four years from when the defect is discovered, or should have been discovered, provided that if the defect is latent there is an outside limit for seeking redress which is ten years from the completion of construction. In addition, because the Company generally subcontracts its homebuilding work to qualified subcontractors who generally provide the Company with an indemnity and a certificate of insurance prior to receiving payment from the Company for their work, the Company generally has recourse against the subcontractors or their insurance carriers for claims relating to the subcontractors' workmanship or materials. 8 11 CUSTOMER FINANCING -- PRESLEY MORTGAGE COMPANY The Company seeks to assist its home buyers in obtaining financing by arranging with mortgage lenders to offer qualified buyers a variety of financing options. Substantially all home buyers utilize long-term mortgage financing to purchase a home and mortgage lenders will usually make loans only to qualified borrowers. The Company attempts to minimize potential risks relating to customer financing by acquiring mortgage financing commitments that lock in the availability of funds and interest costs at specified levels. Presley Mortgage Company, a wholly owned subsidiary, began operations effective December 1, 1994 and is in operation to service all of the Company's operating regions. The mortgage company operates as a mortgage broker/loan correspondent and originates conventional, FHA and VA loans. SALE OF LOTS AND LAND In the ordinary course of business, the Company continually evaluates land sales and has sold, and expects that it will continue to sell, land as market and business conditions warrant. Presley also sells both multiple lots to other builders (bulk sales) and improved individual lots for the construction of custom homes where the presence of such homes adds to the quality of the community. In addition, the Company may acquire sites with commercial, industrial and multi-family parcels which will generally be sold to third-party developers. INFORMATION SYSTEMS AND CONTROLS The Company assigns a high priority to the development and maintenance of its budget and cost control systems and procedures. The Company's regional and area offices are connected to corporate headquarters through a fully integrated accounting, financial and operational management information system. Through this system, management regularly evaluates the status of its projects in relation to budgets to determine the cause of any variances and, where appropriate, adjusts its operations to capitalize on favorable variances or to limit adverse financial impacts. COMPETITION The homebuilding industry is highly competitive, particularly in the low and medium-price range where the Company currently concentrates its activities. Although Presley is one of California's largest homebuilders, the Company does not believe it has a significant market position in any geographic area which it serves due to the fragmented nature of the market. Due in significant part to the recent recession and its effect on the housing market, the Company has, since 1990, had to reduce its sales prices and offer greater incentives to buyers in order to effectively compete for sales in several of its markets. During the first quarter of 1998 the market has generally rebounded allowing the Company to selectively increase sales prices and reduce incentives while remaining competitive. A number of Presley's competitors have larger staffs, larger marketing organizations, and substantially greater financial resources than those of Presley. However, the Company believes that it competes effectively in its existing markets as a result of its product and geographic diversity, substantial development expertise, and its reputation as a low-cost producer of quality homes. Further, the Company sometimes gains a competitive advantage in locations where changing regulations make it difficult for competitors to obtain entitlements and/or government approvals which the Company has already obtained. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS The Company and its competitors are subject to various local, state and Federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can ultimately be built within the boundaries of a particular project. The Company and its competitors may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future in the states in which it operates. Because the Company usually purchases land with entitlements, the Company believes that the moratoriums would adversely affect the Company only if they arose from unforeseen health, safety and welfare issues such as insufficient water or sewage facilities. Local and state 9 12 governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in when the Company receives entitlements. The Company and its competitors are also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause the Company and its competitors to incur substantial compliance and other costs, and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. The Company's projects in California are especially susceptible to restrictive government regulations and environmental laws. However, environmental laws have not, to date, had a material adverse impact on the Company's operations. CORPORATE ORGANIZATION AND PERSONNEL Each of the Company's operating regions has responsibility for the Company's homebuilding and development operations within the geographical boundaries of that region. The Company's seven executive officers at the corporate level average more than 20 years of experience in the homebuilding and development industries. The Company combines decentralized management in those aspects of its business where detailed knowledge of local market conditions is important (such as governmental processing, construction, land development and sales and marketing), with centralized management in those functions where the Company believes central control is required (such as financial, personnel and legal matters). Land acquisition and certain other strategic decisions combine centralized management, for financial and strategic control, with decentralized management, for identification of opportunistic purchases and in-depth knowledge of local market conditions. As of December 31, 1997, Presley's real estate development and homebuilding operations employed approximately 328 full-time and 30 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, engineering, land acquisition, sales and marketing activities. Presley believes that its relations with its employees have been good. Some employees of the subcontractors which Presley utilizes are unionized, but virtually none of Presley's employees are union members. Although there have been temporary work stoppages in the building trades in Presley's areas of operation, to date none has had any material impact upon Presley's overall operations. ITEM 2. PROPERTIES Headquarters Presley owns a 15,800 square foot building on leased land in Newport Beach, California which it uses for its corporate headquarters. The Company leases or owns properties for its area offices, but none of these properties is material to the operation of Presley's business. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings, most of which relate to routine litigation and some of which are covered by insurance. In the opinion of the Company's management, none of the uninsured claims involve claims which will have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's stockholders during the fourth quarter of 1997. 10 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Series A Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol PDC. Public trading of the Series A Common Stock commenced on October 11, 1991. Prior to that date, there was no public market for the Series A Common Stock. The following table sets forth the high and low sales prices for the Series A Common Stock as reported on the NYSE for the periods indicated.
HIGH LOW ---- --- 1996 First Quarter............................................. $1 7/8 $1 1/4 Second Quarter............................................ 1 7/ 1 3/ Third Quarter............................................. 1 3/ 1 1/ Fourth Quarter............................................ 1 3/ 7 1997 First Quarter............................................. $1 1/4 $ 7/8 Second Quarter............................................ 1 7/ 1 Third Quarter............................................. 1 15/1 13/ Fourth Quarter............................................ 1 1/1 9/
As of March 16, 1998, the closing price for the Company's Series A Common Stock as reported on the NYSE was $1 1/16. As of March 16, 1998, there were 369 holders of record of the Company's Series A Common Stock. The Company has not paid any cash dividends on its Common Stock during the last two fiscal years and expects that for the foreseeable future it will follow a policy of retaining earnings in order to help finance its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements, general economic conditions and operating and financial condition of the Company, among other factors. In addition, the effect of the Company's principal financing agreements currently prohibits the payment of dividends by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Notes 2 and 6 of "Notes to Consolidated Financial Statements." 11 14 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company have been derived from the Consolidated Financial Statements of the Company and other available information. The summary should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere herein. As described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 2 of "Notes to Consolidated Financial Statements," the consolidated financial statements for 1994, 1995, 1996 and 1997 have been prepared after giving retroactive effect as of January 1, 1994 to a capital restructuring and quasi-reorganization. The restructuring and quasi-reorganization resulted in a reduction of the book value of the Company's real estate assets and liabilities as of January 1, 1994, and as a result, cost of sales and interest expense are lower in 1994, 1995, 1996 and 1997 than they would have been otherwise, affecting comparability of 1994, 1995, 1996 and 1997 results to 1993 and prior years.
JANUARY 1, 1997 1996 1995 1994 1994(3) 1993 -------- -------- -------- -------- ---------- -------- (IN THOUSANDS EXCEPT NET INCOME (LOSS) PER COMMON SHARE AMOUNTS AND NUMBER OF HOMES) STATEMENT OF OPERATIONS DATA: Sales Homes................................... $307,332 $317,366 $231,204 $262,866 $261,672 Lots, land and other.................... 22,610 1,631 54,301 7,302 9,565 -------- -------- -------- -------- -------- -------- Total sales.......................... 329,942 318,997 285,505 270,168 271,237 Operating income (loss)(2)................ (84,534) 163 (41,335) 14,318 (49,397) Income (loss) before income taxes and extraordinary item...................... (89,894) 152 (41,653) 10,232 (67,297) Credit (provision) for income taxes....... -- -- 1,868 (4,195) 3,041 Income (loss) before extraordinary item... (89,894) 152 (39,785) 6,037 (64,256) Extraordinary item-gain from retirement of debt, net of applicable taxes........... -- -- 2,688 -- -- Net income (loss)......................... (89,894) 152 (37,097) 6,037 (64,256) Basic and diluted earnings per common share(4): Before extraordinary item............ $(1.72) $-- $(0.76) $0.11 $(3.47) Extraordinary item................... -- -- 0.05 -- -- -------- -------- -------- -------- -------- -------- After extraordinary item............. $(1.72) $-- $(0.71) $0.11 $(3.47) Ratio of earnings to fixed charges(1)..... (2) (2) (2) (2) (2) BALANCE SHEET DATA: Real estate inventories................... $255,472 $306,381 $315,535 $382,055 $374,048 $439,548 Total assets.............................. 285,244 331,615 340,933 425,637 419,914 485,414 Notes payable............................. 254,935 208,524 224,434 272,717 277,198 372,198 Stockholders' equity (deficit)............ (5,681) 84,213 84,061 121,158 110,890 81,390 OPERATING DATA: Number of homes sold...................... 1,718 1,804 1,488 1,423 1,509 Number of homes closed.................... 1,597 1,838 1,425 1,442 1,475 Number of homes in escrow at end of period.................................. 403 282 316 253 272 Average sales prices of homes closed...... $192 $173 $162 $182 $177
- --------------- (1) Ratio of earnings to fixed charges is calculated by dividing income as adjusted by fixed charges. For this purpose, "income as adjusted" means income (loss) before (i) minority partners' interest in consolidated income (loss) and (ii) income taxes, plus (i) interest expense and (ii) amortization of capitalized interest included in cost of sales. For this purpose "fixed charges" means (i) interest expense and (ii) interest capitalized during the period. (2) Earnings were not adequate to cover fixed charges by $25.4 million, $21.1 million, $67.1 million, $13.9 million, and $65.6 million for the years ended December 31, 1997, 1996, 1995, 1994, and 1993, respectively. These deficits, as well as the operating income (loss), include the effect of an impairment loss on real estate assets of $74 million in 1997 and $16.8 million in 1995 and reductions of real estate assets to estimated net realizable value of $9.4 million and $46.6 million in 1995 and 1993, respectively. (3) The amounts at January 1, 1994 include the effects of the capital restructuring and quasi-reorganization on the consolidated balance sheet as of December 31, 1993 as described in Note 2 of "Notes to Consolidated Financial Statements." (4) All earnings per share amounts for all periods presented conform to FASB Statement 128. Basic and diluted earnings per share for the four years ended December 31, 1997 are based on 52,195,678 shares of Series A and Series B common stock outstanding. Basic and diluted earnings per share for the year ended December 31, 1993 are based on 18,500,000 shares of common stock outstanding before the capital restructuring and quasi-reorganization described in Footnote (3) above. 12 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of results of operations and financial condition should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. GENERAL OVERVIEW. The Company's financial condition as of December 31, 1997 reflects the severe economic conditions encountered in the Company's primary homebuilding markets within California, together with the Company's highly leveraged debt and capital structure. The declining economic conditions began to affect the Company's primary homebuilding markets during 1989 and continued off and on since then. In view of substantial declines in the value of certain of the Company's real estate assets since 1992, the Company has been required to write down the book value of these real estate assets, in accordance with generally accepted accounting principles. The loss for the year ended December 31, 1997 includes a non-cash charge of $74 million as a result of the recognition of impairment losses on certain of the Company's real estate assets in accordance with Statement of Financial Accounting Standards No. 121. As a result of the substantial losses realized by the Company since 1992, the Company has a stockholders' deficit of $5.7 million at December 31, 1997. In accordance with the bond indenture agreement governing the Company's Senior Notes which are due in 2001, because the Company's Consolidated Tangible Net Worth was less than $60 million as of September 30, 1997, the Company was, effective on December 4, 1997, required to make an offer to purchase $20 million of the Senior Notes at par plus accrued interest, less the face amount of Senior Notes acquired by the Company after September 30, 1997. The Company acquired Senior Notes with a face amount of $20 million prior to December 4, 1997 and therefore was not required to make said offer. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20.0 million of Senior Notes. At December 31, 1997, the Company's Consolidated Tangible Net Worth was a deficit of $8.9 million. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. Because of the Company's obligation to offer to purchase $20 million of the Senior Notes each six months so long as the Company's Consolidated Tangible Net Worth is less than $60 million, the Company is restricted in its ability to acquire, hold and develop real estate projects. The Company changed its operating strategy during 1997 to finance certain projects in California by forming joint ventures with venture partners that would provide a substantial portion of the capital necessary to develop these projects. The Company believes that the use of joint venture partnerships will better enable it to reduce its capital investment and risk in the highly capital intensive California markets, as well as to repurchase the Company's Senior Notes as described above. The Company would generally receive, after priority returns and capital distributions to its partners, approximately 50% of the profits and losses, and cash flows from these joint ventures. As of December 31, 1997, the Company had formed four joint ventures in California which had acquired land at a cost of approximately $32 million. The Company contributed approximately $7 million to these joint ventures. In January 1998, the Company formed an additional joint venture in California which acquired land from the Company at the Company's approximate book value of $23.2 million (which also approximated the land's current market value). The Company contributed approximately $5.1 million to this joint venture and the joint venture assumed the Company's non-recourse note payable of $12.5 million relating to the purchase of this property. These projects are currently in the initial development stages and, based upon current estimates of project revenues and costs, all future development and construction costs will be funded by the Company's venture partners. 13 16 RESULTS OF OPERATIONS Homes sold, closed and in backlog as of and for the periods presented are as follows:
