-----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, EFYY3rrcjUcpyGRwcxiFGAEU0Gr6gQ1i7PqvE07eu1U80X+nKB53j3J9JRA0/hfS CUWa7qfCs5RUIPnwray4/g== 0000892569-99-002616.txt : 19991018 0000892569-99-002616.hdr.sgml : 19991018 ACCESSION NUMBER: 0000892569-99-002616 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991007 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/A SEC ACT: SEC FILE NUMBER: 001-10830 FILM NUMBER: 99724177 BUSINESS ADDRESS: STREET 1: 19 CORPORATE PLAZA CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7146406400 MAIL ADDRESS: STREET 1: 19 CORP PLAZA STREET 2: 19 CORP PLAZA CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-K405/A 1 10-K405/A FOR THE FISCAL YEAR ENDED 12/31/98. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-18001 THE PRESLEY COMPANIES (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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: (949) 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/A or any amendments to this Form 10-K/A. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 1999 was $23,341,011. (This calculation assumes that all officers and directors of the Company are affiliates.) The number of shares of Series A Common Stock and Series B Common Stock outstanding as of September 30, 1999 was 34,792,732 and 17,402,946, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's Proxy Statement for the Annual Meeting of Holders of Series A Common Stock held on May 10, 1999 are incorporated herein by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE PRESLEY COMPANIES INDEX
PAGE NO. -------- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 13 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 13 PART II Market for the Registrant's Common Equity and Related Item 5. Stockholder Matters......................................... 14 Item 6. Selected Financial Data..................................... 15 Management's Discussion and Analysis of Financial Condition Item 7. and Results of Operations.................................................. 16 Quantitative and Qualitative Disclosures About Market Item 7A. Risk........................................................ 29 Item 8. Financial Statements and Supplementary Data................. 29 Changes in and Disagreements with Accountants on Accounting Item 9. and Financial Disclosure........................................ 29 PART III Item 10. Directors and Executive Officers of the Registrant.......... 29 Item 11. Executive Compensation...................................... 29 Security Ownership of Certain Beneficial Owners and Item 12. Management.................................................. 30 Item 13. Certain Relationships and Related Transactions.............. 30 PART IV Exhibits, Consolidated Financial Statement Schedules and Item 14. Reports on Form 8-K......................................... 30 Index to Consolidated Financial Statements.................. 35
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 47,000 homes. At December 31, 1998 the Company conducted its homebuilding operations through six geographic regions (Southern California, San Diego, Northern California, Arizona, New Mexico and Nevada) including both wholly-owned projects and projects being developed in unconsolidated joint ventures. The Company believes that it was one of the largest homebuilders in California in terms of both sales and homes delivered in 1998. Approximately 55% of the Company's home closings were derived from its California operations. In 1998, the Company and its unconsolidated joint ventures had combined revenues of $409.4 million and delivered 1,925 homes. Beginning in early 1996, the Company's homebuilding operations have been conducted under the name Presley Homes. The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. The Company currently markets its homes through 46 sales locations in both its wholly-owned projects and projects being developed in unconsolidated joint ventures. In 1998, the average sales price for homes delivered was $202,300, with homes priced from $82,900 to $885,600. The Company and its unconsolidated joint ventures currently own approximately 7,658 lots (including 3,158 in unconsolidated joint ventures) and control an additional 4,141 lots (including 3,300 in unconsolidated joint ventures) on which to construct homes. Substantially all lots are entitled, except for approximately 4,900 lots in two unconsolidated joint ventures in Arizona which are in the preliminary entitlement stage. As used in this Annual Report on Form 10-K/A, "entitled" land has a Development Agreement and/or Vesting Tentative Map, or a final recorded plat or map from the appropriate county or city government. Development Agreements and Vesting Tentative Maps generally provide for the right to develop the land in accordance with the provisions of the Development Agreement or Vesting Tentative Map unless an issue arises concerning health, safety or general welfare. The Company's sources of supply of developed lots for its homebuilding operations are (1) development of its master-planned communities and (2) purchase of smaller projects with shorter life cycles (merchant homebuilding). As of December 31, 1998 approximately 64% of the total lots owned and controlled by the Company and its unconsolidated joint ventures are located in the Company's eight master-planned communities. Development of master-planned communities, which generally takes five to fifteen years from the date of initial land acquisition to completion, includes selecting sites and acquiring large parcels of undeveloped land, obtaining all necessary government approvals to build, and developing land, infrastructure and finished lots. The Company estimates that its current inventory of land is adequate to supply its homebuilding operations at current operating levels for approximately 2 years. Prior to 1994, the Company had focused on the development of master-planned communities as a primary source of supply of developed lots for its homebuilding operations. Beginning in 1994, the Company's land acquisition strategy, to the extent permitted by the Company's financing arrangements, has been to undertake projects with shorter life-cycles in order to reduce development and market risk while maintaining an inventory of lots sufficient for construction of homes over a two or three year period. As part of this strategy, the Company's current plans are to: (i) acquire and develop parcels of land with up to approximately 300 lots, (ii) expand its homebuilding operations in the Southwest, particularly in its long established markets in California and Arizona, and in Nevada, where the Company entered the market in 1995 and (iii) continue to evaluate opportunities in land development and master-planned communities with the intention that any such projects would be funded in significant part by sources other than the Company. The Company announced on May 5, 1998 that it had engaged Warburg Dillon Read Inc. to explore various strategic alternatives including the refinancing/restructuring of its outstanding debt obligations or the sale of certain, or substantially all, of its assets. In conjunction with the engagement of the financial advisor, a Special Committee comprised of independent directors of the Company's Board of Directors was formed to 1 4 evaluate strategic alternatives. The Company's actions were a direct result of the severe economic conditions encountered during the past several years, together with the Company's highly leveraged capital structure. The declining economic conditions began to affect the Company's primary home-building markets in California during 1989 and continued on and off since that time. In view of substantial declines in the value of certain of the Company's real estate assets since 1992, the Company has been required to write down the book value of these real estate assets in accordance with generally accepted accounting principles. The $89.9 million loss for the year ended December 31, 1997 included a non-cash charge of $74.0 million as a result of the recognition of impairment losses on certain of the Company's real estate assets. As a result of the substantial losses realized by the Company since 1992, the Company had a stockholders' deficit of $5.7 million at December 31, 1997. As of December 31, 1998, the Company's stockholders' equity totaled $5.8 million. On December 31, 1998, the Company announced that, after unanimous approval by the Special Committee of independent directors, Presley had entered into a letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting forth their preliminary understanding with respect to (i) the proposed acquisition by Presley of substantially all of the assets of William Lyon Homes for approximately $48.0 million together with the assumption of related liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to a tender offer for not less than 40% and not more than 49% of the outstanding shares of Presley common stock held by stockholders other than William Lyon at a price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and his son, William H. Lyon, is a California-based homebuilder and real estate developer with projects currently under development in Northern and Southern California. Following the completion of the proposed transactions, William Lyon, who is the current Chairman of the Board of Presley, would beneficially own between 55% and 65% (depending on the number of shares tendered) of the outstanding shares of Presley common stock and the remaining shares would continue to be publicly traded. The execution of the letter of intent followed a review over several months by the Special Committee, together with its financial and legal advisors, of strategic alternatives available to Presley as well as a review of other proposals received from third parties. Under the terms of the letter of intent, the proposed transactions are subject to various conditions, including the successful negotiation and execution of a definitive agreement, the receipt of opinions of Presley's advisors with respect to the fairness of the transactions to Presley and its stockholders as well as the solvency of Presley following consummation of the transactions, the receipt of real estate appraisals satisfactory to Presley and William Lyon Homes with respect to the real estate assets of William Lyon Homes, the approval of a definitive agreement by the respective boards of directors of Presley and William Lyon Homes by March 31, 1999, receipt of all required regulatory approvals and third party consents, including any required lender consents, the receipt of agreements from certain significant stockholders of Presley to tender their shares pursuant to the tender offer, the receipt of financing by Presley in an amount sufficient to enable Presley to finance the transactions, and the absence of any material adverse change in the business or financial condition of either Presley or William Lyon Homes. In addition, the letter of intent contemplates that each of the transactions will be structured so as to be subject to the successful completion of the other and that the parties will structure the transactions (including, if necessary, by imposing limitations on certain transfers of shares) so as to avoid triggering the change of control tax provisions that would result in the loss of Presley's net operating losses for tax purposes. The letter of intent also contemplates that Presley's 12 1/2% Senior Notes due 2001 shall remain outstanding without modification. The letter of intent provides that, subject to the fiduciary duties of their respective boards of directors, Presley and William Lyon Homes will negotiate exclusively with each other toward a definitive agreement until March 31, 1999. The letter of intent does not constitute a binding agreement to consummate the transactions and there can be no assurances that the parties ultimately will enter into a definitive agreement with respect to the transactions or that the conditions to the transactions will be satisfied. 2 5 On February 18, 1999 the Company announced that it had received a letter from William Lyon, Chairman of the Board of William Lyon Homes and also Chairman of the Board of Presley, proposing a modification to the previously executed letter of intent with William Lyon Homes. Under the proposed modification, William Lyon Homes would make a tender offer for not more than 37% of the outstanding shares of common stock of Presley for a purchase price of $0.62 per share. In the event that more than 37% of the outstanding shares of common stock of Presley is tendered, William Lyon Homes will purchase shares from each tendering stockholder on a pro rata basis. The tender offer will be conditioned upon there being tendered and not withdrawn, a number of shares which constitutes at least 37% of the outstanding shares of Presley. The proposed modification also provides that the transaction will be structured to permit William Lyon or his affiliates, prior to consummation of the transaction and consistent with applicable securities laws, to sell shares of Presley common stock owned by them up to a maximum of 4% of the total number of shares of Presley common stock presently outstanding. The proposed modification is currently being considered by the Special Committee of independent directors. On March 30, 1999, the parties amended the letter of intent to extend its term and the period of exclusive negotiation to April 30, 1999. The condition included in the letter of intent that the boards of directors of Presley and William Lyon Homes must approve a definitive agreement by March 31, 1999 was also extended to April 30, 1999. The parties have also agreed that William Lyon Homes may participate in discussions and negotiations with the holders of Presley's Series B Common Stock regarding the purchase by William Lyon Homes of such percentage of the Series B holder's shares so as to reduce such Series B holder's ownership interest in Presley Common Stock to between 4.9% and 5% of Presley's outstanding Common Stock following consummation of the proposed transactions. William Lyon Homes may also seek commitments from the Series B holders to sell additional shares to the extent that the number of shares of Series A Common Stock tendered in the tender offer are below the minimum threshold set forth in a definitive agreement. Any such negotiations are to be conducted exclusively so as to obtain the consent of the Series B holders to the proposed transactions and to avoid triggering the change of control tax provisions that would result in the loss of Presley's net operating loss carryforwards for tax purposes. William Lyon Homes is required to notify the Special Committee regarding the details of any such discussions and negotiations. William Lyon Homes may not enter into any agreement with any Series B Holder prior to receiving the written approval from the Special Committee or Presley's Board of Directors. In connection with these events, the Company has incurred costs of approximately $1.3 million for the year ended December 31, 1998 which are reflected in the Consolidated Statement of Operations as financial advisory expenses. In accordance with the bond indenture agreement governing the Company's Senior Notes which are due in 2001, if the Company's Consolidated Tangible Net Worth is less than $60 million for two consecutive fiscal quarters, the Company is required to offer to purchase $20 million in principal amount of the Senior Notes. Because the Company's Consolidated Tangible Net Worth has been less than $60 million beginning with the quarter ended June 30, 1997, the Company would, effective on December 4, 1997, June 4, 1998 and December 4, 1998, have been required to make offers to purchase $20 million of the Senior Notes at par plus accrued interest, less the face amount of Senior Notes acquired by the Company after September 30, 1997, March 31, 1998 and September 30, 1998, respectively. The Company acquired Senior Notes with a face amount of $20 million after September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and prior to June 4, 1998, and again after September 30, 1998 and prior to December 4, 1998, and therefore was not required to make said offers. As a result of these transactions, the Company has recognized a net gain of $2.7 million during the year ended December 31, 1998, after giving effect to income taxes and amortization of related loan costs. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20 million of Senior Notes. At December 31, 1998, the Company's Consolidated Tangible Net Worth was $2.4 million. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this 3 6 repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. On July 6, 1998 the Company completed an agreement with the Agent of its existing lender group under its Working Capital Facility to (1) extend this loan facility to May 20, 2001, (2) increase the loan commitment to $100 million and (3) decrease the fees and costs compared to the prior revolving facility. Because of the Company's obligation to offer to purchase $20 million of the Senior Notes each six months so long as the Company's Consolidated Tangible Net Worth is less than $60 million, the Company is restricted in its ability to acquire, hold and develop real estate projects. The Company changed its operating strategy during 1997 to finance certain projects by forming joint ventures with venture partners that would provide a substantial portion of the capital necessary to develop these projects. The Company believes that the use of joint venture partnerships will better enable it to reduce its capital investment and risk in the highly capital intensive California markets, as well as to repurchase the Company's Senior Notes as described above. The Company would generally receive, after priority returns and capital distributions to its partners, approximately 50% of the profits and losses, and cash flows from these joint ventures. As of December 31, 1998, the Company and certain of its subsidiaries are general partners or members in twelve joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned and, accordingly, the financial statements of such joint ventures are not consolidated with the Company's financial statements. The Company's investments in unconsolidated joint ventures are accounted for using the equity method. See Note 6 of "Notes to Consolidated Financial Statements" for condensed combined financial information for these joint ventures. The majority of these projects are currently in the initial development stages and based upon current estimates, all future development and construction costs will be funded by the Company's venture partners or from the proceeds of non-recourse construction financing obtained by the joint ventures. The Company will continue to utilize its current inventory of lots and future land acquisitions to conduct its operating strategy which consists of: (i) offering a diverse product line at a variety of prices to suit a wide range of consumer tastes, (ii) limiting completed housing inventory exposure, (iii) emphasizing well-designed cost-effective products, (iv) utilizing market research to allow for a quick response to local market conditions, (v) maintaining budget and control systems to facilitate effective cost controls and (vi) using extensive marketing and sales efforts. The Company had total revenues from operations of $368.3 million, $329.9 million and $319.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. Homes closed by the Company were 1,925, 1,597 and 1,838 for the years ended December 31, 1998, 1997 and 1996, respectively. Presley's operations are dependent to a significant extent on debt financing and, beginning in the fourth quarter of 1997, on joint venture financing. The Company's principal credit sources are the 12 1/2% Senior Notes, a Working Capital Facility, a joint venture facility, and seller-provided financing. The Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200.0 million of 12 1/2% Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. At December 31, 1998, the outstanding principal amount of the 12 1/2% Senior Notes was $140.0 million. The Working Capital Facility is a revolving line of credit facility with a maximum commitment of $100.0 million. The Working Capital Facility is secured by substantially all of the Company's assets. At December 31, 1998, the outstanding principal amount under the Working Capital Facility was $44.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Notes 3 and 7 of "Notes to Consolidated Financial Statements." The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future performance which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions, mortgage and other interest rates, weather, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective 4 7 indemnification agreements, availability of labor and homebuilding materials, changes in governmental laws and regulations, and the availability and cost of land for future development. At this time, the Company's degree of leverage may limit its ability to meet its obligations, withstand adverse business or other conditions and capitalize on business opportunities. The Company's principal executive offices are located at 19 Corporate Plaza, Newport Beach, California 92660 and its telephone number is (949) 640-6400. The Company was incorporated in the State of Delaware on August 7, 1991. THE COMPANY'S MARKETS The Company is currently operating through six geographic regions: Southern California, San Diego, Northern California, Arizona, New Mexico, and Nevada. Each of the regions has responsibility for the management of the Company's homebuilding and development operations within the geographic boundaries of the region. The following table sets forth sales from real estate operations attributable to each of Presley's homebuilding regions during the preceding three fiscal years:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ---------------- DOLLAR % OF DOLLAR % OF DOLLAR % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) WHOLLY-OWNED Southern California(1).................. $ 80,868 20% $120,641 37% $128,153 40% San Diego(2)............................ 70,390 17% 30,464 9% 40,799 13% Northern California(3).................. 76,117 19% 83,171 25% 68,100 21% Arizona(4).............................. 68,803 17% 50,550 15% 57,065 18% New Mexico(5)........................... 27,067 7% 19,996 6% 16,180 5% Nevada(6)............................... 44,487 11% 25,120 8% 8,700 3% Other................................... 550 0% -- 0% -- 0% -------- --- -------- --- -------- --- 368,282 91% 329,942 100% 318,997 100% -------- --- -------- --- -------- --- UNCONSOLIDATED JOINT VENTURES Southern California(1).................. 871 0% -- 0% -- 0% San Diego(2)............................ 26,725 6% -- 0% -- 0% Northern California(3).................. 13,485 3% -- 0% -- 0% -------- --- -------- --- -------- --- 41,081 9% -- 0% -- 0% -------- --- -------- --- -------- --- COMBINED Southern California(1).................. 81,739 20% 120,641 37% 128,153 40% San Diego(2)............................ 97,115 23% 30,464 9% 40,799 13% Northern California(3).................. 89,602 22% 83,171 25% 68,100 21% Arizona(4).............................. 68,803 17% 50,550 15% 57,065 18% New Mexico(5)........................... 27,067 7% 19,996 6% 16,180 5% Nevada(6)............................... 44,487 11% 25,120 8% 8,700 3% Other................................... 550 0% -- 0% -- 0% -------- --- -------- --- -------- --- $409,363 100% $329,942 100% $318,997 100% ======== === ======== === ======== ===
- --------------- (1) The Southern California Region consists of operations in Los Angeles, Orange, Riverside, San Bernardino and Ventura Counties. (2) The San Diego Region consists of operations in San Diego and Riverside Counties. (3) The Northern California Region consists of operations in Alameda, Contra Costa, El Dorado, Sacramento, Solano, Yolo and Santa Clara Counties. (4) The Arizona Region consists of operations in the Phoenix area and, until January 1999, Tucson, Arizona. 5 8 (5) The New Mexico Region consists of operations in Albuquerque and Santa Fe, New Mexico. (6) The Nevada Region consists of operations in the Las Vegas area. For financial information concerning segments, see the "Consolidated Financial Statements" and Note 1 of "Notes to Consolidated Financial Statements." HOMEBUILDING The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its markets. The Company's products include entry-level, move-up and luxury homes and lots for custom homes, although it primarily emphasizes sales to the entry-level and move-up home markets. The Company believes that this diversified product strategy enables it to mitigate some of the risks inherent in the homebuilding industry and to meet a variety of market conditions. In order to reduce exposure to local market conditions, the Company's sales locations are geographically dispersed. The Company currently has 46 sales locations. Because the decision as to which product to develop is based on the Company's assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Company's attached housing ranges in size from 868 to 1,383 square feet, and the Company's detached housing ranges from 940 to 4,655 square feet. Due to Presley's product and geographic diversification strategy, the prices of Presley's homes also vary substantially. Prices for Presley's attached housing range from approximately $134,000 to $203,000 and prices for detached housing range from approximately $81,900 to $885,600. The average sales price of Presley's homes for the year ended December 31, 1998 was $202,300. The Company generally standardizes and limits the number of home designs within any given product line. This standardization permits on-site mass production techniques and bulk purchasing of materials and components, thus enabling the Company to better control and sometimes reduce construction costs. Presley contracts with a number of architects and other consultants who are involved in the design process of Presley homes. Designs are constrained by zoning requirements, building codes, energy efficiency laws and local architectural guidelines, among other factors. Engineering, landscaping, master-planning and environmental impact analysis work are subcontracted to independent firms which are familiar with local requirements. Substantially all construction work is done by subcontractors with Presley acting as the general contractor. The Company manages subcontractor activities with on-site supervisory employees and management control systems. The Company does not have long-term contractual commitments with its subcontractors or suppliers. However, the Company generally has been able to obtain sufficient materials and subcontractors during times of material shortages. The Company believes its relationships with its suppliers and subcontractors are good. DESCRIPTION OF PROJECTS During the year ended December 31, 1998 approximately 34% of the homes closed by the Company were in the Company's master-planned communities. Presley's master-planned communities usually involve the development of hundreds of acres of raw land into a large community providing homeowners with the opportunity for employment, recreation, shopping and education within the community or in close proximity to it. The homes within these communities include a wide variety of detached and attached entry-level, move-up and luxury homes, and may also contain apartments. Within these communities Presley also may sell individual lots for custom homes, multiple lots for construction of homes by other builders and parcels for commercial, industrial and apartment development. These communities may offer a variety of recreational amenities which may include golf courses, equestrian centers, tennis courts and swimming pools, among others. The Company's master-planned communities normally take five to fifteen years to complete depending on the project's size, economic conditions prevailing at the time, geological conditions at the site and the 6 9 Company's strategy for the particular project. Presley's other homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company's homebuilding regions.
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4) ------------------------ -------- ------------- ------------ ------------ ------------ ------------ SOUTHERN CALIFORNIA WHOLLY-OWNED: Sun Lakes Country Club (Riverside County) Previously Closed Products............... 1987 1,794 1,794 0 0 0 Villa Duplexes........... 1990 176 172 4 0 0 Veranda.................. 1994 25 23 2 0 0 Executive Series......... 1995 87 85 2 10 0 Promenade................ 1996 439 58 381 29 5 Atrium................... 1996 436 55 381 29 3 Terrace.................. 1996 407 57 350 33 2 ------ ------ ----- ----- --- 3,364 2,244 1,120 101 10 ------ ------ ----- ----- --- Horsethief Canyon Ranch (Riverside County) Previously Closed Products................. 1989 847 847 0 0 0 Series "300"............. 1998 327 13 314 13 14 Series "400"............. 1995 415 179 236 83 10 Series "500"............. 1995 375 161 214 83 31 ------ ------ ----- ----- --- 1,964 1,200 764 179 55 ------ ------ ----- ----- --- The Highlands (Orange County) Previously Closed Products............... 1989 1,748 1,748 0 0 0 Monaco................... 1995 408 408 0 20 0 Legacy................... 1995 84 84 0 6 0 ------ ------ ----- ----- --- 2,240 2,240 0 26 0 ------ ------ ----- ----- --- Beltierra (Los Angeles County) Previously Closed Products............... 1991 458 458 0 0 0 Las Brisas............... 1995 185 185 0 61 0 ------ ------ ----- ----- --- 643 643 0 61 0 ------ ------ ----- ----- --- Fontana (San Bernardino County).................. 1998 275 147 128 7 8 ------ ------ ----- ----- --- North Park -- Valencia (Los Angeles County).......... 1996 48 48 0 1 0 ------ ------ ----- ----- --- Carey Ranch -- Sylmar (Los Angeles County).......... 1997 138 105 33 84 29 ------ ------ ----- ----- --- Granada Hills (Los Angeles County).................. 1999 37 0 37 0 9 ------ ------ ----- ----- --- Oak Park -- Irvine (Orange County).................. 1998 126 12 114 12 59 ------ ------ ----- ----- --- Total wholly-owned..... 8,835 6,639 2,196 471 170 ====== ====== ===== ===== === UNCONSOLIDATED JOINT VENTURES: Thousand Oaks (Ventura County).................. 1998 110 3 107 3 24 ------ ------ ----- ----- --- White Cloud Estates (Ventura County)......... 1999 78 0 78 0 0 ------ ------ ----- ----- --- Total unconsolidated joint ventures... 188 3 185 3 24 ------ ------ ----- ----- --- SOUTHERN CALIFORNIA REGION TOTAL.................... 9,023 6,642 2,381 474 194 ====== ====== ===== ===== === SALES PRICE PROJECT (COUNTY) PRODUCT RANGE(3) ------------------------ ------------------ SOUTHERN CALIFORNIA WHOLLY-OWNED: Sun Lakes Country Club (Riverside County) Previously Closed Products............... Villa Duplexes........... $ 97,900 - 124,900 Veranda.................. $ 89,990 - 125,990 Executive Series......... $108,900 - 135,900 Promenade................ $117,900 - 125,900 Atrium................... $135,900 - 150,900 Terrace.................. $165,900 - 185,900 Horsethief Canyon Ranch (Riverside County) Previously Closed Products................. Series "300"............. $122,900 - 135,900 Series "400"............. $146,900 - 172,900 Series "500"............. $173,900 - 191,900 The Highlands (Orange County) Previously Closed Products............... Monaco................... $ 97,000 - 157,000 Legacy................... $380,000 - 445,000 Beltierra (Los Angeles County) Previously Closed Products............... Las Brisas............... $105,000 - 143,900 Fontana (San Bernardino County).................. $137,000 - 145,000 North Park -- Valencia (Los Angeles County).......... $225,990 - 240,990 Carey Ranch -- Sylmar (Los Angeles County).......... $210,900 - 246,900 Granada Hills (Los Angeles County).................. $450,000 - 510,000 Oak Park -- Irvine (Orange County).................. $134,000 - 203,000 Total wholly-owned..... UNCONSOLIDATED JOINT VENTURES: Thousand Oaks (Ventura County).................. $272,000 - 297,000 White Cloud Estates (Ventura County)......... Total unconsolidated joint ventures... SOUTHERN CALIFORNIA REGION TOTAL....................