AS OF AND FOR YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ Number of homes sold........................................ 1,718 1,804 1,488 ===== ===== ===== Number of homes closed...................................... 1,597 1,838 1,425 ===== ===== ===== Backlog of homes sold but not closed at end of period....... 403 282 316 ===== ===== =====
Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed as of December 31, 1997 was $84.6 million as compared to $52.7 million as of December 31, 1996 and $81.3 million as of September 30, 1997. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company's projects was approximately 18% during 1997. The number of homes closed in the fourth quarter of 1997 was down 20 percent to 411 from 512 in the fourth quarter of 1996. Net new home orders for the quarter ended December 31, 1997 increased 38 percent to 422 units from 306 for the quarter ended December 31, 1996. For the fourth quarter of 1997, net new orders decreased 1 percent to 422 from 419 units in the third quarter of 1997. The backlog of homes sold as of December 31, 1997 was 403, up 43 percent from 282 units as of December 31, 1996, and up 3 percent from 392 units at September 30, 1997. The Company's inventory of completed and unsold homes as of December 31, 1997 decreased to 111 units from 122 units as of December 31, 1996. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less cost of disposal. Under the new pronouncement, when an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. This was a significant change from the previous accounting standard that required homebuilders to carry real estate assets at the lower of cost or net realizable value. The net loss for the year ended December 31, 1997 included a non-cash charge of $74,000,000 to record impairment losses on certain of the Company's real estate assets. The net loss for the year ended December 31, 1995 included a non-cash charge of $16,811,000 to record impairment losses on certain of the Company's real estate assets. The Company periodically evaluates its real estate assets to determine whether such assets have been impaired and therefore would be required to be adjusted to fair value. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein. Prior to the adoption of Statement No. 121, the Company evaluated its real estate inventories to determine if such assets were stated at the lower of cost or estimated net realizable value, as required by the 14 17 then applicable accounting pronouncements. The evaluations considered the depressed nature of the real estate business in the Company's principal markets, the reduced demand from prospective homebuyers, decreased sales prices, increased sales incentives, future costs of development and holding costs during development. Based on these evaluations, reductions of certain real estate assets to estimated net realizable value amounting to $9,400,000 were recorded during 1995. This Annual Report on Form 10-K does not attempt to discuss or describe all of the factors that influence or impact the evaluation of an impairment of or the net realizable value of the Company's real estate assets. Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of product available for sale is expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expense during 1997, 1996, and 1995 was approximately $7,812,000, $2,256,000 and $2,226,000, respectively. 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 YEARS ENDED DECEMBER 31, 1997 AND 1996. Sales (which represent recorded revenues from closings) for the year ended December 31, 1997 were $329.9 million, an increase of $10.9 million (3.4%), from sales of $319.0 million for the year ended December 31, 1996. Revenue from sales of homes decreased $10.1 million to $307.3 million in 1997 from $317.4 million in 1996. This decrease was due primarily to a decrease in the number of homes closed to 1,597 in 1997 from 1,838 in 1996, partially offset by an increase in the average sales prices of homes to $192,000 in 1997 from $173,000 in 1996 which resulted primarily from increased sales prices, decreased buyer incentives and a change in the mix of product. Revenue from lots, land and other increased $21.0 million to $22.6 million in 1997 from $1.6 million in 1996, primarily as a result of sales of land to be used for commercial purposes, as well as the sale of a golf course formerly owned and operated by the Company. Total operating income (loss) decreased from income of $0.2 million in 1996 to a loss of $84.5 million in 1997. The excess of revenue from sales of homes over the related cost of sales decreased by $8.4 million, to $29.0 million in 1997 from $37.4 million in 1996. These decreases were primarily due to a decrease in the number of homes closed as described above and increases in costs such as interest and development. The excess of revenue from sales of lots, land and other over the related cost of sales decreased by $0.9 million to a loss of $1.3 million in 1997 from a loss of $0.4 million in 1996. Impairment losses on real estate assets amounting to $74.0 million were recorded in 1997 as compared to none in 1996. Sales and marketing expenses decreased by $0.6 million (2.6%) to $22.3 million in 1997 from $22.9 million in 1996 primarily as a result of a decrease in sales commissions directly attributable to a decrease in closed units, partially offset by an increase in advertising and other selling expenses in 1997 compared to 1996. General and administrative expenses increased by $2.0 million (14.3%) to $16.0 million in 1997 from $14.0 million in 1996, primarily as the result of additional staffing in expanding operating units in Arizona and Nevada. Total interest incurred of $33.0 million during 1997 increased $1.4 million (4.4%) from 1996 as a result of increased interest rates and higher debt levels in 1997. Net interest expense increased to $7.8 million in 1997 from $2.3 million for 1996. This increase was due primarily to a reduction in real estate assets which qualify for interest capitalization. Other (income) expense, net increased $0.3 million to a net income of $2.5 million in 1997 from a net income of $2.2 million in 1996 primarily as a result of increased income from design center operations. 15 18 COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995. Sales (which represent recorded revenues from closings) for the year ended December 31, 1996 were $319.0 million, an increase of $33.5 million (11.7%), from sales of $285.5 million for the year ended December 31, 1995. Revenue from sales of homes increased $86.2 million to $317.4 million in 1996 from $231.2 million in 1995. This increase was due primarily to an increase in the number of homes closed to 1,838 in 1996 from 1,425 in 1995 and an increase in the average sales prices of homes to $173,000 in 1996 from $162,000 in 1995. Revenue from lots, land and other decreased $52.7 million to $1.6 million in 1996 from $54.3 million in 1995. Total operating income (loss) changed from a loss of $41.3 million in 1995 to income of $0.2 million in 1996. The excess of revenue from sales of homes over the related cost of sales increased by $17.0 million, to $37.4 million in 1996 from $20.4 million in 1995 primarily due to increased sales prices and an increase in the number of homes closed as described above and decreases in buyer incentives. The excess of revenue from sales of lots, land and other over the related cost of sales changed by $1.0 million to a loss of $0.4 million in 1996 from a loss of $1.4 million in 1995. Impairment losses on real estate assets amounting to $16.8 million were recorded in 1995 as compared to none in 1996. Reductions of real estate assets to estimated net realizable value amounting to $9.4 million were recorded in 1995 as compared to none in 1996. Sales and marketing expenses increased by $1.5 million to $22.9 million in 1996 from $21.4 million in 1995 primarily as a result of increased closing costs (directly related to revenue from increased closings) in 1996 compared to 1995. General and administrative expenses increased by $1.3 million to $14.0 million in 1996 from $12.7 million in 1995, primarily as a result of increased overhead from start-up operations in Arizona and Nevada. General and administrative expenses as a percentage of sales was 4.4% in both 1996 and 1995. Total interest incurred during 1996 decreased $2.6 million (7.6%) from 1995 as a result of lower debt balances in 1996. Net interest expense increased slightly to $2.3 million in 1996 from $2.2 million for 1995. Other (income) expense, net increased $0.3 million to a net income of $2.2 million in 1996 from a net income of $1.9 million in 1995 primarily as a result of (i) increased income from recreational facilities and (ii) increased income from mortgage and design center operations. FINANCIAL CONDITION AND LIQUIDITY The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate and from outside borrowings and, beginning in 1997, by joint venture financing from newly formed joint ventures with venture partners that will provide a substantial portion of the capital required for certain projects. The Company currently maintains the following major credit facilities: 12 1/2% Senior Notes (the "Senior Notes"), a secured revolving lending facility (the "Working Capital Facility") and a revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned joint venture partnership (the "CMR Facility"). The ability of the Company to meet its obligations on the Senior Notes (including the repurchase obligation described in General Overview above) and its other indebtedness will depend to a large degree on its future performance, which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions. The Company's degree of leverage may limit its ability to withstand adverse business conditions or to capitalize on business opportunities. The Company will in all likelihood be required to refinance the Working Capital Facility and the Senior Notes when they mature, and no assurances can be given that the Company will be successful in that regard. Capital Restructuring and Quasi-Reorganization On March 28, 1994 the Company's Board of Directors approved a Plan for Capital Restructuring, which was approved by the Company's Stockholders at the Annual Meeting of Stockholders held on May 20, 1994. In accordance with the Plan for Capital Restructuring, on March 29, 1994 the Company executed a definitive agreement with its lenders to restructure the Company's $340,000,000 revolving line of credit (the "Revolving Facility"). The Plan was approved at the Company's Annual Meeting held on May 20, 1994 and on that date the lender group under the Company's Revolving Facility converted $95,000,000 of outstanding 16 19 debt under the Revolving Facility to equity through the issuance of 43,166,667 shares of a new series of common stock representing initially 70% of the outstanding shares of all series of common stock of the Company. As provided in the agreement with its lenders, when the Company completed its Senior Notes Offering of $200,000,000 on June 29, 1994, as described below, the lending group returned to the Company a total of 8,809,524 shares of the new series of common stock, reducing their aggregate equity interest in the Company to 65% from 70%. In order to implement the Plan for Capital Restructuring, the Company's Certificate of Incorporation was amended to redesignate existing common stock as Series A Common Stock (the "Series A Common"), to establish a second series of common stock which was issued to the lender group (the "Series B Common"), and to increase the number of directors of the Company to nine, of which six are elected by holders of outstanding shares of Series A Common, and the remaining three are elected by the holders of outstanding shares of Series B Common. Concurrent with the conversion of debt to equity, under the Plan for Capital Restructuring, the Revolving Facility was reduced by $95,000,000 to a total of $245,000,000, comprised of a $150,000,000 term facility ("the Term Facility") and a $95,000,000 working capital facility ("the Working Capital Facility") (collectively, "the Debt Facilities"). In addition the lender group increased the Working Capital Facility by $20,000,000 to a total of $115,000,000. Revolving credit loans under the Working Capital Facility may be borrowed, repaid and reborrowed from time to time prior to the termination date of the Working Capital Facility. The lender group had therefore provided Debt Facilities totaling $265,000,000 to the Company. As described more fully below, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Term Facility was repaid in full and the Working Capital Facility was reduced by $43,000,000 from a portion of the proceeds from the issuance of the Senior Notes. The terms of the Working Capital Facility are described more fully below. The Series B Common ranks pari passu with the Series A Common in any liquidation of the Company. The Company may not declare or pay any dividends on the Series A Common unless equal dividends are declared and paid on the Series B Common. The Series B Common became convertible into Series A Common on a share-for-share basis at the option of the holder from and after May 20, 1997. On January 30, 1998, the Company issued an aggregate of 2,677,836 shares of its Series A Common Stock as a result of the conversion of a like number of shares of its Series B Common Stock. As part of the Plan for Capital Restructuring, the Company's Board of Directors also approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented the quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with the Plan for Capital Restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting." Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations. The estimation process involved in the determination of the fair value of those assets as to which an adjustment was made is inherently uncertain since it required estimates and assumptions as to future events and conditions. Such future events and conditions include economic and market conditions, the availability and cost of governmental entitlements necessary to develop and build product, the cost of financing to fund development and construction activities, and the availability and cost of labor and materials necessary to develop, build and sell product. 17 20 Because the amount and timing of the realization of the investments by the Company and its subsidiaries in their respective real estate projects are dependent upon such future uncertain events and conditions, the actual timing and amounts may be materially different from the estimates and assumptions used in determining fair value estimates utilized for purposes of the Plan for Quasi-Reorganization. The quasi-reorganization affects the comparability of operating statements for periods beginning after December 31, 1993 with those for periods beginning on or before December 31, 1993. Moreover, any income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences resulting from the quasi-reorganization, are excluded from the results of operations and credited to paid-in capital. Senior Notes The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a Delaware corporation ("Delaware Presley" or the "Company"), and are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly owned subsidiary of Delaware Presley ("California Presley"). However, California Presley has granted liens on substantially all of its assets as security for its obligations under the Working Capital Facility and other loans. Because the California Presley guarantee is not secured, holders are effectively junior to borrowings under the Working Capital Facility with respect to such assets. Delaware Presley and its consolidated subsidiaries are referred to collectively herein as "Presley" or the "Company." Interest on the Senior Notes is payable on January 1 and July 1 of each year, commencing January 1, 1995. Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes 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. As described above in General Overview, Presley is required to offer to repurchase certain Senior Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest to the date of repurchase if Delaware Presley's Consolidated Tangible Net Worth is less than $60,000,000 for any two consecutive fiscal quarters, as well as from the proceeds of certain asset sales. Upon certain changes of control as described in the Indenture, Presley must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. The Indenture governing the Senior Notes restricts, among other things: (i) the payment of dividends on and redemptions of capital stock by Presley, (ii) the incurrence of indebtedness by Presley or the issuance of preferred stock by Delaware Presley's subsidiaries, (iii) the creation of certain liens, (iv) Delaware Presley's ability to consolidate or merge with or into, or to transfer all or substantially all of its assets to, another person, and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions. The net proceeds of this offering were used to repay amounts outstanding under the Term Facility and to reduce the outstanding debt and commitment level under the Working Capital Facility in connection with the Plan for Capital Restructuring as more fully described above. 18 21 The proceeds of the offering were used as follows: Repayment of Term Facility............................. $150,000,000 Reduction of Working Capital Facility.................. 43,000,000 Underwriting discount.................................. 6,000,000 Offering costs......................................... 1,000,000 ------------ $200,000,000 ============
In April 1995, the Company purchased $10,000,000 principal amount of its outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of $724,000 after giving effect to related deferred loan costs and income taxes. These Senior Notes were held by the Company in treasury and were resold in November 1997 by the Company to an institutional investor in a private placement. Although it has no definitive program to purchase outstanding Senior Notes, the Company may make such purchases from time to time in the future if management believes such purchases are in the Company's best interest. As of December 31, 1997, the outstanding 12 1/2% Senior Notes with a face value of $180,000,000 have an estimated fair value of $172,800,000, based on the Company's repurchase of Senior Notes in late November and early December 1997. 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 the Carmel Mountain Ranch partnership which are currently pledged to other lenders). The borrowing base is calculated based on specified percentages of book values of real estate assets. The borrowing base at December 31, 1997 was approximately $138,000,000; however, the maximum loan under the Working Capital Facility is limited to $72,000,000. The principal outstanding under the Working Capital Facility at December 31, 1997 was $43,000,000. 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 includes negative covenants which, among other things, place limitations on the payment of cash dividends, merger transactions, transactions with affiliates, the incurrence of additional debt and the acquisition of new land as described in the following paragraph. Under the terms of the Working Capital Facility, the Company may acquire new improved land for development of housing units of no more than 300 lots in any one location without approval from the lenders if certain conditions are satisfied. The Company may, however, acquire any new raw land or improved land provided the Company has obtained the prior written approval of lenders holding two-thirds of the obligations under the Working Capital Facility. 19 22 The Working Capital Facility requires that mandatory prepayments be made to reduce the outstanding balance of loans to the extent of all funds in excess of $20,000,000 in the principal operating accounts of the Company. CMR Facility Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel Mountain Ranch master-planned community, is a California general partnership and is 100% owned by The Presley Companies and its wholly-owned subsidiary. Effective in March 1995, the development and construction of CMR, a consolidated joint venture, is financed through a revolving line of credit. The revolving line of credit consists of several components relating to production units, models and residential lots. At December 31, 1997, the revolving line of credit had an outstanding balance of $9,440,000. Availability under the line is subject to a number of limitations, but in any case cannot exceed $10,000,000. Interest on the outstanding balance is at prime plus 1.00%. In March 1998, the maturity date of this line was extended to June 16, 1998. Management is currently in discussions with the lender to extend the maturity date of this line for an additional twelve month period to June 16, 1999. Although management believes that current discussions with this lender will result in this longer term extension, no assurances can be given in that regard. Seller Financing Another source of financing available to the Company is seller-provided financing for land acquired by the Company. At December 31, 1997, the Company had outstanding notes payable related to land acquisitions for which seller financing was provided in the amount of $22,495,000, as described below. In October 1997, the Company executed a promissory note secured by a deed of trust on land purchased within the Company's Northern California Region in the amount of $12,500,000. Interest on the outstanding balance is 8% per annum and is payable annually. The loan is to be repaid in annual installments of $3,125,000. This note, which is non-recourse to the Company, was assumed in January 1998 by a joint venture which acquired the land from the Company, as described below under "Joint Venture Financing." In December 1997, the Company executed a promissory note secured by a deed of trust on land purchased within the Company's San Diego Region in the amount of $4,515,000. Interest on the outstanding balance is 8% per annum. Principal and interest are due and payable thirty days following substantial completion of land improvements by the seller, as defined in the purchase agreement. Substantial completion of the improvements is expected in April 1998. Management currently intends to form of a joint venture with an outside financial partner that would assume or repay this note and provide a substantial portion of the capital for this project. No assurance can be given that management will be successful in forming this joint venture. The balance of notes payable from seller financing includes several smaller notes payable to sellers of land purchased within the Company's Arizona, New Mexico and Nevada Regions. Joint Venture Financing As of December 31, 1997, the Company had formed four joint ventures in California which had acquired land at a cost of approximately $32,000,000. The Company contributed approximately $7,000,000 to these joint ventures and the Company's venture partners contributed approximately $25,000,000 to these joint ventures. In January 1998, the Company formed an additional joint venture in California which acquired land from the Company at the Company's approximate book value of $23,200,000 (which also approximated the land's current market value). The Company contributed approximately $5,100,000 million to this joint venture and the Company's venture partners contributed approximately $5,600,000 to this joint venture, and the joint venture assumed the Company's non-recourse note payable of $12,500,000 million relating to the purchase of this property. These projects are currently in the initial development stages and, based upon current estimates of project revenues and costs, all future development and construction costs will be funded by the Company's venture partners. 20 23 Assessment District Bonds In some locations in which the Company develops its projects, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company's other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When Presley's homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Cash Flows -- Comparison of Years Ended December 31, 1997 and 1996 Net cash provided by (used in) operating activities changed from a source of $15.6 million in 1996 to a use of $14.1 million in 1997. The change was primarily due to the incurrence of the net loss in 1997 compared to income in 1996. Net cash provided by (used in) investing activities changed from a source of $0.7 million in 1996 to a use of $8.7 million in 1997. The change was due primarily to an increase in investments in joint ventures, an increase in the amount of new notes receivable issued, a decrease in principal payments received on notes receivable and an increase in purchases of property and equipment. Net cash provided by (used in) financing activities changed from a use of $15.9 million in 1996 to a source of $22.9 million in 1997. The change was primarily due to a $139.1 million repayment of debt and a $20.0 million retirement of Senior Notes, offset by borrowings on notes payables totaling $172.0 million. Cash Flows -- Comparison of Years Ended December 31, 1996 and 1995 Net cash provided by operating activities decreased from $27.7 million in 1995 to $15.6 million in 1996. The change was primarily due to reduced proceeds from reductions in land sales, offset by the net income in 1996 compared to a net loss in 1995. Net cash provided by (used in) investing activities changed from a use of $0.4 million in 1995 to a source of $0.7 million for 1996. The change was due primarily to a reduction in the issuance of notes receivable, offset by a reduction in the principal payments on notes receivable and an increase in the purchase of property and equipment. Net cash used in financing activities decreased $27.8 million to $15.9 million in 1996 from $43.7 million in 1995. The change was primarily due to the reduction of debt in 1995. Impact of Year 2000 The Company has conducted an assessment of its computer systems to ascertain what modifications it will be required to make so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Management believes that any such modifications will have minimal effects on its systems and the costs incurred in that connection will not be material. ------------------------ 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. 21 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Presley's consolidated financial statements and the report of the independent auditors, listed under Item 14, are submitted as a separate section of this report beginning on page F-1 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1998. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1998 Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1998. 22 25 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following consolidated financial statements of the Company are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below:
PAGE ----- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
(2) Financial Statement Schedules: Schedules are omitted as the required information is not present, is not present in sufficient amounts, or is included in the Consolidated Financial Statements or Notes thereto. (3) Listing of Exhibits:
EXHIBIT NUMBER - ----------- 3.1 (1) Certificate of Incorporation of the Company. 3.3 (1) Bylaws of the Company. 4.1 (1) Specimen certificate of Common Stock. 10.1 (1) First Amended and Restated Loan Agreement dated as of December 18, 1989 among the Company, as Borrower, Security Pacific National Bank, First Interstate Bank of California, The Bank of California, N.A., California Federal Bank, a Federal Savings Bank, and Continental Bank, N.A., as the Banks, and Security Pacific National Bank as the Agent (the "1989 Revolving Facility"). 10.2 (1) First Amendment to the 1989 Revolving Facility, dated February 1, 1991. 10.3 (1) Letter, dated December 11, 1990, providing for the extension of the 1989 Revolving Facility. 10.4 (1) Commitment Letter, dated August 19, 1991, among the Banks, the Agent and the Company relating to the amendment and extension of the 1989 Revolving Facility. 10.5 (1) Loan Agreement, dated as of September 27, 1988, between Carmel Mountain Ranch, as Borrower, Security Pacific National Bank, Bank of America National Trust and Savings Association and Bankers Trust Company, as the Banks, and Security Pacific National Bank, as the Agent (the "CMR Loan Agreement"). 10.6 (1) First Amendment to the CMR Loan Agreement, dated April 3, 1989. 10.7 (1) Second Amendment to the CMR Loan Agreement, dated December 21, 1989. 10.8 (1) Third Amendment to the CMR Loan Agreement, dated January 1, 1991. 10.9 (1) Fourth Amendment to the CMR Loan Agreement, dated March 1, 1991. 10.10 (1) Building Loan Agreement, dated November 4, 1988, between Horsethief Canyon Partners and First Interstate Bank of California (the "HCP Loan Agreement"). 10.11 (1) Note, dated November 4, 1988, in favor of First Interstate Bank of California by Horsethief Canyon Partners (the "HCP Note"). 10.12 (1) Amendment to the HCP Loan Agreement, dated March 28, 1989. 10.13 (1) Modification to the HCP Note, dated November 26, 1990.
23 26
EXHIBIT NUMBER - ----------- 10.14 (1) Modification to the HCP Note, dated February 27, 1991. 10.15 (1) Modification to the HCP Note, dated June 18, 1991. 10.16 (1) Additional Funds Agreement, dated June 18, 1991, between Horsethief Canyon Partners and First Interstate Bank of California. 10.17 (1) Office Building Lease, dated June 1, 1989, between Corporate Plaza and Associates and the Company. 10.18 (1) Form of Employment Agreement, dated October 17, 1991, between Wade H. Cable and the Company. 10.19 (1) Form of Employment Agreement, dated October 17, 1991, between David M. Siegel and the Company. 10.20 (1) Form of Employment Agreement, dated October 17, 1991, between L.C. Albertson, Jr. and the Company. 10.21 (1) Form of Employment Agreement, dated October 17, 1991, between Peter N. Hellmann and the Company. 10.22 (1) Form of Employment Agreement, dated October 17, 1991, between Gerald P. Nordeman and the Company. 10.23 (1) Form of Employment Agreement, dated October 17, 1991, between Charles W. Reynolds and the Company. 10.24 (1) Form of Employment Agreement, dated October 17, 1991, between Lewis N. Wilmot and the Company. 10.25 (1) Form of Employment Agreement, dated October 17, 1991, between Nancy M. Harlan and the Company. 10.26 (1) Form of Employment Agreement, dated October 17, 1991, between Linda L. Foster and the Company. 10.27 (1) Form of Indemnity Agreement, dated October 18, 1991, between the Company and Messrs. Lyon and Cable as Directors, and dated December 12, 1991 as to the other Directors. 10.28 (1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and William Lyon. 10.29 (1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and each of the existing stockholders other than William Lyon. 10.30 (1) 1991 Stock Option Plan. 10.31 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Wade H. Cable. 10.32 (1) Secured Promissory Note, dated February 1, 1990, made by Wade H. Cable in favor of the Company. 10.33 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Wade H. Cable and Susan M. Cable, Trustees of the Cable Family Trust Est. 7-11-88. 10.34 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and David M. Siegel. 10.35 (1) Secured Promissory Note, dated February 1, 1990, made by David M. Siegel in favor of the Company. 10.36 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and David M. Siegel and Linda A. Siegel, Trustees of the Siegel Family Trust U/D/T Est. 6-20-89.
24 27
EXHIBIT NUMBER - ----------- 10.37 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and L.C. Albertson, Jr. 10.38 (1) Secured Promissory Note, dated February 1, 1990, made by L.C. Albertson, Jr. in favor of the Company. 10.39 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Lloyd C. Albertson, Jr. and Dorothy K. Albertson, Trustees of the Lloyd C. Albertson, Jr. Family Trust Est. 6-15-79. 10.40 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Charles W. Reynolds. 10.41 (1) Secured Promissory Note, dated February 1, 1990, made by Charles W. Reynolds in favor of the Company. 10.42 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Charles W. Reynolds. 10.43 (1) Note and Pledge Agreement, dated February 1, 1990 between the Company and Lewis N. Wilmot. 10.44 (1) Secured Promissory Note, dated February 1, 1990, made by Lewis N. Wilmot in favor of the Company. 10.45 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Lewis N. Wilmot. 10.46 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and G. Ross Crawford. 10.47 (1) Secured Promissory Note, dated February 1, 1990, made by G. Ross Crawford in favor of the Company. 10.48 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Gordon Ross Crawford and Carol Georgia Crawford, Trustees of The Crawford Family Trust Est. 5-26-83. 10.49 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Alan D. Uman. 10.50 (1) Secured Promissory Note, dated February 1, 1990, made by Alan D. Uman in favor of the Company. 10.51 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Alan D. Uman. 10.52 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and C. Dean Stewart. 10.53 (1) Secured Promissory Note, dated February 1, 1990, made by C. Dean Stewart in favor of the Company. 10.54 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and C. Dean Stewart. 10.55 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Linda L. Foster. 10.56 (1) Secured Promissory Note, dated February 1, 1990, made by Linda L. Foster in favor of the Company. 10.57 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991,between the Company and Linda L. Foster.