7 10
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4) ------------------------ -------- ------------- ------------ ------------ ------------ ------------ NORTHERN CALIFORNIA WHOLLY-OWNED: Oakhurst Country Club (Contra Costa County) Previously Closed Products............... 1989 1,063 1,063 0 0 0 Falcon Ridge............. 1996 145 103 42 40 28 Peacock Creek............ 1996 142 87 55 27 17 Town Center.............. 1999 33 0 33 0 0 ------ ------ ----- ----- --- 1,383 1,253 130 67 45 ------ ------ ----- ----- --- The Preserve (Alameda) County).................. 1997 13 13 0 5 0 ------ ------ ----- ----- --- Twin Cities Mill Creek (Sacramento County)...... 1996 116 97 19 51 17 ------ ------ ----- ----- --- Marina Woods (El Dorado County)....... 1996 79 79 0 12 0 ------ ------ ----- ----- --- Eagle Ridge (Solano County).......... 1997 364 215 149 51 32 ------ ------ ----- ----- --- Mace Ranch -- Classics (Yolo County)............ 1997 94 67 27 49 15 ------ ------ ----- ----- --- Mace Ranch -- Affordables (Yolo County)............ 1997 28 24 4 19 4 ------ ------ ----- ----- --- Total wholly-owned..... 2,077 1,748 329 254 113 ------ ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Cerro Plata (Santa Clara County)..... 2000 538 0 538 0 0 ------ ------ ----- ----- --- The Preserve (Alameda County)......... 1997 87 16 71 16 34 ------ ------ ----- ----- --- Total unconsolidated joint ventures... 625 16 609 16 34 ------ ------ ----- ----- --- NORTHERN CALIFORNIA REGION TOTAL.................... 2,702 1,764 938 270 147 ====== ====== ===== ===== === SAN DIEGO WHOLLY-OWNED: Discovery Hills (San Diego County) Previously Closed Products............... 1991 734 734 0 0 0 Discovery Meadows........ 1997 143 138 5 85 3 ------ ------ ----- ----- --- 877 872 5 85 3 ------ ------ ----- ----- --- Carmel Mountain Ranch (San Diego County) Previously Closed Products............... 1986 5,044 5,044 0 0 0 The Summit............... 1997 86 49 37 49 13 The Bluffs............... 1997 114 84 30 78 12 ------ ------ ----- ----- --- 5,244 5,177 67 127 25 ------ ------ ----- ----- --- Sycamore Ranch (Riverside County)....... 1997 195 38 157 32 5 ------ ------ ----- ----- --- Vail Ranch (San Diego County)....... 1999 154 0 154 0 0 ------ ------ ----- ----- --- Total wholly-owned..... 6,470 6,087 383 244 33 ------ ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Torrey Unit 1 -- The Sands (San Diego County)....... 1998 107 46 61 46 7 ------ ------ ----- ----- --- Torrey Unit 4 -- The Shores (San Diego County)....... 1998 59 26 33 26 13 ------ ------ ----- ----- --- Torrey Unit 6 (San Diego County)....... 1999 52 0 52 0 0 ------ ------ ----- ----- --- SALES PRICE PROJECT (COUNTY) PRODUCT RANGE(3) ------------------------ ------------------ NORTHERN CALIFORNIA WHOLLY-OWNED: Oakhurst Country Club (Contra Costa County) Previously Closed Products............... Falcon Ridge............. $366,450 - 419,450 Peacock Creek............ $409,000 - 492,000 Town Center.............. The Preserve (Alameda) County).................. $768,600 - 885,600 Twin Cities Mill Creek (Sacramento County)...... $109,900 - 124,900 Marina Woods (El Dorado County)....... $243,900 - 292,900 Eagle Ridge (Solano County).......... $206,950 - 269,950 Mace Ranch -- Classics (Yolo County)............ $185,900 - 226,900 Mace Ranch -- Affordables (Yolo County)............ $118,300 - 135,000 Total wholly-owned..... UNCONSOLIDATED JOINT VENTURES: Cerro Plata (Santa Clara County)..... The Preserve (Alameda County)......... $768,600 - 885,600 Total unconsolidated joint ventures... NORTHERN CALIFORNIA REGION TOTAL.................... SAN DIEGO WHOLLY-OWNED: Discovery Hills (San Diego County) Previously Closed Products............... Discovery Meadows........ $188,900 - 209,900 Carmel Mountain Ranch (San Diego County) Previously Closed Products............... The Summit............... $359,900 - 382,900 The Bluffs............... $272,900 - 312,900 Sycamore Ranch (Riverside County)....... $306,000 - 345,000 Vail Ranch (San Diego County)....... Total wholly-owned..... UNCONSOLIDATED JOINT VENTURES: Torrey Unit 1 -- The Sands (San Diego County)....... $338,900 - 356,900 Torrey Unit 4 -- The Shores (San Diego County)....... $407,900 - 430,900 Torrey Unit 6 (San Diego County).......
8 11
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4) ------------------------ -------- ------------- ------------ ------------ ------------ ------------ Torrey Unit 14 -- The Cove (San Diego County)....... 1999 108 0 108 0 5 ------ ------ ----- ----- --- Knollwood at Castle Creek (San Diego County)....... 1999 77 0 77 0 0 ------ ------ ----- ----- --- Stonecrest (San Diego County)....... 1999 110 0 110 0 19 ------ ------ ----- ----- --- Mercy Road -- Allegra (San Diego County)....... 1999 113 0 113 0 16 ------ ------ ----- ----- --- Otay Ranch (San Diego County)....... 1999 213 0 213 0 0 ------ ------ ----- ----- --- Total unconsolidated joint ventures... 839 72 767 72 60 ------ ------ ----- ----- --- SAN DIEGO REGION TOTAL..... 7,309 6,159 1,150 316 93 ====== ====== ===== ===== === ARIZONA WHOLLY-OWNED: Settler's Point (Maricopa County)........ 1995 103 103 0 1 0 ------ ------ ----- ----- --- McDowell Mt. Ranch (Maricopa County)........ 1995 75 74 1 0 1 ------ ------ ----- ----- --- Estrella (Maricopa County).................. 1995 107 90 17 29 10 ------ ------ ----- ----- --- Eagle Mountain (Maricopa County)........ 1996 101 80 21 35 15 ------ ------ ----- ----- --- Continental Ranch (Pima County)............ 1995 97 97 0 30 0 ------ ------ ----- ----- --- Legend Trail (Maricopa County)........ 1996 102 68 34 41 7 ------ ------ ----- ----- --- Williams Centre --Haciendas (Pima County)............ 1996 50 48 2 18 1 ------ ------ ----- ----- --- Williams Centre -- Las Villas (Pima County)..... 1997 46 45 1 45 1 ------ ------ ----- ----- --- McDowell Mt. Ranch "P" (Maricopa County)........ 1997 69 59 10 33 9 ------ ------ ----- ----- --- Lone Mountain (Maricopa County)........ 1997 44 26 18 23 18 ------ ------ ----- ----- --- Manzanita Heights (Maricopa County)........ 1997 73 67 6 49 3 ------ ------ ----- ----- --- Crystal Gardens (Maricopa County)........ 1997 157 57 100 50 7 ------ ------ ----- ----- --- Monument Vista (Pima County)............ 1997 106 103 3 29 2 ------ ------ ----- ----- --- Sage Creek (Maricopa County)........ 1999 437 0 437 0 0 ------ ------ ----- ----- --- Ironwood (Maricopa County)........ 2000 220 0 220 0 0 ------ ------ ----- ----- --- Total wholly-owned..... 1,787 917 870 383 74 ------ ------ ----- ----- --- UNCONSOLIDATED JOINT VENTURES: Mountaingate (Maricopa County)........ 2000 1,597 0 1,597 0 0 ------ ------ ----- ----- --- Total unconsolidated joint ventures... 1,597 0 1,597 0 0 ------ ------ ----- ----- --- ARIZONA REGION TOTAL....... 3,384 917 2,467 383 74 ====== ====== ===== ===== === NEW MEXICO WHOLLY-OWNED: Summerfield (Bernalillo County)...... 1995 195 89 106 69 10 ------ ------ ----- ----- --- Tuscany (Bernalillo County).................. 1996 87 87 0 36 0 ------ ------ ----- ----- --- Tierra Colinas (Santa Fe County)........ 1996 21 21 0 0 0 ------ ------ ----- ----- --- SALES PRICE PROJECT (COUNTY) PRODUCT RANGE(3) ------------------------ ------------------ Torrey Unit 14 -- The Cove (San Diego County)....... $352,900 - 372,900 Knollwood at Castle Creek (San Diego County)....... $196,900 - 214,900 Stonecrest (San Diego County)....... $214,900 - 242,900 Mercy Road -- Allegra (San Diego County)....... $218,900 - 239,900 Otay Ranch (San Diego County)....... Total unconsolidated joint ventures... SAN DIEGO REGION TOTAL..... ARIZONA WHOLLY-OWNED: Settler's Point (Maricopa County)........ $137,400 - 156,900 McDowell Mt. Ranch (Maricopa County)........ $195,900 - 224,900 Estrella (Maricopa County).................. $120,900 - 147,900 Eagle Mountain (Maricopa County)........ $189,900 - 233,900 Continental Ranch (Pima County)............ $133,900 - 165,900 Legend Trail (Maricopa County)........ $149,900 - 185,900 Williams Centre --Haciendas (Pima County)............ $169,900 - 196,900 Williams Centre -- Las Villas (Pima County)..... $124,400 - 141,400 McDowell Mt. Ranch "P" (Maricopa County)........ $201,900 - 230,900 Lone Mountain (Maricopa County)........ $234,900 - 291,900 Manzanita Heights (Maricopa County)........ $ 82,900 - 93,900 Crystal Gardens (Maricopa County)........ $ 99,900 - 123,900 Monument Vista (Pima County)............ $187,900 - 231,900 Sage Creek (Maricopa County)........ Ironwood (Maricopa County)........ Total wholly-owned..... UNCONSOLIDATED JOINT VENTURES: Mountaingate (Maricopa County)........ Total unconsolidated joint ventures... ARIZONA REGION TOTAL....... NEW MEXICO WHOLLY-OWNED: Summerfield (Bernalillo County)...... $ 90,400 - 107,750 Tuscany (Bernalillo County).................. $106,900 - 143,900 Tierra Colinas (Santa Fe County)........ $146,540 - 262,900
9 12
UNITS LOTS HOMES CLOSED ESTIMATED CLOSED REMAINING FOR YEAR BACKLOG YEAR OF NUMBER OF AS OF AS OF ENDED AT FIRST HOMES AT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PROJECT (COUNTY) PRODUCT DELIVERY COMPLETION(1) 1998 1998 1998 1998(2)(4) ------------------------ -------- ------------- ------------ ------------ ------------ ------------ Tuscany Hills (Bernalillo County)...... 1996 30 27 3 10 3 ------ ------ ----- ----- --- Rancho del Sol (Santa Fe County)........ 1996 195 103 92 41 12 ------ ------ ----- ----- --- The Courtyards at Park West (Bernalillo County)...... 1996 77 47 30 27 11 ------ ------ ----- ----- --- Ventana (Bernalillo County).................. 1997 81 24 57 20 3 ------ ------ ----- ----- --- NEW MEXICO REGION TOTAL.... 686 398 288 203 39 ====== ====== ===== ===== === NEVADA WHOLLY-OWNED: Mountainside (Clark County)........... 1996 158 158 0 21 0 ------ ------ ----- ----- --- Prominence (Clark County).................. 1996 100 98 2 51 2 ------ ------ ----- ----- --- Camden Park (Clark County)........... 1997 150 94 56 73 20 ------ ------ ----- ----- --- Monte Nero (Clark County).................. 1997 98 53 45 29 8 ------ ------ ----- ----- --- Royal Woods (Clark County)........... 1998 142 40 102 40 14 ------ ------ ----- ----- --- Deer Springs Ranch (Clark County)........... 1998 117 34 83 34 7 ------ ------ ----- ----- --- Cambridge Court (Clark County)........... 1998 177 31 146 31 19 ------ ------ ----- ----- --- NEVADA REGION TOTAL........ 942 508 434 279 70 ====== ====== ===== ===== === GRAND TOTALS: Wholly-owned............. 20,797 16,297 4,500 1,834 499 Unconsolidated joint ventures............... 3,249 91 3,158 91 118 ------ ------ ----- ----- --- 24,046 16,388 7,658 1,925 617 ====== ====== ===== ===== === SALES PRICE PROJECT (COUNTY) PRODUCT RANGE(3) ------------------------ ------------------ Tuscany Hills (Bernalillo County)...... $128,800 - 154,900 Rancho del Sol (Santa Fe County)........ $ 94,900 - 156,900 The Courtyards at Park West (Bernalillo County)...... $125,500 - 150,900 Ventana (Bernalillo County).................. $131,900 - 149,900 NEW MEXICO REGION TOTAL.... NEVADA WHOLLY-OWNED: Mountainside (Clark County)........... $121,490 - 149,990 Prominence (Clark County).................. $146,990 - 174,990 Camden Park (Clark County)........... $156,990 - 201,000 Monte Nero (Clark County).................. $129,990 - 164,490 Royal Woods (Clark County)........... $149,000 - 180,500 Deer Springs Ranch (Clark County)........... $116,490 - 142,490 Cambridge Court (Clark County)........... $138,500 - 156,500 NEVADA REGION TOTAL........ GRAND TOTALS: Wholly-owned............. Unconsolidated joint ventures...............