25 28
EXHIBIT NUMBER - ----------- 10.58 (2) Second Amended and Restated Loan Agreement dated as of January 31, 1992 between the Company, as Borrower, Security Pacific National Bank, First Interstate Bank of California, The Bank of California N.A., California Federal Bank, a Federal Savings Institution and Continental Bank, N.A., as the Banks, and Security Pacific Bank, as the Agent (the "Second Amended Loan Agreement"). 10.59 (2) Letter Agreement dated January 31, 1992 between Security Pacific Bank, individually and as Agent for the Banks, and the Company regarding Section 2.8 of the Second Amended Loan Agreement. 10.60 (3) Agreement for Redemption of Partnership Interest dated December 30, 1992 between Carmel Mountain Ranch, a California general partnership, The Presley Companies, a California corporation, Presley CMR, Inc., a California corporation, Home Capital Corporation, a California corporation and Humboldt Financial Services Corp., a California corporation. 10.61 (3) Letter Waiver dated December 31, 1992 between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and California Federal Bank, a Federal Savings Bank, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank) as Agent. 10.62 (3) Amended Statement of Partnership of Carmel Mountain Ranch dated December 30, 1992. 10.63 (3) Amendment to Amended and Restated Partnership Agreement of Carmel Mountain Ranch dated December 29, 1992. 10.64 (3) Commitment Letter Extension Agreement dated January 18, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender. 10.65 (3) Fourth Modification of Note Agreement dated January 18, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender. 10.66 (3) Fifth Modification Agreement dated January 11, 1993 between Carmel Mountain Ranch, as Borrower and Bank of America National Trust and Savings Association and The Bank of California, N.A., as Lenders. 10.67 (3) Conditional Forbearance Agreement dated January 29, 1993 between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and California Federal Bank, a Federal Savings Bank, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent (the "Conditional Forbearance Agreement"). 10.68 (3) Amendment to Conditional Forbearance Agreement dated March 26, 1993, effective March 31, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent (the "Amendment to Conditional Forbearance Agreement"). 10.69 (3) Commitment Letter dated March 30, 1993 between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent (the "Commitment Letter"). 10.70 (3) Modification of Commitment Letter Extension Agreement dated March 29, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender.
26 29
EXHIBIT NUMBER - ----------- 10.71 (3) Fifth Modification of Note Agreement dated March 29, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender. 10.72 (3) Commitment Letter dated March 30, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender. 10.73 (4) Second Amendment to Conditional Forbearance Agreement dated April 29, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent. 10.74 (4) Amendment to Commitment Letter dated April 29, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent. 10.75 (4) Third Amended and Restated Loan Agreement dated as of May 7, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A. and Foothill Capital Corporation, as the Lenders, and Bank of America National Trust and Savings Association, as the Agent, and Bank of America National Trust and Savings Association, as the Lead Bank. 10.76 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to Bank of America Trust and Savings Association. 10.77 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to Continental Bank, N.A. 10.78 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to The Bank of California, N.A. 10.79 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to Foothill Capital Corporation. 10.80 (5) Amended and Restated Loan Agreement dated as of June 1, 1993 among Carmel Mountain Ranch, a California general partnership, as the Borrower, Bank of America National Trust and Savings Association and The Bank of California, N.A., as the Banks and Bank of America National Trust and Savings Association, as the Agent, and Bank of America National Trust and Savings Association, as the Lead Bank. 10.81 (5) Commitment Letter Extension Agreement dated July 29, 1993 between Horsethief Canyon Partners, a California general partnership, as the Borrower, and First Interstate Bank of California. 10.82 (6) Second Amendment, dated as of September 23, 1993, to Third Amended and Restated Loan Agreement dated as of May 7, 1993, between The Presley Companies, a California corporation, as the Borrower, Bank of America National Trust and Savings Association, Foothill Capital Corporation, Mellon Bank, N.A. as Trustee of First Plaza Group Trust, a New York trust, and Foothill Capital Corporation (as successors by assignment of the interest of The Bank of California, N.A.) and Pearl Street L.P. (c/o Goldman, Sachs & Co.), and Internationale Nederlanden (U.S.) Capital Corporation (previously known as ING Bank) (as successors by assignment of the interest of Continental Bank, N.A.), as the Lenders, and Bank of America National Trust and Savings Association, as the Agent and the Lead Bank. 10.83 (7) Third Amendment dated as of December 30, 1993 among The Presley Companies, a California corporation (the Borrower), the lending parties to the Third Amended and Restated Loan Agreement dated as of May 7, 1993 and Bank of America National Trust and Savings Association, as agent and lead bank for the lenders thereunder.
27 30
EXHIBIT NUMBER - ----------- 10.84 (7) Fourth Amendment dated as of February 2, 1994 among The Presley Companies, a California corporation (the Borrower), the lending parties to the Third Amended and Restated Loan Agreement dated as of May 7, 1993, and Foothill Capital Corporation, as agent for the lenders thereunder. 10.85 (7) Fourth Amended and Restated Loan Agreement dated as of March 25, 1994 among The Presley Companies, a California corporation (the Borrower), Foothill Capital Corporation ("Foothill"), Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994), as the lenders, and Foothill, as the Agent for the Lenders under the Loan Documents. 10.86 (7) Agreement to Issue and Purchase Stock as dated for reference purposes the 25th day of March, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994). 10.87 (8) First Amendment to the Agreement to Issue and Purchase Stock dated as of April 8, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994). 10.88 (9) 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 by and among The Presley Companies, a Delaware corporation. The Presley Companies, a California corporation, and Foothill Capital Corporation, individually and as Agent, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994). 10.89 (9) Second Amendment to the Fourth Amended and Restated Loan Agreement dated as of May 31, 1994 by and among The Presley Companies, a California corporation, Foothill Capital Corporation, individually and as agent, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/ Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994). 10.90 (8) Form of Shareholders' Agreement dated as of May 20, 1994, by and among The Presley Companies, a Delaware corporation, each of the holders of shares of the Series B Common Stock and certain holders of shares of the Series A Common Stock. 10.91 (8) Form of Registration Rights Agreement dated as of May 20, 1994, by and among The Presley Companies, a Delaware corporation and each of the holders of shares of the Series B Common Stock.
28 31
EXHIBIT NUMBER - ----------- 10.92 (8) Amended and Restated 1991 Stock Option Plan of The Presley Companies, a Delaware corporation. 10.93 (9) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and Wade H. Cable. 10.94 (9) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and David M. Siegel. 10.95 (9) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and L.C. Albertson, Jr. 10.96 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Gerald P. Nordeman. 10.97 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Charles W. Reynolds. 10.98 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Lewis N. Wilmot. 10.99 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Nancy M. Harlan. 10.100 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Linda L. Foster. 10.101 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and W. Douglass Harris. 10.102 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and C. Dean Stewart. 10.103 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and G. Ross Crawford. 10.104 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Alan Uman. 10.105 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and William Lyon. 10.106 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Wade H. Cable and the Company. 10.107 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between David M. Siegel and the Company. 10.108 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between L.C. Albertson, Jr. and the Company. 10.109 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Gerald P. Nordeman and the Company. 10.110 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Charles W. Reynolds and the Company. 10.111 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Lewis N. Wilmot and the Company. 10.112 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Nancy M. Harlan and the Company. 10.113 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Linda L. Foster and the Company.
29 32
EXHIBIT NUMBER - ----------- 10.114 (9) Form of Employment Agreement, dated as of May 20, 1994, between W. Douglass Harris and the Company. 10.115 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between C. Dean Stewart and the Company. 10.116 (8) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between G. Ross Crawford and the Company. 10.117 (8) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Alan Uman and the Company. 10.118 (10) Third Amendment of Fourth Amended and Restated Loan Agreement, dated for reference purposes June 30, 1994, by and among (i) The Presley Companies, a California corporation, as 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), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994), as the lenders, and Foothill, as the agent for the lenders. 10.119 (10) Agreement and Assignment; Mutual Releases, as of August 23, 1994, by and between Gateway Highlands, a California limited partnership, HSP Inc., a California corporation and The Presley Companies, a California corporation. 10.120 (11) Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, N.A., a national banking association dated as of February 15, 1995. 10.121 (12) Fifth Amendment to Fourth Amended and Restated Loan Agreement, dated for reference purposes June 30, 1995, by and among (i) The Presley Companies, a California corporation, as 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 (iii) Foothill, as the Agent for the Lenders. 10.122 (13) Commitment Letter and Settlement Agreement dated September 11, 1995 by and among First Interstate Bank of California, Horsethief Canyon Partners, a California general partnership ("Borrower"), and The Presley Companies, a California corporation, the Borrower's managing general partner. 10.123 (13) Master Credit Agreement by and between The Presley Companies, a California corporation, and Bank One, Arizona, NA, a national banking association, dated as of October 10, 1995. 10.124 (13) First Amendment to Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, NA dated as of October 10, 1995. 10.125 (14) Master Credit Agreement by and between Horsethief Canyon Partners, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996. 10.126 (14) Amendment to Master Credit Agreement and Secured Promissory Note by and between Presley Homes (formerly known as The Presley Companies), a California corporation ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996.
30 33
EXHIBIT NUMBER - ----------- 10.127 (14) Second Amendment to Master Credit Agreement and Secured Promissory Note by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996. 10.128 (15) Notice of Exercise of Option for Extension of Termination Date dated as of April 18, 1997 under that certain Fourth Amended and Restated Loan Agreement dated as of March 25, 1994 between The Presley Companies, a California corporation, as the borrower, Foothill Capital Corporation, Mellon Bank, N.A., as Trustee of First Plaza Group Trust, a New York trust, Pearl Street L.P. (c/o Goldman, Sachs & Co.), Internationale Nederlanden (U.S.) Capital Corporation, and Continental Stock Transfer & Trust Company, as Trustee for the Whippoorwill/Presley Obligations Trust -1994, as the Lenders, and Foothill Capital Corporation, as the Agent and Lead Bank. 10.129 (16) 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 Transfer & 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. 10.130 (17) Third Amendment to Master Credit Agreement, dated as of September 25, 1997, by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"). 21.1 List of Subsidiaries of the Company. 27 Financial Data Schedule.
- ------------ (1) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and incorporated herein by this reference. (2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1992 and incorporated herein by this reference. (3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by this reference. (4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993 and incorporated herein by this reference. (5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1993 and incorporated herein by this reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993 and incorporated herein by this reference. (7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by this reference. (8) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference. (9) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (10) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by this reference. (11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by this reference. (12) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 and incorporated herein by this reference. (13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by this reference. 31 34 (14) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by this reference. (15) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. (16) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (17) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. (b) Reports on Form 8-K DECEMBER 9, 1997. A Report on Form 8-K was filed by the Company in reference to the repurchase and cancelation of $20,000,000 principal amount of 12 1/2% Senior Notes due 2001, as well as the sale of $10,000,000 principal amount of 12 1/2% Senior Notes due 2001 held by the Company in treasury. FEBRUARY 6, 1998. A Report on Form 8-K was filed by the Company in reference to the issuance of 2,677,836 shares of its Series A Common Stock as a result of the conversion of a like number of shares of its Series B Common Stock. 32 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PRESLEY COMPANIES By: /s/ DAVID M. SIEGEL ------------------------------------ David M. Siegel Senior Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- WILLIAM LYON Chairman of the Board and March 24, 1998 - ----------------------------------------------------- Director William Lyon WADE H. CABLE Director, Chief Executive March 24, 1998 - ----------------------------------------------------- Officer and President Wade H. Cable (Principal Executive Officer) JAMES E. DALTON Director March 24, 1998 - ----------------------------------------------------- James E. Dalton GREGORY P. FLYNN Director March 24, 1998 - ----------------------------------------------------- Gregory P. Flynn Director March 24, 1998 - ----------------------------------------------------- Charles Froland STEVEN B. SAMPLE Director March 24, 1998 - ----------------------------------------------------- Steven B. Sample KAREN SANDLER Director March 24, 1998 - ----------------------------------------------------- Karen Sandler MARSHALL E. STEARNS Director March 24, 1998 - ----------------------------------------------------- Marshall E. Stearns RAY A. WATT Director March 24, 1998 - ----------------------------------------------------- Ray A. Watt DAVID M. SIEGEL Senior Vice President, Chief March 24, 1998 - ----------------------------------------------------- Financial Officer and Treasurer David M. Siegel (Principal Financial Officer) W. DOUGLASS HARRIS Vice President and Corporate March 24, 1998 - ----------------------------------------------------- Controller (Principal W. Douglass Harris Accounting Officer)
33 36 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS THE PRESLEY COMPANIES
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
REQUIRED SCHEDULES Schedules are omitted as the required information is not present, is not present in sufficient amounts, or is included in the Consolidated Financial Statements or Notes thereto. F-1 37 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders The Presley Companies We have audited the accompanying consolidated balance sheets of The Presley Companies as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Presley Companies at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Newport Beach, California February 18, 1998 F-2 38 THE PRESLEY COMPANIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