- --------------- (1) The estimated number of homes to be built at completion is subject to change, and there can be no assurance that the Company will build these homes. (2) Backlog consists of homes sold under sales contracts that have not yet closed, and there can be no assurance that closings of sold homes will occur. (3) Sales price range reflects base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project. (4) Of the total homes subject to pending sales contracts as of December 31, 1998, 573 represent homes completed or under construction and 44 represent homes not yet under construction. SALES AND MARKETING The management team responsible for a specific project develops marketing objectives, formulates pricing and sales strategies and develops advertising and public relations programs for approval of senior management. The Company makes extensive use of advertising and other promotional activities, including newspaper advertisements, brochures, television and radio commercials, direct mail and the placement of strategically located sign boards in the immediate areas of its developments. In general, the Company's advertising emphasizes Presley's strengths with respect to the quality and value of its products. The Company normally builds, decorates, furnishes and landscapes three to five model homes for each product line and maintains on-site sales offices, which typically are open seven days a week. Management believes that model homes play a particularly important role in the Company's marketing efforts. Consequently, the Company expends a significant amount of effort in creating an attractive atmosphere at its model homes. Interior decorations vary among the Company's models and are carefully selected based upon the 10 13 lifestyles of targeted buyers. Structural changes in design from the model homes are not generally permitted, but home buyers may select various other optional construction and design amenities. Presley employs in-house commissioned sales personnel and, on a limited basis, outside brokers in the selling of its homes. Presley typically engages its sales personnel on a long-term, rather than a project-by-project basis, which it believes results in a more motivated sales force with an extensive knowledge of the Company's operating policies and products. Sales personnel are trained by the Company and attend weekly meetings to be updated on the availability of financing, construction schedules and marketing and advertising plans. The Company strives to provide a high level of customer service during the sales process and after a home is sold. The participation of the sales representatives, on-site construction supervisors and the post-closing customer service personnel, working in a team effort, is intended to foster the Company's reputation for quality and service, and ultimately lead to enhanced customer retention and referrals. In the past, and more so during the recent California recession, Presley has used a variety of incentives in order to attract buyers. Sales incentives may include upgrades in interior design features such as carpet or fixtures, or added amenities such as a fireplace or an outdoor deck. The use of incentives depends largely on prevailing economic conditions and the Company's success in marketing its products. The Company's homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyer's ability to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at Presley's projects was approximately 19% during 1998. Cancellation rates are subject to a variety of factors beyond the Company's control such as adverse economic conditions and increases in mortgage interest rates. The Company generally provides a one-year limited warranty of workmanship and materials with each of its homes. From January 1, 1992 through March 31, 1995, the Company provided a five-year limited warranty for certain homes in the Company's Southern California Region. This five-year warranty exceeded the warranty offered by competitors and served as a marketing tool for the Company. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. The Company's historical experience is that one-year warranty claims generally fall within the one percent reserve. In addition, California law provides that consumers can seek redress for patent defects in new homes within four years from when the defect is discovered, or should have been discovered, provided that if the defect is latent there is an outside limit for seeking redress which is ten years from the completion of construction. In addition, because the Company generally subcontracts its homebuilding work to qualified subcontractors who generally provide the Company with an indemnity and a certificate of insurance prior to receiving payment from the Company for their work, the Company generally has recourse against the subcontractors or their insurance carriers for claims relating to the subcontractors' workmanship or materials. However, there can be no assurance that claims will not arise out of matters such as landslides, soil subsidence or earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements. CUSTOMER FINANCING -- PRESLEY MORTGAGE COMPANY The Company seeks to assist its home buyers in obtaining financing by arranging with mortgage lenders to offer qualified buyers a variety of financing options. Substantially all home buyers utilize long-term mortgage financing to purchase a home and mortgage lenders will usually make loans only to qualified borrowers. Presley Mortgage Company, a wholly owned subsidiary, began operations effective December 1, 1994 and is in operation to service the Company's operating regions. The mortgage company operates as a mortgage broker/loan correspondent and originates conventional, FHA and VA loans. 11 14 SALE OF LOTS AND LAND In the ordinary course of business, the Company continually evaluates land sales and has sold, and expects that it will continue to sell, land as market and business conditions warrant. Presley also sells both multiple lots to other builders (bulk sales) and improved individual lots for the construction of custom homes where the presence of such homes adds to the quality of the community. In addition, the Company may acquire sites with commercial, industrial and multi-family parcels which will generally be sold to third-party developers. INFORMATION SYSTEMS AND CONTROLS The Company assigns a high priority to the development and maintenance of its budget and cost control systems and procedures. The Company's regional and area offices are connected to corporate headquarters through a fully integrated accounting, financial and operational management information system. Through this system, management regularly evaluates the status of its projects in relation to budgets to determine the cause of any variances and, where appropriate, adjusts its operations to capitalize on favorable variances or to limit adverse financial impacts. COMPETITION The homebuilding industry is highly competitive, particularly in the low and medium-price range where the Company currently concentrates its activities. Although Presley is one of California's largest homebuilders, the Company does not believe it has a significant market position in any geographic area which it serves due to the fragmented nature of the market. Due in significant part to the recent recession and its effect on the housing market, the Company has, since 1990, had to reduce its sales prices and offer greater incentives to buyers in order to effectively compete for sales in several of its markets. Beginning in 1997 the market has generally rebounded allowing the Company to selectively increase sales prices and reduce incentives while remaining competitive. A number of Presley's competitors have larger staffs, larger marketing organizations, and substantially greater financial resources than those of Presley. However, the Company believes that it competes effectively in its existing markets as a result of its product and geographic diversity, substantial development expertise, and its reputation as a low-cost producer of quality homes. Further, the Company sometimes gains a competitive advantage in locations where changing regulations make it difficult for competitors to obtain entitlements and/or government approvals which the Company has already obtained. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS The Company and its competitors are subject to various local, state and Federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can ultimately be built within the boundaries of a particular project. The Company and its competitors may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future in the states in which it operates. Because the Company usually purchases land with entitlements, the Company believes that the moratoriums would adversely affect the Company only if they arose from unforeseen health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in when the Company receives entitlements. Presley Mortgage Company is subject to state licensing laws as a mortgage broker as well as federal and state laws concerning real estate loans. The Company and its competitors are also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause the Company and its competitors to incur substantial compliance and other costs, 12 15 and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. The Company's projects in California are especially susceptible to restrictive government regulations and environmental laws. However, environmental laws have not, to date, had a material adverse impact on the Company's operations. CORPORATE ORGANIZATION AND PERSONNEL Each of the Company's operating regions has responsibility for the Company's homebuilding and development operations within the geographical boundaries of that region. The Company's six executive officers at the corporate level average more than 20 years of experience in the homebuilding and development industries within California and the Southwest. The Company combines decentralized management in those aspects of its business where detailed knowledge of local market conditions is important (such as governmental processing, construction, land development and sales and marketing), with centralized management in those functions where the Company believes central control is required (such as approval of land acquisitions and financial, personnel and legal matters). As of December 31, 1998, Presley's real estate development and homebuilding operations employed approximately 353 full-time and 30 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, engineering, land acquisition, sales and marketing activities. Presley believes that its relations with its employees have been good. Some employees of the subcontractors which Presley utilizes are unionized, but virtually none of Presley's employees are union members. Although there have been temporary work stoppages in the building trades in Presley's areas of operation, to date none has had any material impact upon Presley's overall operations. ITEM 2. PROPERTIES Headquarters Presley owns a 15,800 square foot building on leased land in Newport Beach, California which it uses for its corporate headquarters. The Company leases or owns properties for its area offices, design centers and Presley Mortgage Company, but none of these properties is material to the operation of Presley's business. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings, most of which relate to routine litigation and some of which are covered by insurance. In the opinion of the Company's management, none of the uninsured claims involve claims which are material and unreserved or will have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's stockholders during the fourth quarter of 1998. 13 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Series A Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol PDC. Public trading of the Series A Common Stock commenced on October 11, 1991. Prior to that date, there was no public market for the Series A Common Stock. There is no established trading market for the Company's Series B Common Stock. The following table sets forth the high and low sales prices for the Series A Common Stock as reported on the NYSE for the periods indicated.
HIGH LOW ------- ------- 1997 First Quarter.................................. $1.2500 $0.8750 Second Quarter................................. 1.8750 1.0000 Third Quarter.................................. 1.9375 0.8125 Fourth Quarter................................. 1.0625 0.5625 1998 First Quarter.................................. $1.1250 $0.6250 Second Quarter................................. 1.1250 0.6875 Third Quarter.................................. 1.3125 0.5625 Fourth Quarter................................. 0.7500 0.4375
As of March 10, 1999, the closing price for the Company's Series A Common Stock as reported on the NYSE was $0.6250. As of March 10, 1999, there were 394 and 4 holders of record of the Company's Series A Common Stock and Series B Common Stock, respectively. The Company has not paid any cash dividends on its Common Stock during the last two fiscal years and expects that for the foreseeable future it will follow a policy of retaining earnings in order to help finance its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements, general economic conditions and operating and financial condition of the Company, among other factors. In addition, the effect of the Company's principal financing agreements currently prohibits the payment of dividends by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Notes 3 and 7 of "Notes to Consolidated Financial Statements." 14 17 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company have been derived from the Consolidated Financial Statements of the Company and other available information. The summary should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere herein. As described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 3 of "Notes to Consolidated Financial Statements," the consolidated financial statements for 1994, 1995, 1996, 1997 and 1998 have been prepared after giving retroactive effect as of January 1, 1994 to a capital restructuring and quasi-reorganization.