DECEMBER 31, ------------------- 1997 1996 -------- -------- ASSETS Cash and cash equivalents................................... $ 4,569 $ 4,550 Receivables -- Note 3....................................... 8,652 4,225 Real estate inventories -- Notes 1 and 4.................... 255,472 306,381 Investments in and advances to unconsolidated joint ventures -- Note 5........................................ 7,077 -- Property and equipment, less accumulated depreciation of $2,339 and $1,432 at December 31, 1997 and 1996, respectively.............................................. 3,613 3,047 Deferred loan costs -- Note 1............................... 3,266 4,347 Other assets................................................ 2,595 9,065 -------- -------- $285,244 $331,615 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable............................................ $ 12,854 $ 18,428 Accrued expenses............................................ 23,136 20,450 Notes payable -- Note 6..................................... 74,935 18,524 12 1/2% Senior Notes Due 2001 -- Note 6..................... 180,000 190,000 -------- -------- 290,925 247,402 -------- -------- Commitments and contingencies -- Note 10 Stockholders' equity (deficit) -- Notes 2 and 7 Common stock: Series A common stock, par value $.01 per share; 100,000,000 shares authorized; 17,838,535 issued and outstanding at December 31, 1997 and 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 December 31, 1997 and 1996, respectively........... 344 344 Additional paid-in capital................................ 114,599 114,599 Accumulated deficit from January 1, 1994.................. (120,802) (30,908) -------- -------- (5,681) 84,213 -------- -------- $285,244 $331,615 ======== ========
See accompanying notes. F-3 39 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- --------- --------- Sales Homes..................................................... $ 307,332 $ 317,366 $ 231,204 Lots, land and other...................................... 22,610 1,631 54,301 --------- --------- --------- 329,942 318,997 285,505 --------- --------- --------- Operating costs Cost of sales -- homes.................................... (278,299) (279,988) (210,808) Cost of sales -- lots, land and other..................... (23,902) (1,991) (55,703) Impairment loss on real estate assets -- Note 1........... (74,000) -- (16,811) Reduction of real estate assets to estimated net realizable value -- Note 1............................. -- -- (9,400) Sales and marketing....................................... (22,279) (22,877) (21,400) General and administrative................................ (15,996) (13,978) (12,718) --------- --------- --------- (414,476) (318,834) (326,840) --------- --------- --------- Operating income (loss)..................................... (84,534) 163 (41,335) Interest expense, net of amounts capitalized -- Note 6...... (7,812) (2,256) (2,226) Other income (expense), net................................. 2,452 2,245 1,908 --------- --------- --------- Income (loss) before income taxes and extraordinary item.... (89,894) 152 (41,653) Credit for income taxes -- Note 8........................... -- -- 1,868 --------- --------- --------- Income (loss) before extraordinary item..................... (89,894) 152 (39,785) Extraordinary item -- gain from retirement of debt, net of applicable income taxes of $1,868 -- Note 9............... -- -- 2,688 --------- --------- --------- Net income (loss)........................................... $ (89,894) $ 152 $ (37,097) ========= ========= ========= Basic and diluted earnings per common share: -- Note 1 Before extraordinary item................................. $ (1.72) $ -- $ (0.76) Extraordinary item........................................ -- -- 0.05 --------- --------- --------- After extraordinary item.................................. $ (1.72) $ -- $ (0.71) ========= ========= =========
See accompanying notes. F-4 40 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
RETAINED EARNINGS COMMON STOCK (ACCUMULATED --------------------------------- DEFICIT SERIES A SERIES B ADDITIONAL FROM) --------------- --------------- PAID-IN JANUARY 1, SHARES AMOUNT SHARES AMOUNT CAPITAL 1994 TOTAL ------ ------ ------ ------ ---------- ------------ -------- Balance -- December 31, 1994........................ 17,839 $178 34,357 $344 $ 114,599 $ 6,037 $121,158 Net loss...................... -- -- -- -- -- (37,097) (37,097) ------ ---- ------ ---- --------- --------- -------- Balance -- December 31, 1995........................ 17,839 178 34,357 344 114,599 (31,060) 84,061 Net income.................... -- -- -- -- -- 152 152 ------ ---- ------ ---- --------- --------- -------- Balance -- December 31, 1996........................ 17,839 178 34,357 344 114,599 (30,908) 84,213 Net loss...................... -- -- -- -- -- (89,894) (89,894) ------ ---- ------ ---- --------- --------- -------- Balance -- December 31, 1997........................ 17,839 $178 34,357 $344 $ 114,599 $(120,802) $ (5,681) ====== ==== ====== ==== ========= ========= ========
See accompanying notes. F-5 41 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Operating activities Net income (loss)........................................ $(89,894) $ 152 $(37,097) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......................... 907 585 463 Reduction of certain real estate assets to estimated net realizable value................................ -- -- 9,400 Impairment loss on real estate assets................. 74,000 -- 16,811 Gain from retirement of debt, before applicable income taxes............................................... -- -- (4,556) Provision for uncollectible notes receivable.......... -- 145 -- Net changes in operating assets and liabilities: Other receivables................................... (4,273) (778) 2,809 Real estate inventories............................. (680) 11,409 40,309 Deferred loan costs................................. 1,081 1,019 1,196 Other assets........................................ 6,470 (3,386) (2,270) Accounts payable.................................... (5,574) 7,877 1,403 Accrued expenses.................................... 3,819 (1,437) (727) -------- -------- -------- Net cash provided by (used in) operating activities...... (14,144) 15,586 27,741 -------- -------- -------- Investing activities Investment in joint ventures............................. (7,077) -- -- Issuance of notes receivable............................. (637) -- (2,175) Principal payments on notes receivable................... 483 1,712 2,529 Purchases of property and equipment...................... (1,473) (1,055) (794) -------- -------- -------- Net cash provided by (used in) investing activities...... (8,704) 657 (440) -------- -------- -------- Financing activities Proceeds from borrowings on notes payable................ 171,964 107,891 75,339 Principal payments on notes payable...................... (139,097) (123,801) (94,851) Retirement of debt....................................... (20,000) -- (24,215) Sale of Senior Notes held in treasury.................... 10,000 -- -- -------- -------- -------- Net cash provided by (used in) financing activities...... 22,867 (15,910) (43,727) -------- -------- -------- Net increase (decrease) in cash and cash equivalents....... 19 333 (16,426) Cash and cash equivalents -- beginning of period........... 4,550 4,217 20,643 -------- -------- -------- Cash and cash equivalents -- end of period................. $ 4,569 $ 4,550 $ 4,217 ======== ======== ======== Supplemental disclosures of cash flow and non-cash financing activities Cash paid during the period for interest, net of amounts capitalized........................................... $ 7,277 $ 2,517 $ 2,018 ======== ======== ======== Issuance of notes payable for land acquisitions.......... $ 22,411 $ -- $ -- ======== ======== ========
See accompanying notes. F-6 42 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations The Presley Companies (the "Company") is primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona, New Mexico and Nevada. Basis of Presentation The consolidated financial statements include the accounts of the Company and all majority-owned or controlled subsidiaries and joint ventures. The equity interests of other partners are reflected as minority partners' interest. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company has less than a controlling interest are accounted for using the equity method. The accounting policies of the joint ventures are substantially the same as those of the Company. Certain balances on the consolidated balance sheet as of December 31, 1996 have been reclassified to be consistent with the classification presented in the consolidated balance sheet as of December 31, 1997. Real Estate Inventories and Related Indebtedness Real estate inventories are carried at cost net of impairment losses and real estate valuation adjustments. Real estate inventories consist primarily of raw land, lots under development, houses under construction and completed houses. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land and improvement costs are allocated within a project utilizing a method that approximates relative value. Selling expenses and other marketing costs are expensed in the period incurred. A provision for warranty costs relating to the Company's limited warranty plans is included in cost of sales at the time the sale of a home is recorded. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. Interest incurred under the Working Capital Facility, the Senior Notes and other notes payable, as more fully discussed in Note 6, is generally first capitalized to real estate projects under development. Excess interest charges related to real estate projects not under development are expensed in the period incurred. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less cost of disposal. Under the new pronouncement, when an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. This was a significant change from the previous accounting standard that required homebuilders to carry real estate assets at the lower of cost or net realizable value. The net loss for the year ended December 31, 1997 included a non-cash charge of $74,000,000 to record impairment losses on certain of the Company's real estate assets. The net loss for the year ended December 31, 1995 included a non-cash charge of $16,811,000 to record impairment losses on certain of the Company's real estate assets. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions. Such future events and F-7 43 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein. Prior to the adoption of Statement No. 121, 1995, the Company evaluated its real estate inventories to determine if such assets were stated at the lower of cost or estimated net realizable value, as required by the then applicable accounting pronouncements. The evaluations considered the depressed nature of the real estate business in the Company's principal markets, the reduced demand from prospective homebuyers, decreased sales prices, increased sales incentives, future costs of development and holding costs during development. Based on these evaluations, reductions of certain real estate assets to estimated net realizable value amounting to $9,400,000 were recorded during 1995. Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of projects are expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expensed during 1997, 1996 and 1995 was approximately $7,812,000, $2,256,000 and $2,226,000, respectively. Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to thirty-five years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the shorter of either their estimated useful lives or term of the lease. Deferred Loan Costs Deferred loan costs are amortized over the term of applicable loans using a method which approximates the interest method. Included in deferred loan costs at December 31, 1997 and 1996, net of related amortization, are $2,958,000 and $4,259,000, respectively, of costs associated with the issuance of the Company's Senior Notes. Sales and Profit Recognition A sale is generally recorded and profit recognized when title has passed to a buyer who has met down payment and continuing investment criteria in accordance with the provisions of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate." When it is determined that the earnings process is not complete, unearned profit is deferred for recognition in future periods. Income Taxes Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Financial Instruments Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash investments, receivables, and deposits. The Company typically places its cash investments in investment grade short-term instruments. Collateral on first trust deed notes receivable is primarily located in Southern F-8 44 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) California and Arizona. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers. For those instruments, as defined under Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," for which it is practical to estimate fair value, management has determined that the carrying amounts of the Company's financial instruments approximate their fair value at December 31, 1997, except for the 12 1/2% Senior Notes as described in Note 6. The Company is an issuer of, or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in connection with assessment district bonds. These off-balance sheet financial instruments are described in the applicable Notes. Cash and Cash Equivalents Short-term investments with a maturity of three months or less when purchased are considered cash equivalents. Basic and Diluted Earnings Per Common Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("Statement No. 128") which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. All earnings per share amounts for all periods presented conform to Statement No. 128 requirements. Basic and diluted earnings per common share for each of the three years in the period ended December 31, 1997 are based on 52,195,678 shares of Series A and Series B common stock outstanding. Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 1997 and 1996 and revenues and expenses for each of the three years in the period ended December 31, 1997. Accordingly, actual results could differ from those estimates in the near-term. NOTE 2 -- CAPITAL RESTRUCTURING AND QUASI-REORGANIZATION On March 28, 1994 the Company's Board of Directors approved a Plan for Capital Restructuring, which was approved by the Company's Stockholders at the Annual Meeting of Stockholders held on May 20, 1994. In accordance with the Plan for Capital Restructuring, on March 29, 1994 the Company executed a definitive agreement with its lenders to restructure the Company's $340,000,000 revolving line of credit. The Plan was approved at the Company's Annual Meeting held on May 20, 1994 and on that date the lender group under the Company's Revolving Debt Facility (see Note 6) converted $95,000,000 of outstanding debt under the Revolving Facility to equity through the issuance of 43,166,667 shares of a new series of common stock representing initially 70% of the outstanding shares of all series of common stock of the Company. As provided in the agreement with its lenders, when the Company completed its Senior Notes Offering of $200,000,000 on June 29, 1994, as described below, the lending group returned to the Company a total of 8,809,524 shares of the new series of common stock, reducing their aggregate equity interest in the Company to 65% from 70%. In order to implement the Plan for Capital Restructuring, the Company's Certificate of Incorporation was amended to redesignate existing common stock as Series A Common Stock (the "Series A Common"), to establish a second series of common stock which was issued to the lender group (the "Series B Common"), F-9 45 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and to increase the number of directors of the Company to nine, of which six are elected by holders of outstanding shares of Series A Common, and the remaining three are elected by the holders of outstanding shares of Series B Common. Concurrent with the conversion of debt to equity, under the Plan for Capital Restructuring, the Revolving Debt Facility was reduced by $95,000,000 to a total of $245,000,000, comprised of a $150,000,000 term facility ("the Term Facility") and a $95,000,000 working capital facility ("the Working Capital Facility"), each described below (collectively, "the Debt Facilities"). In addition the lender group increased the Working Capital Facility by $20,000,000 to a total of $115,000,000. Revolving credit loans under the Working Capital Facility may be borrowed, repaid and reborrowed from time to time prior to the termination date of the Working Capital Facility. The lender group had therefore provided Debt Facilities totaling $265,000,000 to the Company. As described more fully in Note 6, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Term Facility was repaid in full and the Working Capital Facility was reduced by $43,000,000 from a portion of the proceeds from the issuance of the Senior Notes. The terms of the Working Capital Facility are described more fully in Note 6. The Series B Common ranks pari passu with the Series A Common in any liquidation of the Company. The Company may not declare or pay any dividends on the Series A Common unless equal dividends are declared and paid on the Series B Common. The Series B Common became convertible into Series A Common on a share-for-share basis at the option of the holder from and after May 20, 1997. On January 30, 1998, the Company issued an aggregate 2,677,836 shares of its Series A Common Stock as a result of the conversion of a like number of shares of its Series B Common Stock. As part of the Plan for Capital Restructuring, the Company's Board of Directors also approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented the quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with the Plan for Capital Restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting." Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations. The estimation process involved in the determination of the fair value of those assets as to which an adjustment was made is inherently uncertain since it required estimates and assumptions as to future events and conditions. Such future events and conditions include economic and market conditions, the availability and cost of governmental entitlements necessary to develop and build product, the cost of financing to fund development and construction activities, and the availability and cost of labor and materials necessary to develop, build and sell product. Because the amount and timing of the realization of the investments by the Company and its subsidiaries in their respective real estate projects are dependent upon such future uncertain events and conditions, the actual timing and amounts may be materially different from the estimates and assumptions used in determining fair value estimates utilized for purposes of the Plan for Quasi-Reorganization. F-10 46 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The quasi-reorganization affects the comparability of operating statements for periods beginning after December 31, 1993 with those for periods beginning on or before December 31, 1993. Moreover, any income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences resulting from the quasi-reorganization, are excluded from the results of operations and credited to paid-in capital. F-11 47 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effect of the capital restructuring and quasi-reorganization on the consolidated balance sheet as of December 31, 1993 is as follows as of January 1, 1994 (in thousands except number of shares and par value per share):
HISTORICAL BALANCE ADJUSTMENTS BALANCE SHEET ----------------------------------- SHEET DECEMBER 31, DEBT QUASI- JANUARY 1, 1993 CONVERSION (A) REORGANIZATION (B) 1994 ------------ -------------- ------------------ ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) ASSETS Cash and cash equivalents................. $ 26,632 $ -- $ -- $ 26,632 Receivables............................... 10,591 -- -- 10,591 Real estate inventories................... 439,548 -- (65,500) 374,048 Property and equipment.................... 1,632 -- -- 1,632 Deferred loan costs....................... 835 -- -- 835 Other assets.............................. 6,176 -- -- 6,176 -------- -------- --------- -------- $485,414 $ -- $ (65,500) $419,914 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable.......................... $ 8,440 $ -- $ -- $ 8,440 Accrued expenses.......................... 15,190 -- -- 15,190 Notes payable............................. 372,198 (95,000) -- 277,198 Minority partners' interest............... 8,196 -- -- 8,196 -------- -------- --------- -------- 404,024 (95,000) -- 309,024 -------- -------- --------- -------- Stockholders' equity Common stock: Common stock, par value $.01 per share; 100,000,000 shares authorized; 18,500,000 shares issued and outstanding (designated as Series A common stock at January 1, 1994)........................... 185 -- -- 185 Series B restricted voting convertible common stock, par value $.01 per share; 50,000,000 shares authorized; 43,166,667 shares issued and outstanding at January 1, 1994............................ -- 432 -- 432 Additional paid-in capital.............. 155,474 94,568 (136,778) 113,264 Promissory notes related to management stock................................ (2,991) -- -- (2,991) Retained earnings (accumulated deficit)............................. (71,278) -- 71,278 -- -------- -------- --------- -------- 81,390 95,000 (65,500) 110,890 -------- -------- --------- -------- $485,414 $ -- $ (65,500) $419,914 ======== ======== ========= ========
- --------------- (A) To reflect the conversion of $95,000,000 of the Company's Revolving Debt Facility to equity through the issuance of 43,166,667 shares of Series B common stock. (B) To reflect the readjustment of the Company's accounts to estimated fair values and the elimination of the accumulated deficit against additional paid-in capital as of January 1, 1994. F-12 48 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- RECEIVABLES Receivables consist of the following (in thousands):
DECEMBER 31, --------------- 1997 1996 ------ ------ First trust deed notes secured by real estate sold, interest rates generally ranging from 8.00% to 12.00%.............. $1,165 $ 930 Other notes receivable...................................... 147 228 ------ ------ 1,312 1,158 Other receivables -- primarily escrow proceeds.............. 7,340 3,067 ------ ------ $8,652 $4,225 ====== ======
Notes receivable as of December 31, 1997 mature through 2010 approximately as follows (in thousands): 1998........................................................ $ 661 1999........................................................ -- 2000........................................................ 638 2001........................................................ -- 2002........................................................ -- Thereafter.................................................. 13 ------ $1,312 ======
NOTE 4 -- REAL ESTATE INVENTORIES Real estate inventories consist of the following (in thousands):
DECEMBER 31, 1997 - -------------------------------------------------------------------------------------------------------- COMPLETED LAND AND INVENTORY, INCLUDING CONSTRUCTION COMPLETED LOTS REGION IN PROGRESS HELD FOR SALE MODELS TOTAL ------ ------------ -------------------- ------- -------- Southern California........................... $ 34,362 $11,241 $ 2,940 $ 48,543 San Diego..................................... 46,424 1,116 2,740 50,280 Northern California........................... 87,931 5,060 2,529 95,520 Arizona....................................... 21,613 5,227 1,545 28,385 New Mexico.................................... 8,766 2,903 1,584 13,253 Nevada........................................ 15,392 3,147 -- 18,539 Illinois...................................... 952 -- -- 952 -------- ------- ------- -------- $215,440 $28,694 $11,338 $255,472 ======== ======= ======= ========
F-13 49 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 - -------------------------------------------------------------------------------------------------------- COMPLETED LAND AND INVENTORY, INCLUDING CONSTRUCTION COMPLETED LOTS REGION IN PROGRESS HELD FOR SALE MODELS TOTAL ------ ------------ -------------------- ------ -------- Southern California............................ $118,953 $15,621 $3,383 $137,957 San Diego...................................... 34,931 1,282 -- 36,213 Northern California............................ 81,945 5,160 3,530 90,635 Arizona........................................ 17,533 3,486 1,098 22,117 New Mexico..................................... 7,643 713 1,256 9,612 Nevada......................................... 6,998 1,477 409 8,884 Illinois....................................... 963 -- -- 963 -------- ------- ------ -------- $268,966 $27,739 $9,676 $306,381 ======== ======= ====== ========
NOTE 5 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES The Company and certain of its subsidiaries are general partners in four joint ventures involved in the development and sale of residential housing projects. Such joint ventures are not effectively controlled by the Company and, accordingly, the financial statements of such joint ventures are not consolidated in the preparation of the Company's consolidated financial statements. The Company's investments in unconsolidated joint ventures are accounted for using the equity method. Condensed combined financial information of these joint ventures as of December 31, 1997 is summarized as follows (in thousands):
DECEMBER 31, 1997 ------------ ASSETS Cash and cash equivalents................................... $ 18 Receivables................................................. 293 Real estate inventories..................................... 32,097 Other assets................................................ 750 ------- $33,158 ======= LIABILITIES AND PARTNERS' CAPITAL Accounts payable............................................ $ 86 Accrued expenses............................................ 701 Advances from The Presley Companies and subsidiaries........ 127 ------- 914 ------- Partners' Capital The Presley Companies and subsidiaries.................... 6,950 Others.................................................... 25,294 ------- 32,244 ------- $33,158 =======
In January 1998, the Company formed an additional joint venture in California which acquired land from the Company at the Company's approximate book value of $23,200,000 (which also approximated the land's current market value). The joint venture assumed the Company's non-recourse note payable of $12,500,000 relating to the purchase of this property. F-14 50 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- 12 1/2% SENIOR NOTES AND NOTES PAYABLE 12 1/2% Senior Notes and notes payable consist of the following (in thousands):
DECEMBER 31, -------------------- 1997 1996 -------- -------- 12 1/2% Senior Notes due 2001............................... $180,000 $190,000 -------- -------- Notes payable: Working Capital Facility (Revolving Facility)............. 43,000 12,000 Notes payable: Revolving line of credit -- consolidated joint venture.............................................. 9,440 6,170 Purchase money notes payable -- land acquisitions...... 22,495 354 -------- -------- 74,935 18,524 -------- -------- $254,935 $208,524 ======== ========
Interest costs relating to the above notes consist of the following (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Interest incurred.................................. $(32,970) $(31,571) $(34,160) Interest capitalized............................... 25,158 29,315 31,934 -------- -------- -------- Interest expense................................... $ (7,812) $ (2,256) $ (2,226) ======== ======== ========
Senior Notes Presley is required to offer to repurchase certain Senior Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest to the date of repurchase if Delaware Presley's Consolidated Tangible Net Worth is less than $60,000,000 for any two consecutive fiscal quarters and from the proceeds of certain asset sales. Because the Company's Consolidated Tangible Net Worth was less than $60,000,000 as of September 30, 1997, the Company was, effective on December 4, 1997, required to make an offer to purchase $20,000,000 of the Senior Notes at par plus accrued interest, less the face amount of Senior Notes acquired by the Company after September 30, 1997. The Company acquired Senior Notes with a face amount of $20,000,000 prior to December 4, 1997 and therefore was not required to make said offer. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20,000,000 of Senior Notes. At December 31, 1997, the Company's Consolidated Tangible Net Worth was a deficit of $8,947,000. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. The Company's obligation to offer to purchase $20,000,000 of Senior Notes each six months restricts its ability to acquire, hold and develop real estate projects. The Company has changed its operating strategy during 1997 to finance certain projects in California by forming joint ventures with venture partners that would provide a substantial portion of the capital necessary to develop these projects. The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a Delaware corporation ("Delaware Presley"), are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly owned subsidiary of Delaware Presley ("California Presley"). However, California Presley has granted liens on substantially all of its assets as security for its F-15 51 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) obligations under the Working Capital Facility and other loans. Because the California Presley guarantee is not secured, holders are effectively junior to borrowings under the Working Capital Facility with respect to such assets. Delaware Presley and its consolidated subsidiaries are referred to collectively herein as "Presley" or the "Company." Interest on the Senior Notes is payable on January 1 and July 1 of each year, commencing January 1, 1995. Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes 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. 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. In April 1995, the Company purchased $10,000,000 principal amount of its outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of $724,000 after giving effect to related deferred loan costs and income taxes. These Senior Notes were held by the Company in treasury and subsequently were resold in November 1997 by the Company to an institutional investor in a private placement. Although it has no definitive program to purchase outstanding Senior Notes, the Company may make such purchases from time to time in the future if management believes such purchases are in the Company's best interest. As of December 31, 1997, the outstanding 12 1/2% Senior Notes with a face value of $180,000,000 have an estimated fair value of $172,800,000, based on the Company's repurchase of Senior Notes in late November and early December 1997. 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 the Carmel Mountain Ranch partnership which are currently pledged to other lenders). The borrowing base is calculated based on specified percentages of book values of real estate assets. The borrowing base at December 31, 1997 was approximately $138,000,000; however, the maximum loan under the Working Capital Facility is limited to $72,000,000. The principal outstanding under the Working Capital Facility at December 31, 1997 was $43,000,000. 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. F-16 52 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 includes negative covenants which, among other things, place limitations on the payment of cash dividends, merger transactions, transactions with affiliates, the incurrence of additional debt and the acquisition of new land as described in the following paragraph. Under the terms of the Working Capital Facility, the Company may acquire new improved land for development of housing units of no more than 300 lots in any one location without approval from the lenders if certain conditions are satisfied. The Company may, however, acquire any new raw land or improved land provided the Company has obtained the prior written approval of lenders holding two-thirds of the obligations under the Working Capital Facility. The Working Capital Facility requires that mandatory prepayments be made to reduce the outstanding balance of loans to the extent of all funds in excess of $20,000,000 in the principal operating accounts of the Company. Revolving Line of Credit -- Consolidated Joint Venture Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel Mountain Ranch master-planned community, is a California general partnership and is 100% owned by The Presley Companies and its wholly-owned subsidiary. Effective in March 1995, the development and construction of CMR, a consolidated joint venture, is financed through a revolving line of credit. The revolving line of credit consists of several components relating to production units, models and residential lots. At December 31, 1997, the revolving line of credit had an outstanding balance of $9,440,000. Availability under the line is subject to a number of limitations, but in any case cannot exceed $10,000,000. Interest on the outstanding balance is at prime plus 1.00%. In March 1998, the maturity date of this line was extended to June 16, 1998. Management is currently in discussions with the lender to extend the maturity date of this line for an additional twelve month period to June 16, 1999. Although management believes that current discussions with this lender will result in this longer term extension, no assurances can be given in that regard. Purchase Money Notes Payable -- Land Acquisitions At December 31, 1997, the Company had notes payable outstanding related to land acquisitions for which seller financing was provided in the amount of $22,495,000, as described below. In October 1997, the Company executed a promissory note secured by a deed of trust on land purchased within the Company's Northern California Region in the amount of $12,500,000. Interest on the outstanding balance is 8% per annum and is payable annually. The loan is to be repaid in annual installments of $3,125,000. This note, which is non-recourse to the Company, was assumed in January 1998 by a joint venture which acquired the land from the Company, as described in Note 5. In December 1997, the Company executed a promissory note secured by a deed of trust on land purchased within the Company's San Diego Region in the amount of $4,515,000. Interest on the outstanding balance is 8% per annum. Principal and interest are due and payable thirty days following substantial completion of land improvements by the seller as defined in the purchase agreement. Substantial completion of the improvements is expected in April, 1998. The balance of notes payable related to land acquisitions includes several smaller notes payable to sellers of land purchased within the Company's Arizona, New Mexico and Nevada Regions. F-17 53 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The prime rate averaged 8.46%, 8.27% and 8.83% for 1997, 1996 and 1995, respectively, and was 8.50% and 8.25% at December 31, 1997 and 1996, respectively. NOTE 7 -- STOCK OPTIONS AND INCENTIVE COMPENSATION PLANS Stock Option Plan Effective May 20, 1994, Delaware Presley amended the 1991 Stock Option Plan (the "Plan") to increase the number of shares authorized for options to be granted to 2,642,000 shares of Series A Common Stock. Under the Plan, options may be granted from time to time to key employees, officers, directors, consultants and advisors of the Company. The Plan is administered by the Stock Option Committee of the Board of Directors (the "Committee"). The Committee is generally empowered to interpret the Plan, prescribe rules and regulations relating thereto, determine the terms of the option agreements, amend them with the consent of the optionee, determine the employees to whom options are to be granted, and determine the number of shares subject to each option and the exercise price thereof. The per share exercise price for options will not be less than 100% of the fair market value of a share of the Series A Common Stock on the date the option is granted. The options will be exercisable for a term determined by the Committee, not to exceed ten years from the date of grant or upon a change of control. On May 20, 1994, Delaware Presley issued options to purchase a total of 2,035,000 shares of Series A Common Stock at $2.875 per share. The options outstanding at December 31, 1997 vested at various times and became fully vested on May 20, 1997 and expire five years from the date of vesting. In connection with a new incentive compensation plan (as described below), 725,000 stock options outstanding were repriced effective January 1, 1997 from $2.875 to $1.00. Pursuant to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation", issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB Opinion 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been recognized in the financial statements related to stock options awarded to officers, directors and employees under the Stock Option Plan. As required by Statement No. 123, for disclosure purposes only, the Company has measured the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The Company estimated the fair value of the stock options at date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.2%; a dividend yield of 0.0%, a volatility factor for the market price of the Company's common stock of 0.51; and a weighted average expected life of four years for the stock options. Incentive Compensation Plan Effective on January 1, 1997, the Company's Board of Directors approved a new incentive compensation plan for all of the Company's full-time, salaried employees, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), Executives, Managers, Field Construction Supervisors, and certain other employees. Under the terms of this new plan, the CEO and CFO will be eligible to receive bonuses at the discretion of the Compensation Committee of the Board; in addition, the stock options held by the CEO and CFO (totaling 725,000 options) were repriced from $2.875 to $1.00. In addition, the 1997 Executive Bonus Plan stipulates annual setting of individual bonus targets, expressed as a percent of each executive's salary, with awards based on performance against goals pertaining to each participant's operating area. All awards will be prorated downward if the sum of all calculated awards for the entire Company exceeds 20% of the Company's consolidated pre-tax income before bonuses. Awards will be paid out in three F-18 54 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. NOTE 8 -- INCOME TAXES The following summarizes the credit (provision) for income taxes (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------- ----- -------- Current Federal.............................................. $-- $-- $ -- State................................................ (6) (4) (4) --- --- ------- (6) (4) (4) --- --- ------- Deferred Federal.............................................. -- -- 1,448 State................................................ 6 4 424 --- --- ------- 6 4 1,872 --- --- ------- Credit for income taxes before extraordinary item...... -- -- 1,868 Tax provision on extraordinary item.................... -- -- (1,868) --- --- ------- $-- $-- $ -- === === =======
Income taxes differ from the amounts computed by applying the applicable Federal statutory rates due to the following (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- ---- -------- Credit (provision) for Federal income taxes at the statutory rate....................................... $ 31,463 $(53) $ 14,578 (Provision) credit for state income taxes, net of Federal income tax benefits.......................... 2,583 (20) 2,517 Valuation allowance for deferred tax asset............. (34,046) (15,385) Extraordinary item -- gain from retirement of debt..... -- -- (1,868) Other.................................................. -- 73 158 -------- ---- -------- $ -- $ -- $ -- ======== ==== ========
F-19 55 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Temporary differences giving rise to deferred income taxes consist of the following (in thousands):
DECEMBER 31, --------------------- 1997 1996 --------- -------- Deferred tax assets Reserves deducted for financial reporting purposes not allowable for tax purposes............................. $ 33,720 $ 13,996 Compensation deductible for tax purposes when paid........ 326 300 Net operating loss and alternative minimum tax credit carryovers............................................. 69,231 61,922 Valuation allowance....................................... (104,416) (70,370) State income tax provisions deductible when paid for Federal tax purposes................................... 17,281 10,917 Other..................................................... 67 149 --------- -------- 16,209 16,914 --------- -------- Deferred tax liabilities Interest capitalized for financial reporting purposes and deducted currently for tax purposes.................... (17,154) (17,134) Effect of book/tax differences for joint ventures......... 945 220 --------- -------- (16,209) (16,914) --------- -------- $ -- $ -- ========= ========
At December 31, 1997 the Company has net operating loss carryforwards for Federal tax purposes of approximately $141,974,000, of which $5,066,000 expires in 2007, $17,542,000 expires in 2008, $27,378,000 expires in 2009, $35,840,000 expires in 2010, $13,668,000 expires in 2011 and $42,480,000 expires in 2012. Due to the transactions discussed in Note 2, the future benefits associated with the utilization of the net operating loss carryforwards may be substantially limited. NOTE 9 -- GAIN FROM RETIREMENT OF DEBT In April 1995, the Company purchased $10,000,000 principal amount of its outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of $724,000 after giving effect to related deferred loan costs and income taxes. In September 1995, the Company retired a land acquisition and development loan at its wholly-owned partnership, Horsethief Canyon Partners, resulting in a net gain of $1,964,000, after giving effect to income taxes. NOTE 10 -- COMMITMENTS AND CONTINGENCIES In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, "Accounting for Special Assessment and Tax Increment Financing Entities' issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, and recorded as liabilities in the Company's consolidated balance sheet, if the amounts are fixed and determinable. The Company's commitments and contingent liabilities include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Company's consolidated financial position. F-20 56 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company is a defendant in various lawsuits related to its normal business activities. In the opinion of management, disposition of the various lawsuits will have no material effect on the consolidated financial statements of the Company. NOTE 11 -- UNAUDITED SUMMARIZED QUARTERLY FINANCIAL INFORMATION Summarized quarterly financial information for the years ended December 31, 1997, 1996 and 1995 is as follows (in thousands except per common share amounts):
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 TOTAL --------- --------- ------------- ------------ --------- Sales................................. $ 67,795 $ 97,566 $ 68,349 $ 96,232 $ 329,942 Costs and expenses, net............... (71,369) (173,020) (71,549) (103,898) (419,836) -------- --------- -------- --------- --------- Income (loss) before income taxes..... (3,574) (75,454) (3,200) (7,666) (89,894) Credit (provision) for income taxes... -- -- -- -- -- -------- --------- -------- --------- --------- Net income (loss)(1).................. $ (3,574) $ (75,454) $ (3,200) $ (7,666) $ (89,894) ======== ========= ======== ========= ========= Basic and diluted earnings per common share Note 1........................ $ (0.07) $ (1.45) $ (0.06) $ (0.15) $ (1.72) ======== ========= ======== ========= =========
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 TOTAL --------- --------- ------------- ------------ --------- Sales................................. $ 61,071 $ 82,219 $ 79,550 $ 96,157 $ 318,997 Costs and expenses, net............... (63,392) (81,852) (78,867) (94,734) (318,845) -------- --------- -------- --------- --------- Income (loss) before income taxes..... (2,321) 367 683 1,423 152 Credit (provision) for income taxes... -- -- -- -- -- -------- --------- -------- --------- --------- Net income (loss)..................... $ (2,321) $ 367 $ 683 $ 1,423 $ 152 ======== ========= ======== ========= ========= Basic and diluted earnings per common share Note 1........................ $ (0.04) $ 0.01 $ 0.01 $ 0.03 $ -- ======== ========= ======== ========= =========
F-21 57 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1995 1995 1995 1995 TOTAL --------- --------- ------------- ------------ --------- Sales................................. $ 67,920 $ 60,216 $ 65,668 $ 91,701 $ 285,505 Costs and expenses, net............... (73,300) (73,572) (68,304) (111,982) (327,158) -------- -------- -------- --------- --------- Income (loss) before income taxes and extraordinary item.................. (5,380) (13,356) (2,636) (20,281) (41,653) Credit (provision) for income taxes... 2,206 2,492 1,365 (4,195) 1,868 -------- -------- -------- --------- --------- Income (loss) before extraordinary item................................ (3,174) (10,864) (1,271) (24,476) (39,785) Extraordinary item -- gain from retirement of debt, net of applicable taxes -- Note 9.............................. -- 724 1,964 -- 2,688 -------- -------- -------- --------- --------- Net income (loss)(2)(3)............... $ (3,174) $(10,140) $ 693 $ (24,476) $ (37,097) ======== ======== ======== ========= ========= Basic and diluted earnings per common share Note 1 Before extraordinary item........... $ (0.06) $ (0.21) $ (0.02) $ (0.47) $ (0.76) Extraordinary item.................... -- 0.02 0.03 -- 0.05 -------- -------- -------- --------- --------- After extraordinary item.............. $ (0.06) $ (0.19) $ 0.01 $ (0.47) $ (0.71) ======== ======== ======== ========= =========
- --------------- (1) Results for the three months ended June 30, 1997 were adversely affected by a $74,000,000 reduction of certain real estate assets to their estimated net realizable value as described in Note 1. (2) Results for the three months ended June 30, 1995 were adversely affected by a $9,400,000 reduction of certain real estate assets to their estimated net realizable value as described in Note 1. (3) Results for the three months ended December 31, 1995 were adversely affected due to recognition of an impairment loss on real estate assets amounting to $16,811,000 as described in Note 1. F-22 58 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 3.1 (1) Certificate of Incorporation of the Company................. 3.3 (1) Bylaws of the Company....................................... 4.1 (1) Specimen certificate of Common Stock........................ 10.1 (1) First Amended and Restated Loan Agreement dated as of December 18, 1989 among the Company, as Borrower, Security Pacific National Bank, First Interstate Bank of California, The Bank of California, N.A., California Federal Bank, a Federal Savings Bank, and Continental Bank, N.A., as the Banks, and Security Pacific National Bank as the Agent (the "1989 Revolving Facility").................................. 10.2 (1) First Amendment to the 1989 Revolving Facility, dated February 1, 1991............................................ 10.3 (1) Letter, dated December 11, 1990, providing for the extension of the 1989 Revolving Facility.............................. 10.4 (1) Commitment Letter, dated August 19, 1991, among the Banks, the Agent and the Company relating to the amendment and extension of the 1989 Revolving Facility.................... 10.5 (1) Loan Agreement, dated as of September 27, 1988, between Carmel Mountain Ranch, as Borrower, Security Pacific National Bank, Bank of America National Trust and Savings Association and Bankers Trust Company, as the Banks, and Security Pacific National Bank, as the Agent (the "CMR Loan Agreement")................................................. 10.6 (1) First Amendment to the CMR Loan Agreement, dated April 3, 1989........................................................ 10.7 (1) Second Amendment to the CMR Loan Agreement, dated December 21, 1989..................................... 10.8 (1) Third Amendment to the CMR Loan Agreement, dated January 1, 1991........................................................ 10.9 (1) Fourth Amendment to the CMR Loan Agreement, dated March 1, 1991........................................................ 10.10 (1) Building Loan Agreement, dated November 4, 1988, between Horsethief Canyon Partners and First Interstate Bank of California (the "HCP Loan Agreement")....................... 10.11 (1) Note, dated November 4, 1988, in favor of First Interstate Bank of California by Horsethief Canyon Partners (the "HCP Note")...................................................... 10.12 (1) Amendment to the HCP Loan Agreement, dated March 28, 1989... 10.13 (1) Modification to the HCP Note, dated November 26, 1990....... 10.14 (1) Modification to the HCP Note, dated February 27, 1991....... 10.15 (1) Modification to the HCP Note, dated June 18, 1991........... 10.16 (1) Additional Funds Agreement, dated June 18, 1991, between Horsethief Canyon Partners and First Interstate Bank of California.................................................. 10.17 (1) Office Building Lease, dated June 1, 1989, between Corporate Plaza and Associates and the Company........................ 10.18 (1) Form of Employment Agreement, dated October 17, 1991, between Wade H. Cable and the Company....................... 10.19 (1) Form of Employment Agreement, dated October 17, 1991, between David M. Siegel and the Company..................... 10.20 (1) Form of Employment Agreement, dated October 17, 1991, between L.C. Albertson, Jr. and the Company.................
59
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.21 (1) Form of Employment Agreement, dated October 17, 1991, between Peter N. Hellmann and the Company................... 10.22 (1) Form of Employment Agreement, dated October 17, 1991, between Gerald P. Nordeman and the Company.................. 10.23 (1) Form of Employment Agreement, dated October 17, 1991, between Charles W. Reynolds and the Company................. 10.24 (1) Form of Employment Agreement, dated October 17, 1991, between Lewis N. Wilmot and the Company..................... 10.25 (1) Form of Employment Agreement, dated October 17, 1991, between Nancy M. Harlan and the Company..................... 10.26 (1) Form of Employment Agreement, dated October 17, 1991, between Linda L. Foster and the Company..................... 10.27 (1) Form of Indemnity Agreement, dated October 18, 1991, between the Company and Messrs. Lyon and Cable as Directors, and dated December 12, 1991 as to the other Directors........... 10.28 (1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and William Lyon.................. 10.29 (1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and each of the existing stockholders other than William Lyon........................ 10.30 (1) 1991 Stock Option Plan...................................... 10.31 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Wade H. Cable............................... 10.32 (1) Secured Promissory Note, dated February 1, 1990, made by Wade H. Cable in favor of the Company....................... 10.33 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Wade H. Cable and Susan M. Cable, Trustees of the Cable Family Trust Est. 7-11-88..................................................... 10.34 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and David M. Siegel............................. 10.35 (1) Secured Promissory Note, dated February 1, 1990, made by David M. Siegel in favor of the Company..................... 10.36 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and David M. Siegel and Linda A. Siegel, Trustees of the Siegel Family Trust U/D/T Est. 6-20-89.......................................... 10.37 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and L.C. Albertson, Jr.......................... 10.38 (1) Secured Promissory Note, dated February 1, 1990, made by L.C. Albertson, Jr. in favor of the Company................. 10.39 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Lloyd C. Albertson, Jr. and Dorothy K. Albertson, Trustees of the Lloyd C. Albertson, Jr. Family Trust Est. 6-15-79........... 10.40 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Charles W. Reynolds......................... 10.41 (1) Secured Promissory Note, dated February 1, 1990, made by Charles W. Reynolds in favor of the Company................. 10.42 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Charles W. Reynolds....................................................
60
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.43 (1) Note and Pledge Agreement, dated February 1, 1990 between the Company and Lewis N. Wilmot............................. 10.44 (1) Secured Promissory Note, dated February 1, 1990, made by Lewis N. Wilmot in favor of the Company..................... 10.45 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Lewis N. Wilmot... 10.46 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and G. Ross Crawford............................ 10.47 (1) Secured Promissory Note, dated February 1, 1990, made by G. Ross Crawford in favor of the Company....................... 10.48 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Gordon Ross Crawford and Carol Georgia Crawford, Trustees of The Crawford Family Trust Est. 5-26-83.......................... 10.49 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Alan D. Uman................................ 10.50 (1) Secured Promissory Note, dated February 1, 1990, made by Alan D. Uman in favor of the Company........................ 10.51 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and Alan D. Uman...... 10.52 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and C. Dean Stewart............................. 10.53 (1) Secured Promissory Note, dated February 1, 1990, made by C. Dean Stewart in favor of the Company........................ 10.54 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991, between the Company and C. Dean Stewart... 10.55 (1) Note and Pledge Agreement, dated February 1, 1990, between the Company and Linda L. Foster............................. 10.56 (1) Secured Promissory Note, dated February 1, 1990, made by Linda L. Foster in favor of the Company..................... 10.57 (1) Form of Amendment to Note and Pledge Agreement, dated October 17, 1991,between the Company and Linda L. Foster.... 10.58 (2) Second Amended and Restated Loan Agreement dated as of January 31, 1992 between the Company, as Borrower, Security Pacific National Bank, First Interstate Bank of California, The Bank of California N.A., California Federal Bank, a Federal Savings Institution and Continental Bank, N.A., as the Banks, and Security Pacific Bank, as the Agent (the "Second Amended Loan Agreement")............................ 10.59 (2) Letter Agreement dated January 31, 1992 between Security Pacific Bank, individually and as Agent for the Banks, and the Company regarding Section 2.8 of the Second Amended Loan Agreement................................................... 10.60 (3) Agreement for Redemption of Partnership Interest dated December 30, 1992 between Carmel Mountain Ranch, a California general partnership, The Presley Companies, a California corporation, Presley CMR, Inc., a California corporation, Home Capital Corporation, a California corporation and Humboldt Financial Services Corp., a California corporation......................................
61
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.61 (3) Letter Waiver dated December 31, 1992 between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and California Federal Bank, a Federal Savings Bank, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank) as Agent....................................................... 10.62 (3) Amended Statement of Partnership of Carmel Mountain Ranch dated December 30, 1992..................................... 10.63 (3) Amendment to Amended and Restated Partnership Agreement of Carmel Mountain Ranch dated December 29, 1992............... 10.64 (3) Commitment Letter Extension Agreement dated January 18, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender.................... 10.65 (3) Fourth Modification of Note Agreement dated January 18, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender.................... 10.66 (3) Fifth Modification Agreement dated January 11, 1993 between Carmel Mountain Ranch, as Borrower and Bank of America National Trust and Savings Association and The Bank of California, N.A., as Lenders................................ 10.67 (3) Conditional Forbearance Agreement dated January 29, 1993 between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and California Federal Bank, a Federal Savings Bank, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent (the "Conditional Forbearance Agreement")..................................... 10.68 (3) Amendment to Conditional Forbearance Agreement dated March 26, 1993, effective March 31, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent (the "Amendment to Conditional Forbearance Agreement")........... 10.69 (3) Commitment Letter dated March 30, 1993 between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent (the "Commitment Letter")........................................ 10.70 (3) Modification of Commitment Letter Extension Agreement dated March 29, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender...................................................... 10.71 (3) Fifth Modification of Note Agreement dated March 29, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender.................... 10.72 (3) Commitment Letter dated March 30, 1993 between Horsethief Canyon Partners, as Borrower and First Interstate Bank of California, as Lender.......................................
62
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.73 (4) Second Amendment to Conditional Forbearance Agreement dated April 29, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent.................................... 10.74 (4) Amendment to Commitment Letter dated April 29, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A., First Interstate Bank of California and Foothill Capital Corporation, as the Banks, and Bank of America National Trust and Savings Association (as successor by merger with Security Pacific National Bank), as Agent.... 10.75 (4) Third Amended and Restated Loan Agreement dated as of May 7, 1993, between the Company, as Borrower, Bank of America National Trust and Savings Association, Continental Bank, N.A., The Bank of California, N.A. and Foothill Capital Corporation, as the Lenders, and Bank of America National Trust and Savings Association, as the Agent, and Bank of America National Trust and Savings Association, as the Lead Bank........................................................ 10.76 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to Bank of America Trust and Savings Association......................................... 10.77 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to Continental Bank, N.A. ..... 10.78 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to The Bank of California, N.A. ....................................................... 10.79 (4) Warrant Certificate dated as of May 7, 1993 for Warrants to Purchase Common Stock issued to Foothill Capital Corporation................................................. 10.80 (5) Amended and Restated Loan Agreement dated as of June 1, 1993 among Carmel Mountain Ranch, a California general partnership, as the Borrower, Bank of America National Trust and Savings Association and The Bank of California, N.A., as the Banks and Bank of America National Trust and Savings Association, as the Agent, and Bank of America National Trust and Savings Association, as the Lead Bank............. 10.81 (5) Commitment Letter Extension Agreement dated July 29, 1993 between Horsethief Canyon Partners, a California general partnership, as the Borrower, and First Interstate Bank of California.................................................. 10.82 (6) Second Amendment, dated as of September 23, 1993, to Third Amended and Restated Loan Agreement dated as of May 7, 1993, between The Presley Companies, a California corporation, as the Borrower, Bank of America National Trust and Savings Association, Foothill Capital Corporation, Mellon Bank, N.A. as Trustee of First Plaza Group Trust, a New York trust, and Foothill Capital Corporation (as successors by assignment of the interest of The Bank of California, N.A.) and Pearl Street L.P. (c/o Goldman, Sachs & Co.), and Internationale Nederlanden (U.S.) Capital Corporation (previously known as ING Bank) (as successors by assignment of the interest of Continental Bank, N.A.), as the Lenders, and Bank of America National Trust and Savings Association, as the Agent and the Lead Bank...................................................
63
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.83 (7) Third Amendment dated as of December 30, 1993 among The Presley Companies, a California corporation (the Borrower), the lending parties to the Third Amended and Restated Loan Agreement dated as of May 7, 1993 and Bank of America National Trust and Savings Association, as agent and lead bank for the lenders thereunder............................. 10.84 (7) Fourth Amendment dated as of February 2, 1994 among The Presley Companies, a California corporation (the Borrower), the lending parties to the Third Amended and Restated Loan Agreement dated as of May 7, 1993, and Foothill Capital Corporation, as agent for the lenders thereunder............ 10.85 (7) Fourth Amended and Restated Loan Agreement dated as of March 25, 1994 among The Presley Companies, a California corporation (the Borrower), Foothill Capital Corporation ("Foothill"), Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994), as the lenders, and Foothill, as the Agent for the Lenders under the Loan Documents....... 10.86 (7) Agreement to Issue and Purchase Stock as dated for reference purposes the 25th day of March, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994)....... 10.87 (8) First Amendment to the Agreement to Issue and Purchase Stock dated as of April 8, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/ Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994)............................... 10.88 (9) 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 by and among The Presley Companies, a Delaware corporation. The Presley Companies, a California corporation, and Foothill Capital Corporation, individually and as Agent, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994).......
64
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.89 (9) Second Amendment to the Fourth Amended and Restated Loan Agreement dated as of May 31, 1994 by and among The Presley Companies, a California corporation, Foothill Capital Corporation, individually and as agent, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/ Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994)........................................... 10.90 (8) Form of Shareholders' Agreement dated as of May 20, 1994, by and among The Presley Companies, a Delaware corporation, each of the holders of shares of the Series B Common Stock and certain holders of shares of the Series A Common Stock....................................................... 10.91 (8) Form of Registration Rights Agreement dated as of May 20, 1994, by and among The Presley Companies, a Delaware corporation and each of the holders of shares of the Series B Common Stock.............................................. 10.92 (8) Amended and Restated 1991 Stock Option Plan of The Presley Companies, a Delaware corporation........................... 10.93 (9) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and Wade H. Cable....................... 10.94 (9) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and David M. Siegel..................... 10.95 (9) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and L.C. Albertson, Jr.................. 10.96 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Gerald P. Nordeman.................. 10.97 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Charles W. Reynolds................. 10.98 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Lewis N. Wilmot..................... 10.99 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Nancy M. Harlan..................... 10.100 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Linda L. Foster..................... 10.101 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and W. Douglass Harris.................. 10.102 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and C. Dean Stewart..................... 10.103 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and G. Ross Crawford.................... 10.104 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Alan Uman........................... 10.105 (9) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and William Lyon........................ 10.106 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Wade H. Cable and the Company......
65
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.107 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between David M. Siegel and the Company.... 10.108 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between L.C. Albertson, Jr. and the Company..................................................... 10.109 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Gerald P. Nordeman and the Company..................................................... 10.110 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Charles W. Reynolds and the Company..................................................... 10.111 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Lewis N. Wilmot and the Company.... 10.112 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Nancy M. Harlan and the Company.... 10.113 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Linda L. Foster and the Company.... 10.114 (9) Form of Employment Agreement, dated as of May 20, 1994, between W. Douglass Harris and the Company.................. 10.115 (9) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between C. Dean Stewart and the Company.... 10.116 (8) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between G. Ross Crawford and the Company... 10.117 (8) Form of Amended and Restated Employment Agreement, dated as of May 20, 1994, between Alan Uman and the Company.......... 10.118 (10) Third Amendment of Fourth Amended and Restated Loan Agreement, dated for reference purposes June 30, 1994, by and among (i) The Presley Companies, a California corporation, as 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), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994), as the lenders, and Foothill, as the agent for the lenders..... 10.119 (10) Agreement and Assignment; Mutual Releases, as of August 23, 1994, by and between Gateway Highlands, a California limited partnership, HSP Inc., a California corporation and The Presley Companies, a California corporation................. 10.120 (11) Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, N.A., a national banking association dated as of February 15, 1995........................................... 10.121 (12) Fifth Amendment to Fourth Amended and Restated Loan Agreement, dated for reference purposes June 30, 1995, by and among (i) The Presley Companies, a California corporation, as 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 (iii) Foothill, as the Agent for the Lenders.....................................................
66
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ---------- ----------- ------------ 10.122 (13) Commitment Letter and Settlement Agreement dated September 11, 1995 by and among First Interstate Bank of California, Horsethief Canyon Partners, a California general partnership ("Borrower"), and The Presley Companies, a California corporation, the Borrower's managing general partner........ 10.123 (13) Master Credit Agreement by and between The Presley Companies, a California corporation, and Bank One, Arizona, NA, a national banking association, dated as of October 10, 1995........................................................ 10.124 (13) First Amendment to Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, NA dated as of October 10, 1995.......... 10.125 (14) Master Credit Agreement by and between Horsethief Canyon Partners, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996....................... 10.126 (14) Amendment to Master Credit Agreement and Secured Promissory Note by and between Presley Homes (formerly known as The Presley Companies), a California corporation ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996....................... 10.127 (14) Second Amendment to Master Credit Agreement and Secured Promissory Note by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996....................................... 10.128 (15) Notice of Exercise of Option for Extension of Termination Date dated as of April 18, 1997 under that certain Fourth Amended and Restated Loan Agreement dated as of March 25, 1994 between The Presley Companies, a California corporation, as the borrower, Foothill Capital Corporation, Mellon Bank, N.A., as Trustee of First Plaza Group Trust, a New York trust, Pearl Street L.P. (c/o Goldman, Sachs & Co.), Internationale Nederlanden (U.S.) Capital Corporation, and Continental Stock Transfer & Trust Company, as Trustee for the Whippoorwill/Presley Obligations Trust -- 1994, as the Lenders, and Foothill Capital Corporation, as the Agent and Lead Bank............................................... 10.129 (16) 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 Transfer & 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............................................. 10.130 (17) Third Amendment to Master Credit Agreement, dated as of September 25, 1997, by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank")........ 21.1 List of Subsidiaries of the Company......................... 27 Financial Data Schedule.....................................
67 - ------------ (1) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and incorporated herein by this reference. (2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1992 and incorporated herein by this reference. (3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by this reference. (4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993 and incorporated herein by this reference. (5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1993 and incorporated herein by this reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993 and incorporated herein by this reference. (7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by this reference. (8) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference. (9) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (10) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by this reference. (11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by this reference. (12) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 and incorporated herein by this reference. (13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by this reference. (14) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by this reference. (15) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. (16) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (17) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. EX-21.1 2 EXHIBIT 21.1 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES Presley Homes (formerly The Presley Companies) State of Incorporation: California PH Institutional Ventures State of Incorporation: California PH Ventures -- San Jose State of Incorporation: California Presley CMR, Inc. State of Incorporation: California HSP Inc. State of Incorporation: California Presley Mortgage Company State of Incorporation: California Presley Southwest, Inc. State of Incorporation: Arizona Other names under which The Presley Companies conducts business: Presley of Southern California Presley of Northern California Presley of San Diego Presley of Central California Presley of Arizona Presley of Illinois Presley of New Mexico Presley of Nevada Presley of the Southwest Carmel Mountain Ranch Presley Sports Management Group Palm Desert Resorter Horsethief Canyon Partners BCED/Presley Corona Hills Sun Lakes Country Club American Self Storage Oakhurst Country Club Presley Homes Thousand Oaks, LP Presley Torrey I Associates, LLC Presley Torrey II Associates, LLC Presley Mercy Associates, LLC Cerro Plata Associates, LLC EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 4,569 0 8,652 0 255,472 0 5,952 2,339 285,244 0 0 0 0 522 (6,203) 285,244 329,942 329,942 302,201 302,201 109,823 0 7,812 (89,894) 0 (89,894) 0 0 0 (89,894) (1.72) (1.72)
-----END PRIVACY-ENHANCED MESSAGE-----