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS AND NUMBER OF HOMES) STATEMENT OF OPERATIONS DATA: Sales Homes.................................. $348,352 $307,332 $317,366 $231,204 $262,866 Lots, land and other................... 19,930 22,610 1,631 54,301 7,302 -------- -------- -------- -------- -------- Total sales....................... 368,282 329,942 318,997 285,505 270,168 Income from unconsolidated joint ventures............................... 3,499 -- -- -- -- Operating income (loss).................. 15,580 (84,534) 163 (41,335) 14,318 Income (loss) before income taxes and extraordinary item..................... 8,305 (89,894) 152 (41,653) 10,232 Credit (provision) for income taxes...... (1,191) -- -- 1,868 (4,195) Income (loss) before extraordinary item................................... 7,114 (89,894) 152 (39,785) 6,037 Extraordinary item-gain from retirement of debt, net of applicable taxes....... 2,741 -- -- 2,688 -- Net income (loss)........................ $ 9,855 $(89,894) $ 152 $(37,097) $ 6,037 Basic and diluted earnings per common share: Before extraordinary item.............. $ 0.14 $ (1.72) $ -- $ (0.76) $ 0.11 Extraordinary item..................... 0.05 -- -- 0.05 -- -------- -------- -------- -------- -------- After extraordinary item............... $ 0.19 $ (1.72) $ -- $ (0.71) $ 0.11 Ratio of earnings to fixed charges(1)(2).......................... 1.31 (2) (2) (2) (2) BALANCE SHEET DATA: Real estate inventories.................. $174,502 $255,472 $306,381 $315,535 $382,055 Total assets............................. 246,404 285,244 331,615 340,933 425,637 Notes payable............................ 195,393 254,935 208,524 224,434 272,717 Stockholders' equity (deficit)........... 5,824 (5,681) 84,213 84,061 121,158 OPERATING DATA (including unconsolidated joint ventures): Number of homes sold..................... 2,139 1,718 1,804 1,488 1,423 Number of homes closed................... 1,925 1,597 1,838 1,425 1,442 Number of homes in escrow at end of period................................. 617 403 282 316 253 Average sales prices of homes closed..... $ 202 $ 192 $ 173 $ 162 $ 182
- --------------- (1) Ratio of earnings to fixed charges is calculated by dividing income as adjusted by fixed charges. For this purpose, "income as adjusted" means income (loss) before (i) minority partners' interest in consolidated income (loss) and (ii) income taxes, plus (i) interest expense and (ii) amortization of capitalized interest included in cost of sales. For this purpose "fixed charges" means (i) interest expense and (ii) interest capitalized during the period. (2) Earnings were not adequate to cover fixed charges by $25.4 million, $21.1 million, $67.1 million and $13.9 million for the years ended December 31, 1997, 1996, 1995, and 1994, respectively. These deficits, as well as the operating income (loss), include the effect of an impairment loss on real estate assets of $74 million in 1997, and $16.8 million in 1995 and reductions of real estate assets to estimated net realizable value of $9.4 million in 1995. 15 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of results of operations and financial condition should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K/A. General Overview. The Company announced on May 5, 1998 that it had engaged Warburg Dillon Read Inc. to explore various strategic alternatives including the refinancing/restructuring of its outstanding debt obligations or the sale of certain, or substantially all, of its assets. In conjunction with the engagement of the financial advisor, a Special Committee comprised of independent directors of the Company's Board of Directors was formed to evaluate strategic alternatives. The Company's actions were a direct result of the severe economic conditions encountered during the past several years, together with the Company's highly leveraged capital structure. The declining economic conditions began to affect the Company's primary home-building markets in California during 1989 and continued on and off since that time. In view of substantial declines in the value of certain of the Company's real estate assets since 1992, the Company has been required to write down the book value of these real estate assets in accordance with generally accepted accounting principles. The $89.9 million loss for the year ended December 31, 1997, included a non-cash charge of $74.0 million as a result of the recognition of impairment losses on certain of the Company's real estate assets. As a result of the substantial losses realized by the Company since 1992, the Company had a stockholders' deficit of $5.7 million at December 31, 1997. As of December 31, 1998, the Company's stockholders' equity totaled $5.8 million. On December 31, 1998, the Company announced that, after unanimous approval by the Special Committee of independent directors, Presley had entered into a letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting forth their preliminary understanding with respect to (i) the proposed acquisition by Presley of substantially all of the assets of William Lyon Homes for approximately $48.0 million together with the assumption of related liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to a tender offer for not less than 40% and not more than 49% of the outstanding shares of Presley common stock held by stockholders other than William Lyon at a price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and his son, William H. Lyon, is a California-based homebuilder and real estate developer with projects currently under development in Northern and Southern California. Following the completion of the proposed transactions, William Lyon, who is the current Chairman of the Board of Presley, would beneficially own between 55% and 65% (depending on the number of shares tendered) of the outstanding shares of Presley common stock and the remaining shares would continue to be publicly traded. The execution of the letter of intent followed a review over several months by the Special Committee, together with its financial and legal advisors, of strategic alternatives available to Presley as well as a review of other proposals received from third parties. Under the terms of the letter of intent, the proposed transactions are subject to various conditions, including the successful negotiation and execution of a definitive agreement, the receipt of opinions of Presley's advisors with respect to the fairness of the transactions to Presley and its stockholders as well as the solvency of Presley following consummation of the transactions, the receipt of real estate appraisals satisfactory to Presley and William Lyon Homes with respect to the real estate assets of William Lyon Homes, the approval of a definitive agreement by the respective boards of directors of Presley and William Lyon Homes by March 31, 1999, receipt of all required regulatory approvals and third party consents, including any required lender consents, the receipt of agreements from certain significant stockholders of Presley to tender their shares pursuant to the tender offer, the receipt of financing by Presley in an amount sufficient to enable Presley to finance the transactions, and the absence of any material adverse change in the business or financial condition of either Presley or William Lyon Homes. In addition, the letter of intent contemplates that each of the transactions will be structured so as to be subject to the successful completion of the other and that the parties will structure the transactions (including, if necessary, by imposing limitations on certain transfers of shares) so as to avoid triggering the change of control tax provisions that would result in the loss of Presley's net operating losses for tax purposes. The letter 16 19 of intent also contemplates that Presley's 12 1/2% Senior Notes due 2001 shall remain outstanding without modification. The letter of intent provides that, subject to the fiduciary duties of their respective boards of directors, Presley and William Lyon Homes will negotiate exclusively with each other toward a definitive agreement until March 31, 1999. The letter of intent does not constitute a binding agreement to consummate the transactions and there can be no assurances that the parties ultimately will enter into a definitive agreement with respect to the transactions or that the conditions to the transactions will be satisfied. On February 18, 1999 the Company announced that it had received a letter from William Lyon, Chairman of the Board of William Lyon Homes and also Chairman of the Board of Presley, proposing a modification to the previously executed letter of intent with William Lyon Homes. Under the proposed modification, William Lyon Homes would make a tender offer for not more than 37% of the outstanding shares of common stock of Presley for a purchase price of $0.62 per share. In the event that more than 37% of the outstanding shares of common stock of Presley is tendered, William Lyon Homes will purchase shares from each tendering stockholder on a pro rata basis. The tender offer will be conditioned upon there being tendered and not withdrawn, a number of shares which constitutes at least 37% of the outstanding shares of Presley. The proposed modification also provides that the transaction will be structured to permit William Lyon or his affiliates, prior to consummation of the transaction and consistent with applicable securities laws, to sell shares of Presley common stock owned by them up to a maximum of 4% of the total number of shares of Presley common stock presently outstanding. The proposed modification is currently being considered by the Special Committee of independent directors. On March 30, 1999, the parties amended the letter of intent to extend its term and the period of exclusive negotiation to April 30, 1999. The condition included in the letter of intent that the boards of directors of Presley and William Lyon Homes must approve a definitive agreement by March 31, 1999 was also extended to April 30, 1999. The parties have also agreed that William Lyon Homes may participate in discussions and negotiations with the holders of Presley's Series B Common Stock regarding the purchase by William Lyon Homes of such percentage of the Series B holder's shares so as to reduce such Series B holder's ownership interest in Presley Common Stock to between 4.9% and 5% of Presley's outstanding Common Stock following consummation of the proposed transactions. William Lyon Homes may also seek commitments from the Series B holders to sell additional shares to the extent that the number of shares of Series A Common Stock tendered in the tender offer are below the minimum threshold set forth in a definitive agreement. Any such negotiations are to be conducted exclusively so as to obtain the consent of the Series B holders to the proposed transactions and to avoid triggering the change of control tax provisions that would result in the loss of Presley's net operating loss carryforwards for tax purposes. William Lyon Homes is required to notify the Special Committee regarding the details of any such discussions and negotiations. William Lyon Homes may not enter into any agreement with any Series B Holder prior to receiving the written approval from the Special Committee or Presley's Board of Directors. In connection with these events, the Company has incurred costs of approximately $1.3 million for the year ended December 31, 1998 which are reflected in the Consolidated Statement of Operations as financial advisory expenses. In accordance with the bond indenture agreement governing the Company's Senior Notes which are due in 2001, if the Company's Consolidated Tangible Net Worth is less than $60 million for two consecutive fiscal quarters, the Company is required to offer to purchase $20 million in principal amount of the Senior Notes. Because the Company's Consolidated Tangible Net Worth has been less than $60 million beginning with the quarter ended June 30, 1997, the Company would, effective on December 4, 1997, June 4, 1998 and December 4, 1998, have been required to make offers to purchase $20 million of the Senior Notes at par plus accrued interest, less the face amount of Senior Notes acquired by the Company after September 30, 1997, March 31, 1998 and September 30, 1998, respectively. The Company acquired Senior Notes with a face amount of $20 million after September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and prior to June 4, 1998, and again after September 30, 1998 and prior to December 4, 1998, and therefore 17 20 was not required to make said offers. As a result of these transactions, the Company has recognized a net gain of $2.7 million during the year ended December 31, 1998, after giving effect to income taxes and amortization of related loan costs. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60 million or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20 million of Senior Notes. At December 31, 1998, the Company's Consolidated Tangible Net Worth was $2.4 million. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. As more fully discussed under Working Capital Facility, on July 6, 1998 the Company completed an agreement with the Agent of its existing lender group under its Working Capital Facility to (1) extend this loan facility to May 20, 2001, (2) increase the loan commitment to $100 million and (3) decrease the fees and costs compared to the prior revolving facility. Because of the Company's obligation to offer to purchase $20 million of the Senior Notes each six months so long as the Company's Consolidated Tangible Net Worth is less than $60 million, the Company is restricted in its ability to acquire, hold and develop real estate projects. The Company changed its operating strategy during 1997 to finance certain projects by forming joint ventures with venture partners that would provide a substantial portion of the capital necessary to develop these projects. The Company believes that the use of joint venture partnerships will better enable it to reduce its capital investment and risk in the highly capital intensive California markets, as well as to repurchase the Company's Senior Notes as described above. The Company would generally receive, after priority returns and capital distributions to its partners, approximately 50% of the profits and losses, and cash flows from these joint ventures. As of December 31, 1998, the Company and certain of its subsidiaries are general partners or members in twelve joint ventures involved in the development and sale of residential projects. Such joint ventures are not effectively controlled by the Company and, accordingly, the financial statements of such joint ventures are not consolidated in the preparation of the Company's consolidated financial statements. The Company's investments in unconsolidated joint ventures are accounted for using the equity method. See Note 6 of "Notes to Consolidated Financial Statements" for condensed combined financial information for these joint ventures. The majority of these projects are currently in the initial development stages and, based upon current estimates, all future development and construction costs will be funded by the Company's venture partners or from the proceeds of non-recourse construction financing obtained by the joint ventures. At December 31, 1998 the Company had net operating loss carryforwards for Federal tax purposes of approximately $117.9 million, of which $5.1 million expires in 2007, $17.5 million expires in 2008, $27.4 million expires in 2009, $35.8 million expires in 2010, $13.7 million expires in 2011, $16.4 million expires in 2012 and $2.0 million expires in 2013. The Company's ability to utilize the tax benefits associated with its net operating loss carryforwards will depend upon the amount of its otherwise taxable income and may be limited in the event of an "ownership change" under federal tax laws and regulations. The Company presently cannot prohibit such ownership changes from occurring. The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future performance which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions, mortgage and other interest rates, weather, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, availability of labor and homebuilding materials, changes in governmental laws and regulations, and the availability and cost of lands for future development. At this time, the Company's degree of leverage may limit its ability to meet its obligations, withstand adverse business or other conditions and capitalize on business opportunities. 18 21 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, -------------------------- 1998 1997 1996 ------ ------ ------ Number of homes sold Company........................................ 1,937 1,718 1,804 Unconsolidated joint ventures.................. 202 -- -- ------ ------ ------ 2,139 1,718 1,804 ====== ====== ====== Number of homes closed Company........................................ 1,834 1,597 1,838 Unconsolidated joint ventures.................. 91 -- -- ------ ------ ------ 1,925 1,597 1,838 ====== ====== ====== Backlog of homes sold but not closed at end of period Company........................................ 499 403 282 Unconsolidated joint ventures.................. 118 -- -- ------ ------ ------ 617 403 282 ====== ====== ====== Dollar amount of backlog of homes sold but not closed at end of period (in millions) Company........................................ $111.8 $ 84.6 $ 52.7 Unconsolidated joint ventures.................. 53.3 -- -- ------ ------ ------ $165.1 $ 84.6 $ 52.7 ====== ====== ======
Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed as of December 31, 1998 was $165.1 million as compared to $84.6 million as of December 31, 1997 and $222.8 million as of September 30, 1998. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company's projects was approximately 19% during 1998. The number of homes closed in the fourth quarter of 1998 increased 69.6 percent to 697 from 411 in the fourth quarter of 1997. Net new home orders for the quarter ended December 31, 1998 increased 1.7 percent to 429 units from 422 for the quarter ended December 31, 1997. For the fourth quarter of 1998, net new orders decreased 21.9 percent to 429 from 549 units in the third quarter of 1998. The backlog of homes sold as of December 31, 1998 was 617, up 53.1 percent from 403 units as of December 31, 1997, and down 30.3 percent from 885 units at September 30, 1998. The Company's inventory of completed and unsold homes as of December 31, 1998 decreased to 50 units from 111 units as of December 31, 1997. The improvement in net new home orders, closings and backlog for the fourth quarter of 1998 as compared with the fourth quarter of 1997 is primarily the result of improved market conditions in substantially all of the Company's markets and additional sales locations as a result of new land acquisitions. At December 31, 1998, the Company had 46 sales locations as compared to 40 sales locations at December 31, 1997. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less cost of disposal. Under the new pronouncement, when an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. 19 22 The net loss for the year ended December 31, 1997 included a non-cash charge of $74,000,000 during the second quarter of 1997 to record impairment losses on certain real estate assets held and used by the Company. The impairment losses related to three of the Company's master-planned communities. The impairment losses related to two communities, which are located in the Inland Empire area of Southern California, arose primarily from declines in home sales prices due to continued weak economic conditions and competitive pressures in that area of Southern California. The impairment loss relating to the other community, which is located in Contra Costa County in the East San Francisco Bay area of Northern California, was primarily attributable to lower than expected cash flow relating to one of the high end residential products in this community and to a deterioration in the value of the non-residential portion of the project. The significant deteriorations in the market conditions associated with these communities resulted in the undiscounted cash flows (excluding interest) estimated to be generated by these communities being less than their historical book values. Accordingly, the master-planned communities were written-down to their estimated fair value. The following represents the sales and excess of revenue from sales over related cost of sales (i.e., gross profit) of the three master-planned communities since the recordation of impairment losses on June 30, 1997:
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 ------------------ ----------------- Sales.................................... $17,662,000 $54,828,000 Gross profit............................. $ 1,202,000 $ 5,850,000 Gross profit %........................... 6.8% 10.7%
The gross profits recognized on the three master-planned communities subsequent to the recordation of the impairment losses has increased due to better than projected sales price increases beginning in 1998. The Company periodically evaluates its real estate assets to determine whether such assets have been impaired and therefore would be required to be adjusted to fair value. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein. This Annual Report on Form 10-K/A does not attempt to discuss or describe all of the factors that influence or impact the evaluation of an impairment of the Company's real estate assets. Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of product available for sale is expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expense during 1998, 1997, and 1996 was approximately $9.2 million, $7.8 million and $2.3 million, respectively. In general, housing demand is adversely affected by increases in interest rates and housing prices. Interest rates, the length of time that assets remain in inventory, and the proportion of inventory that is financed affect the Company's interest cost. If the Company is unable to raise sales prices sufficiently to compensate for higher costs or if mortgage interest rates increase significantly, affecting prospective buyers' ability to adequately finance home purchases, the Company's sales, gross margins and net results may be adversely impacted. To a limited extent, the Company hedges against increases in interest costs by acquiring interest 20 23 rate protection that locks in or caps interest rates for limited periods of time for mortgage financing for prospective homebuyers. Comparison of Years Ended December 31, 1998 and 1997. Total sales (which represent recorded revenues from closings) for the year ended December 31, 1998 were $368.3 million, an increase of $38.4 million (11.6%), from sales of $329.9 million for the year ended December 31, 1997. Revenue from sales of homes increased $41.1 million to $348.4 million in 1998 from $307.3 million in 1997. This increase was due primarily to an increase in the number of homes closed to 1,834 in 1998 from 1,597 in 1997, partially offset by a decrease in the average sales prices of homes to $189,900 in 1998 from $192,000 in 1997 which resulted primarily from a change in product mix. Total operating income (loss) changed from a loss of $84.5 million in 1997 to an income of $12.1 million in 1998. The excess of revenue from sales of homes over the related cost of sales increased by $21.6 million, to $50.6 million in 1998 from $29.0 million in 1997. This increase was primarily due to (1) an increase of 14.8% in the number of units closed from 1,597 units in 1997 to 1,834 units in 1998, (2) changes in product delivered in 1998 compared to 1997 comprised of 10 new products introduced in 1998 with average gross margins of 18.5% on sales of $64.7 million compared with 27 old products closed out in 1997 with average gross margins of 13.4% on sales of $107.5 million, and (3) increases for continuing products delivered in both 1998 and 1997 in average sales prices to $187,300 from $179,600 (a 4.3% increase) and in average gross margins to 8.6% from 5.3% (a 61.6% increase) on sales of $283.3 million and $199.9 million, respectively. Impairment losses on real estate assets amounting to $74.0 million were recorded in 1997 compared to no impairment losses in 1998. Sales and marketing expenses decreased by $0.8 million (3.6%) to $21.5 million in 1998 from $22.3 million in 1997 primarily as a result of reductions in advertising and sales office/model operation expenses, offset by increased direct sales expenses related to the increased sales volume. General and administrative expenses decreased slightly in the 1998 period from the 1997 period, primarily as a result of the consolidation of certain California operations in the third quarter of 1997 and reimbursement of overhead expenses from joint ventures. Income from unconsolidated joint ventures amounting to $3.5 million was recorded in the 1998 period, with no corresponding amount in the comparable period for 1997. The Company did not begin investing in unconsolidated joint ventures until the fourth quarter of 1997. Total interest incurred during 1998 decreased $1.5 million to $31.5 million from $33.0 million in 1997 as a result of a decrease in the average amount of outstanding debt resulting from a reduction in real estate inventories. Net interest expense increased to $9.2 million in 1998 from $7.8 million for 1997. This increase was due primarily to a reduction in real estate assets which qualify for interest capitalization. As a result of the Company's engagement of a financial advisor in May 1998 as described previously in "General Overview", the Company has incurred costs of approximately $1.3 million for the year ended December 31, 1998. Other (income) expense, net increased $0.7 million to a net income of $3.2 million in 1998 from a net income of $2.5 million in 1997 primarily as a result of increased income from design center operations, mortgage company operations and interest income. As a result of the retirement of certain debt as described previously in "General Overview", the Company has recognized a net gain of $2.7 million during the year ended December 31, 1998, after giving effect to income taxes and amortization of related loan costs. Comparison of Years Ended December 31, 1997 and 1996. Total sales (which represent recorded revenues from closings) for the year ended December 31, 1997 were $329.9 million, an increase of $10.9 million (3.4%), from sales of $319.0 million for the year ended December 31, 1996. Revenue from sales of homes decreased $10.1 million to $307.3 million in 1997 from $317.4 million in 1996. This decrease was due primarily to a decrease in the number of homes closed to 1,597 in 1997 from 1,838 in 1996, partially offset by an increase in the average sales prices of homes to $192,000 in 1997 from $173,000 in 1996 which resulted primarily from increased sales prices, decreased buyer incentives and a change in the mix of product. Revenue from lots, land and other increased $21.0 million to $22.6 million in 1997 from $1.6 million in 1996, primarily 21 24 as a result of sales of land to be used for commercial purposes, as well as the sale of a golf course formerly owned and operated by the Company. Total operating income (loss) changed from an income of $0.2 million in 1996 to a loss of $84.5 million in 1997. The excess of revenue from sales of homes over the related cost of sales decreased by $8.4 million, to $29.0 million in 1997 from $37.4 million in 1996. These decreases were primarily due to a decrease in the number of homes closed as described above and increases in costs such as interest and development. The excess of revenue from sales of lots, land and other over the related cost of sales decreased by $0.9 million to a loss of $1.3 million in 1997 from a loss of $0.4 million in 1996. Impairment losses on real estate assets amounting to $74.0 million were recorded in 1997 as compared to none in 1996. Sales and marketing expenses decreased by $0.6 million (2.6%) to $22.3 million in 1997 from $22.9 million in 1996 primarily as a result of a decrease in sales commissions directly attributable to a decrease in closed units, partially offset by an increase in advertising and other selling expenses in 1997 compared to 1996. General and administrative expenses increased by $2.0 million (14.3%) to $16.0 million in 1997 from $14.0 million in 1996, primarily as the result of additional staffing in expanding operating units in Arizona and Nevada. Total interest incurred of $33.0 million during 1997 increased $1.4 million (4.4%) from 1996 as a result of increased interest rates and higher debt levels in 1997. Net interest expense increased to $7.8 million in 1997 from $2.3 million for 1996. This increase was due primarily to a reduction in real estate assets which qualify for interest capitalization. Other (income) expense, net increased $0.3 million to a net income of $2.5 million in 1997 from a net income of $2.2 million in 1996 primarily as a result of increased income from design center operations. FINANCIAL CONDITION AND LIQUIDITY The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate and from outside borrowings and, beginning in the fourth quarter of 1997, by joint venture financing from newly formed joint ventures with venture partners that will provide a substantial portion of the capital required for certain projects. The Company currently maintains the following major credit facilities: 12 1/2% Senior Notes (the "Senior Notes"), a secured revolving lending facility (the "Working Capital Facility") and a revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned joint venture partnership (the "CMR Facility"). The letter of intent with William Lyon Homes includes the proposed acquisition by Presley of substantially all of the assets of William Lyon Homes for approximately $48 million. The letter of intent is conditioned upon, among other things, the receipt of financing by Presley in an amount sufficient to finance the transaction. The ability of the Company to meet its obligations on the Senior Notes (including the repurchase obligation described in "General Overview" above) and its other indebtedness will depend to a large degree on its future performance, which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions. The Company's degree of leverage may limit its ability to meet its obligations, withstand adverse business conditions and capitalize on business opportunities. The Company will in all likelihood be required to refinance the Senior Notes and the Working Capital Facility when they mature, and no assurances can be given that the Company will be successful in that regard. CAPITAL RESTRUCTURING AND QUASI-REORGANIZATION On March 28, 1994 the Company's Board of Directors approved a Plan for Capital Restructuring, which was approved by the Company's Stockholders at the Annual Meeting of Stockholders held on May 20, 1994. In accordance with the Plan for Capital Restructuring, on March 29, 1994 the Company executed a definitive agreement with its lenders to restructure the Company's $340 million revolving line of credit (the "Revolving Facility"). The Plan was approved at the Company's Annual Meeting held on May 20, 1994 and on that date the lender group under the Company's Revolving Facility converted $95 million of outstanding 22 25 debt under the Revolving Facility to equity through the issuance of 43,166,667 shares of a new series of common stock representing initially 70% of the outstanding shares of all series of common stock of the Company. As provided in the agreement with its lenders, when the Company completed its Senior Notes Offering of $200 million on June 29, 1994, as described below, the lending group returned to the Company a total of 8,809,524 shares of the new series of common stock, reducing their aggregate equity interest in the Company to 65% from 70%. In order to implement the Plan for Capital Restructuring, the Company's Certificate of Incorporation was amended to redesignate existing common stock as Series A Common Stock (the "Series A Common"), to establish a second series of common stock which was issued to the lender group (the "Series B Common"), and to increase the number of directors of the Company to nine, of which six are elected by holders of outstanding shares of Series A Common, and the remaining three are elected by the holders of outstanding shares of Series B Common. As a result of the conversion of a portion of the Series B Common in 1998, the number of directors elected by the holders of the Series B Common will be reduced to two at the Company's next Annual Meeting of Stockholders at which Series B Common directors are to be elected and the total number of directors will be reduced to eight. Concurrent with the conversion of debt to equity, under the Plan for Capital Restructuring, the Revolving Facility was reduced by $95 million to a total of $245 million comprised of a $150 million term facility ("the Term Facility") and a $95 million working capital facility ("the Working Capital Facility") (collectively, "the Debt Facilities"). In addition the lender group increased the Working Capital Facility by $20 million to a total of $115 million. Revolving credit loans under the Working Capital Facility may be borrowed, repaid and reborrowed from time to time prior to the termination date of the Working Capital Facility. The lender group had therefore provided Debt Facilities totaling $265 million to the Company. The terms of the Working Capital Facility are described more fully below. As described more fully below, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200 million of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Term Facility was repaid in full and the Working Capital Facility was reduced by $43 million from a portion of the proceeds from the issuance of the Senior Notes. The Series B Common ranks pari passu with the Series A Common in any liquidation of the Company. The Company may not declare or pay any dividends on the Series A Common unless equal dividends are declared and paid on the Series B Common. The Series B Common became convertible into Series A Common on a share-for-share basis at the option of the holder from and after May 20, 1997. On January 30, 1998 and June 30, 1998, the Company issued an aggregate of 2,677,836 and 14,276,361 shares, respectively, of its Series A Common as a result of the conversion of a like number of shares of its Series B Common. The shares of the Series A Common issued as a result of the conversion were not required to be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of Section 3(a)(9) of the Securities Act. Foothill Capital Corporation held 14,276,361 shares of Series B Common as managing general partner of Foothill Partners, L.P., a Delaware limited partnership and Foothill Partners II, L.P., a Delaware limited partnership (together, the "Partnerships"). The 14,276,361 shares of Series A Common have been issued in the names of the individual partners of the Partnerships, as the beneficial owners of such shares. A sufficient number of shares of Series A Common were listed with the New York Stock Exchange and reserved for issuance with ChaseMellon Shareholder Services, Inc., the transfer agent for the Company. As part of the Plan for Capital Restructuring, the Company's Board of Directors also approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented the quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with the Plan for Capital Restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting." Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair 23 26 values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations. The estimation process involved in the determination of the fair value of those assets as to which an adjustment was made is inherently uncertain since it required estimates and assumptions as to future events and conditions. Such future events and conditions include economic and market conditions, the availability and cost of governmental entitlements necessary to develop and build product, the cost of financing to fund development and construction activities, and the availability and cost of labor and materials necessary to develop, build and sell product. Because the amount and timing of the realization of the investments by the Company and its subsidiaries in their respective real estate projects are dependent upon such future uncertain events and conditions, the actual timing and amounts may be materially different from the estimates and assumptions used in determining fair value estimates utilized for purposes of the Plan for Quasi-Reorganization. The quasi-reorganization affects the comparability of operating statements for periods beginning after December 31, 1993 with those for periods beginning on or before December 31, 1993. Moreover, any income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences resulting from the quasi-reorganization, are excluded from the results of operations and credited to paid-in capital. SENIOR NOTES The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a Delaware corporation ("Delaware Presley" or the "Company"), and are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly owned subsidiary of Delaware Presley. However, Presley Homes has granted liens on substantially all of its assets as security for its obligations under the Working Capital Facility and other loans. Because the Presley Homes guarantee is not secured, holders of the Senior Notes are effectively junior to borrowings under the Working Capital Facility with respect to such assets. Delaware Presley and its consolidated subsidiaries are referred to collectively herein as "Presley" or the "Company." Interest on the Senior Notes is payable on January 1 and July 1 of each year, commencing January 1, 1995. Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes were not redeemable by Presley prior to July 1, 1998. Thereafter, the Senior Notes are redeemable at the option of Delaware Presley, in whole or in part, at the redemption prices set forth in the Indenture. The Senior Notes are senior obligations of Presley and rank pari passu in right of payment to all existing and future unsecured indebtedness of Presley, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the Senior Notes. As described above in "General Overview", Presley is required to offer to repurchase certain Senior Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest to the date of repurchase if Delaware Presley's Consolidated Tangible Net Worth is less than $60 million for any two consecutive fiscal quarters, as well as from the proceeds of certain asset sales. Upon certain changes of control as described in the Indenture, Presley must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. The letter of intent with William Lyon Homes described above contemplates that the transaction would be structured so as to not constitute a change of control as described in the Indenture. The Indenture governing the Senior Notes restricts, among other things: (i) the payment of dividends on and redemptions of capital stock by Presley, (ii) the incurrence of indebtedness by Presley or the issuance of preferred stock by Delaware Presley's subsidiaries, (iii) the creation of certain liens, (iv) Delaware Presley's ability to consolidate or merge with or into, or to transfer all or substantially all of its assets to, another person, 24 27 and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions. The net proceeds of this offering were used to repay amounts outstanding under the Term Facility and to reduce the outstanding debt and commitment level under the Working Capital Facility in connection with the Plan for Capital Restructuring as more fully described above. In April 1995, the Company purchased $10,000,000 principal amount of its outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of $724,000 after giving effect to related deferred loan costs and income taxes. In November 1997, the Company resold these Senior Notes held by the Company in treasury in a private placement. As of December 31, 1998, the outstanding 12 1/2% Senior Notes with a face value of $140 million were valued at a range from $120 million to $122 million, based on quotes from industry sources. WORKING CAPITAL FACILITY On July 6, 1998, the Company completed an agreement with the Agent of its existing lender group under its Working Capital Facility to (1) extend this loan facility to May 20, 2001, (2) increase the loan commitment to $100 million and (3) decrease the fees and costs compared to the prior revolving facility. The collateral for the loans provided by the Working Capital Facility continues to include substantially all real estate and other assets of the Company (excluding assets of partnerships and the portion of the partnership interests in the Carmel Mountain Ranch partnership which are currently pledged to other lenders). The borrowing base is calculated based on specified percentages of book values of real estate assets. The borrowing base at December 31, 1998 was approximately $116 million; however, the maximum loan under the Working Capital Facility is limited to $100 million. The principal outstanding under the Working Capital Facility at December 31, 1998 was $44 million. In addition, $2 million of available loan capacity is restricted for letters of credit outstanding under the Working Capital Facility. Pursuant to the terms of the Working Capital Facility, outstanding advances bear interest at the "reference rate" of Chase Manhattan Bank plus 2%. An alternate option provides for interest based on a specified overseas base rate plus 4.44%, but not less than 8%. In addition, the Company pays a monthly fee of 0.25% on the average daily unused portion of the loan facility. Upon completion of the new Working Capital Facility agreement, the Company paid a one-time, non-refundable Facility Fee of $2 million as well as a yearly non-refundable Administrative Fee of $100,000. The Working Capital Facility requires certain minimum cash flow and pre-tax and pre-interest tests. The Working Capital Facility also includes negative covenants which, among other things, place limitations on the payment of cash dividends, merger transactions, transactions with affiliates, the incurrence of additional debt and the acquisition of new land as described in the following paragraph. Under the terms of the Working Capital Facility, the Company may acquire new improved land for development of housing units of no more than 300 lots in any one location without approval from the lenders if certain conditions are satisfied. The Company may, however, acquire any new raw land or improved land provided the Company has obtained the prior written approval of lenders holding two-thirds of the obligations under the Working Capital Facility. The Working Capital Facility requires that mandatory prepayments be made to reduce the outstanding balance of loans to the extent of all funds in excess of $20 million in the principal operating accounts of the Company. CMR FACILITY Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel Mountain Ranch master-planned community, is a California general partnership and is 100% owned by the Company. Effective in March 1995, the development and construction of CMR, a consolidated joint venture, is financed through a 25 28 revolving line of credit. The revolving line of credit consists of several components relating to production units, models and residential lots. At December 31, 1998, the revolving line of credit had an outstanding balance of $5.7 million. Availability under the line is subject to a number of limitations, but in any case cannot exceed $10,000,000. Interest on the outstanding balance is at prime plus 1.00%. In August 1998, the maturity date of this line was extended to April 16, 1999. At the option of the borrower, the maturity date of this line may be extended from April 16, 1999 to August 16, 1999, subject to certain specified terms and conditions. The Company currently intends to exercise the option to extend the maturity date of this loan to August 16, 1999, and may, if necessary, seek to extend the maturity date beyond August 16, 1999. SELLER FINANCING Another source of financing available to the Company is seller-provided financing for land acquired by the Company. At December 31, 1998, the Company had various notes payable outstanding related to land acquisitions for which seller financing was provided in the amount of $5.7 million within the Company's Arizona, New Mexico and Nevada regions. JOINT VENTURE FINANCING As of December 31, 1998, the Company and certain of its subsidiaries are general partners or members in twelve joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned and, accordingly, such joint ventures are not consolidated with the Company's financial statements. The Company's investments in unconsolidated joint ventures are accounted for using the equity method. See Note 6 of "Notes to Consolidated Financial Statements" for condensed combined financial information for these joint ventures. The majority of these projects are currently in the initial development stages and, based upon current estimates, all future development and construction costs will be funded by the Company's venture partners or from the proceeds of non-recourse construction financing obtained by the joint ventures. As of December 31, 1998, the Company's investment in such joint ventures was approximately $29.8 million and the Company's venture partners' investment in such joint ventures was approximately $102.6 million. In addition, certain joint ventures have obtained financing from land sellers or construction lenders which amounted to approximately $29.0 million at December 31, 1998. In January 1998, one of these joint ventures acquired land from the Company at the Company's book value of approximately $23,200,000 (which also approximated the land's current market value) and assumed the Company's non-recourse note payable of $12,500,000 secured by the land. The Company received cash of approximately $5,600,000 and was credited with a capital contribution of approximately $5,100,000 upon the formation of this joint venture. In March 1998, one of these joint ventures acquired land from the Company at the Company's book value of approximately $6,300,000 (which also approximated the land's current market value) and repaid the Company's non-recourse note payable of $4,515,000 secured by the land. The Company received cash of approximately $1,260,000 and was credited with a capital contribution of approximately $525,000 upon the formation of this joint venture. In May 1998, the Company contributed land to one of these joint ventures at the Company's book value of approximately $29,381,000 (which also approximated the project's current market value). The Company received cash of approximately $25,431,000 and was credited with a capital contribution of approximately $3,950,000 upon the formation of this joint venture. The majority of these projects are currently in the initial development stages and, based upon current estimates, all future development and construction costs will be funded by the Company's venture partners or from the proceeds of non-recourse construction financing obtained by the joint ventures. ASSESSMENT DISTRICT BONDS AND SELLER FINANCING In some locations in which the Company develops its projects, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company's other sources of funds and the fact that the bonds are sold, 26 29 administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When Presley's homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. CASH FLOWS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 Net cash provided by (used in) operating activities changed from a use of $14.1 million in 1997 to a source of $55.1 million in 1998. The change was primarily as a result of increased income and reductions in real estate inventories. Net cash provided by (used in) investing activities changed from a use of $8.7 million in 1997 to a source of $5.8 million in 1998 primarily as a result of investment activity with unconsolidated joint ventures. Net cash provided by (used in) financing activities changed from a source of $22.9 million in 1997 to a use of $41.5 million in 1998 primarily as a result of the repurchase of $40.0 million principal amount of 12 1/2% Senior Notes and reduced net borrowings from notes payable. CASH FLOWS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 Net cash provided by (used in) operating activities changed from a source of 15.6 million in 1996 at a use of $14.1 million in 1997. The change was primarily due to the incurrence of the net loss in 1997 compared to income in 1996. Net cash provided by (used in) investing activities changed from a source of $0.7 million in 1996 to a use of $8.7 million in 1997. The change was due primarily to an increase in investments in joint ventures, an increase in the amount of new notes receivable issued, a decrease in principal payments received on notes receivable and an increase in purchases of property and equipment. Net cash provided by (used in) financing activities changed from a use of $15.9 million in 1996 to a source of $22.9 million in 1997. The change was primarily due to a $139.1 million repayment of debt and a $20.0 million retirement of Senior Notes, offset by borrowings on notes payable totaling $172.0 million. IMPACT OF YEAR 2000 The term "year 2000 issue" is a general term used to describe the complications that may be caused by existing computer hardware and software that were designed without consideration for the upcoming change in the century. If not corrected, such programs may cause computer systems and equipment to fail or to miscalculate data. Due to the year 2000 issue, the Company has undertaken initiatives to modify or replace portions of its existing computer operating systems so that they will function properly with respect to dates in the year 2000 and thereafter. To date, the Company's year 2000 compliance effort has been focused on its core business computer applications (i.e., those systems that the Company is dependent upon for the conduct of day-to-day business operations). The Company determined that the highest priority project based on greatest business risk and greatest technical effort should be the conversion and upgrade of the Company's JD Edwards accounting systems (the "JD Edwards Programs"). The version of the JD Edwards programs which the Company is currently using is not Year 2000 compliant. However, the Company has acquired and installed a Year 2000 compliant version of the software and is currently testing such software and developing programs to convert its current applications to the new version of the software. Based on current evaluations, the Company believes that this conversion will be implemented no later than June 30, 1999 and will have minimal effects on its systems, and that the cost incurred in that connection will not be material. The Company has undertaken an assessment of other internal systems used by the Company in various of its operations. Internal systems used by the Company in its mortgage company operations, payroll processing and banking interfaces were all converted during 1998 to systems which are Year 2000 compliant and as such, the Company's efforts are 100% complete with respect to these systems. The implementation had minimal effect on its systems and the costs incurred in that connection were not material. Internal systems used by the 27 30 Company in its design center operations are currently being converted to a system which is Year 2000 compliant. This implementation is expected to be completed no later than June 30, 1999 and the cost incurred in that connection will not be material. As part of these projects, the Company's relationships with suppliers, subcontractors, financial institutions and other third parties are being examined to determine the status of their year 2000 issue efforts as related to the Company. As a general matter, the Company is vulnerable to significant suppliers' inability to remedy their own year 2000 issues. Furthermore, the Company relies on financial institutions, government agencies (particularly for zoning, building permits and related matters), utility companies, telecommunication service companies and other service providers outside of its control. There is no assurance that such third parties will not suffer a year 2000 business disruption and it is conceivable that such failures could, in turn, have a material adverse effect on the Company's liquidity, financial condition and results of operations. The Company acknowledges that its failure to resolve a material year 2000 issue could result in the interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations. Although the Company considers its exposure to the year 2000 issue from third party suppliers as generally low, due to the uncertainty of the year 2000 readiness of third party suppliers, the Company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. In addition, the Company could be materially impacted by the widespread economic or financial market disruption by year 2000 computer system failures at government agencies on which the Company is dependent for zoning, building permits and related matters. Possible risks of year 2000 failure could include, among other things, delays or errors with respect to payments, third party delivery of materials and government approvals. The Company's year 2000 project is expected to significantly reduce the Company's level of uncertainty and exposure to the year 2000 issue. To date, the Company has not identified any operating systems, either of its own or of a material third party supplier, that present a material risk of not being year 2000 ready or for which a suitable alternative cannot be implemented. Management will consider the necessity of implementing a contingency plan to mitigate any adverse effects associated with the year 2000 issue. The Company's ability to complete the year 2000 modifications outlined above prior to any anticipated impact on its operating systems is based on numerous assumptions of future events and is dependent upon numerous factors, including the ability of third party software and hardware suppliers and manufacturers to make necessary modifications to current versions of their products, the availability of resources to install and test the modified systems and other factors. Accordingly, there can be no assurance that these modifications will be successful. The Company has incurred less than $50,000 in connection with its Year 2000 initiatives. The Company estimates its future costs related to its Year 2000 initiatives to be less than $200,000. The Company currently anticipates that its operating systems will be Year 2000 ready well before January 1, 2000, and that the year 2000 issue will not have a material adverse effect upon the Company's liquidity, financial position or results of operations. INFLATION Although inflation rates have been low in recent years, the Company's revenues and profitability may be affected by increased inflation rates and other general economic conditions. In periods of high inflation, demand for the Company's homes may be reduced by increases in mortgage interest rates. Further, the Company's profits will be affected by its ability to recover through higher sales prices increases in the costs of land, construction, labor and administrative expenses. The Company's ability to raise prices at such times will depend upon demand and other competitive factors. FORWARD LOOKING STATEMENTS Investors are cautioned that certain statements contained in this Annual Report on Form 10-K, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are "forward-looking state- 28 31 ments" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates", "hopes", and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined in the Act. Forward-looking statements are based upon expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company, economic and market factors and the homebuilding industry. Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company's actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates, whether an ownership change occurs which results in the limitation of the Company's ability to utilize the tax benefits associated with its net operating loss carryforwards, changes in home mortgage interest rates, changes in prices of homebuilding materials, labor shortages, adverse weather conditions, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, changes in governmental laws and regulations, whether a definitive agreement with William Lyon Homes is executed and consummated, whether the Company is able to refinance the outstanding balances of Senior Notes and Working Capital Facility at their respective maturities, and the availability and cost of land for future growth. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's revolving lines of credit with a total outstanding balance at December 31, 1998 of $49.7 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on the Company's consolidated financial statements would be to reduce income before taxes by approximately $200,000 based on amounts outstanding and rates in effect at December 31, 1998, as well as to increase capitalized interest by approximately $490,000 which would be amortized to cost of sales as unit closings occur. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of Presley and the financial statements of the Significant Subsidiaries of Presley, together with the reports of the independent auditors, listed under Item 14, are submitted as a separate section of this report beginning on page 35 and are incorporated herein by reference. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A Common Stock to be held on May 10, 1999. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A Common Stock to be held on May 10, 1999. 29 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A Common Stock to be held on May 10, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of Holders of Series A Common Stock to be held on May 10, 1999. PART IV ITEM 14.EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS The following financial statements of the Company are included in a separate section of this Annual Report on Form 10-K/A commencing on the page numbers specified below:
PAGE ---- THE PRESLEY COMPANIES Report of Independent Auditors.............................. 36 Consolidated Balance Sheets................................. 37 Consolidated Statements of Operations....................... 38 Consolidated Statements of Stockholders' Equity (Deficit)... 39 Consolidated Statements of Cash Flows....................... 40 Notes to Consolidated Financial Statements.................. 41 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES Report of Independent Auditors.............................. 68 Combined Balance Sheets..................................... 69 Combined Statements of Operations........................... 70 Combined Statements of Members' Capital..................... 71 Combined Statements of Cash Flows........................... 72 Notes to Combined Financial Statements...................... 73
(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 DESCRIPTION ------- ----------- 3.1(1) Certificate of Incorporation of the Company. 3.3(1) Bylaws of the Company. 4.1(1) Specimen certificate of Common Stock. 10.1(1) Form of Indemnity Agreement, dated October 18, 1991, between the Company and Messrs. Lyon and Cable as Directors, and dated December 12, 1991 as to the other Directors. 10.2(1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and William Lyon. 10.3(1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and each of the existing stockholders other than William Lyon.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.4(1) 1991 Stock Option Plan. 10.5(2) Agreement for Redemption of Partnership Interest dated December 30, 1992 between Carmel Mountain Ranch, a California general partnership, The Presley Companies, a California corporation, Presley CMR, Inc., a California corporation, Home Capital Corporation, a California corporation and Humboldt Financial Services Corp., a California corporation. 10.6(2) Amended Statement of Partnership of Carmel Mountain Ranch dated December 30, 1992. 10.7(2) Amendment to Amended and Restated Partnership Agreement of Carmel Mountain Ranch dated December 29, 1992. 10.8(3) Agreement to Issue and Purchase Stock as dated for reference purposes the 25th day of March, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994). 10.9(4) First Amendment to the Agreement to Issue and Purchase Stock dated as of April 8, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994). 10.10(4) Form of Registration Rights Agreement dated as of May 20, 1994, by and among The Presley Companies, a Delaware corporation and each of the holders of shares of the Series B Common Stock. 10.11(4) Amended and Restated 1991 Stock Option Plan of The Presley Companies, a Delaware corporation. 10.12(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and Wade H. Cable. 10.13(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and David M. Siegel. 10.14(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Nancy M. Harlan. 10.15(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Linda L. Foster. 10.16(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and W. Douglass Harris. 10.17(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and C. Dean Stewart. 10.18(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Alan Uman. 10.19(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and William Lyon.
31 34
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.20(6) Agreement and Assignment; Mutual Releases, as of August 23, 1994, by and between Gateway Highlands, a California limited partnership, HSP Inc., a California corporation and The Presley Companies, a California corporation. 10.21(7) Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, N.A., a national banking association dated as of February 15, 1995. 10.22(8) First Amendment to Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, NA dated as of October 10, 1995. 10.23(9) Second Amendment to Master Credit Agreement and Secured Promissory Note by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996. 10.24(10) Third Amendment to Master Credit Agreement, dated as of September 25, 1997, by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"). 10.25(11) Fifth Amended and Restated Loan Agreement, dated as of July 6, 1998, between Presley Homes (formerly The Presley Companies), a California corporation, as the Borrower, and Foothill Capital Corporation, as the Lender. 10.26(11) Modification to Master Credit Agreement dated as of March 17, 1998, between Carmel Mountain Ranch, a California general partnership, as Borrower, and Bank One, Arizona, NA, a national banking association, as Bank. 10.27(11) Modification to Master Credit Agreement dated as of June 16, 1998, between Carmel Mountain Ranch, a California general partnership, as Borrower, and Bank One, Arizona, NA, a national banking association, as Bank. 10.28(12) Modification to Master Credit Agreement dated as of August 25, 1998, between Carmel Mountain Ranch, a California general partnership, as Borrower, and Bank One, Arizona, NA, a national banking association, as Bank. 10.29(12) Form of Severance Agreements dated September 24, 1998. 10.30(14) Presley Homes 1998 Bonus Plan. 10.31(13) Letter of Intent dated December 31, 1998 by and among William Lyon Homes, Inc., a California corporation, The Presley Companies, a Delaware corporation and The Presley Companies, a California corporation. 10.32(14) Amendment to Letter of Intent dated March 30, 1999 by and among William Lyon Homes, Inc., a California corporation, The Presley Companies, a Delaware corporation and Presley Homes, a California corporation. 21.1(14) List of Subsidiaries of the Company. 23.1 Consent of Independent Auditors. 27(14) Financial Data Schedule.
- --------------- (1) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and incorporated herein by this reference. (2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by this reference. (3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by this reference. 32 35 (4) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference. (5) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by this reference. (7) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by this reference. (8) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by this reference. (9) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by this reference. (10) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. (11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (12) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998. (13) Previously filed as an exhibit to the Company's Report on Form 8-K dated December 31, 1998. (14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by this reference. (b) Reports on Form 8-K OCTOBER 28, 1998. A Report on Form 8-K (Item 5) was filed by the Company related to the Company's purchase of $20,000,000 principal amount of its 12 1/2% Senior Notes. DECEMBER 31, 1998. A Report on Form 8-K (Item 5) was filed by the Company in reference to the announcement that the Company entered into a letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting forth their preliminary understanding with respect to (i) the proposed acquisition by Presley of substantially all of the assets of William Lyon Homes for approximately $48,000,000 together with the assumption of related liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to a tender offer for not less than 40% and not more than 49% of the outstanding shares of Presley common stock held by stockholders other than William Lyon at a price of $0.62 per share. 33 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PRESLEY COMPANIES By: /s/ DAVID M. SIEGEL ------------------------------------ David M. Siegel Senior Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM LYON Chairman of the Board and October 4, 1999 - ----------------------------------------------------- Director William Lyon /s/ WADE H. CABLE Director, Chief Executive October 4, 1999 - ----------------------------------------------------- Officer and President Wade H. Cable (Principal Executive Officer) /s/ JAMES E. DALTON Director October 4, 1999 - ----------------------------------------------------- James E. Dalton /s/ GREGORY P. FLYNN Director October 4, 1999 - ----------------------------------------------------- Gregory P. Flynn Director October , 1999 - ----------------------------------------------------- Steven B. Sample /s/ KAREN SANDLER Director October 4, 1999 - ----------------------------------------------------- Karen Sandler /s/ MARSHALL E. STEARNS Director October 4, 1999 - ----------------------------------------------------- Marshall E. Stearns /s/ RAY A. WATT Director October 4, 1999 - ----------------------------------------------------- Ray A. Watt /s/ DAVID M. SIEGEL Senior Vice President, Chief October 4, 1999 - ----------------------------------------------------- Financial Officer and David M. Siegel Treasurer (Principal Financial Officer) /s/ W. DOUGLASS HARRIS Vice President and Corporate October 4, 1999 - ----------------------------------------------------- Controller (Principal W. Douglass Harris Accounting Officer)
34 37 INDEX TO FINANCIAL STATEMENTS
PAGE ---- THE PRESLEY COMPANIES Report of Independent Auditors.............................. 36 Consolidated Balance Sheets................................. 37 Consolidated Statements of Operations....................... 38 Consolidated Statements of Stockholders' Equity (Deficit)... 39 Consolidated Statements of Cash Flows....................... 40 Notes to Consolidated Financial Statements.................. 41 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES Report of Independent Auditors.............................. 68 Combined Balance Sheets..................................... 69 Combined Statements of Operations........................... 70 Combined Statements of Members' Capital..................... 71 Combined Statements of Cash Flows........................... 72 Notes to Combined Financial Statements...................... 73
REQUIRED SCHEDULES Schedules are omitted as the required information is not present, is not present in sufficient amounts, or is included in the Consolidated Financial Statements or Notes thereto. 35 38 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders The Presley Companies We have audited the accompanying consolidated balance sheets of The Presley Companies as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Presley Companies at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Newport Beach, California February 16, 1999 36 39 THE PRESLEY COMPANIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE) (NOTE 2) ASSETS
DECEMBER 31, -------------------- 1998 1997 -------- -------- Cash and cash equivalents................................... $ 23,955 $ 4,569 Receivables -- Note 4....................................... 8,613 8,652 Real estate inventories -- Notes 1 and 5.................... 174,502 255,472 Investments in and advances to unconsolidated joint ventures -- Note 6........................................ 30,462 7,077 Property and equipment, less accumulated depreciation of $3,156 and $2,339 at December 31, 1998 and 1997, respectively.............................................. 2,912 3,613 Deferred loan costs -- Note 1............................... 3,381 3,266 Other assets................................................ 2,579 2,595 -------- -------- $246,404 $285,244 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable............................................ $ 17,364 $ 12,854 Accrued expenses............................................ 27,823 23,136 Notes payable -- Note 7..................................... 55,393 74,935 12 1/2% Senior Notes Due 2001 -- Note 7..................... 140,000 180,000 -------- -------- 240,580 290,925 -------- -------- Commitments and contingencies -- Note 12 Stockholders' equity (deficit) -- Notes 3 and 9 Common stock: Series A common stock, par value $.01 per share; 100,000,000 shares authorized; 34,792,732 and 17,838,535 shares issued and outstanding at December 31, 1998 and 1997, respectively....................... 348 178 Series B restricted voting convertible common stock, par value $.01 per share; 50,000,000 shares authorized; 17,402,946 and 34,357,143 shares issued and outstanding at December 31, 1998 and 1997, respectively.......................................... 174 344 Additional paid-in capital................................ 116,249 114,599 Accumulated deficit from January 1, 1994.................. (110,947) (120,802) -------- -------- 5,824 (5,681) -------- -------- $246,404 $285,244 ======== ========
See accompanying notes. 37 40 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS) (NOTE 2)
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Sales Homes................................................. $ 348,352 $ 307,332 $ 317,366 Lots, land and other -- Note 11....................... 19,930 22,610 1,631 --------- --------- --------- 368,282 329,942 318,997 --------- --------- --------- Operating costs Cost of sales -- homes................................ (297,781) (278,299) (279,988) Cost of sales -- lots, land and other................. (20,992) (23,902) (1,991) Impairment loss on real estate assets -- Note 1....... -- (74,000) -- Sales and marketing................................... (21,463) (22,279) (22,877) General and administrative............................ (15,965) (15,996) (13,978) --------- --------- --------- (356,201) (414,476) (318,834) --------- --------- --------- Income from unconsolidated joint ventures -- Note 6..... 3,499 -- -- --------- --------- --------- Operating income (loss)................................. 15,580 (84,534) 163 Interest expense, net of amounts capitalized -- Note 7..................................................... (9,214) (7,812) (2,256) Financial advisory expenses -- Note 2................... (1,286) -- -- Other income (expense), net............................. 3,225 2,452 2,245 --------- --------- --------- Income (loss) before income taxes and extraordinary item.................................................. 8,305 (89,894) 152 Provision for income taxes -- Notes 3 and 9............. (1,191) -- -- --------- --------- --------- Income (loss) before extraordinary item................. 7,114 (89,894) 152 Extraordinary item -- gain from retirement of debt, net of applicable income taxes of $459 -- Notes 3, 9 and 10.................................................... 2,741 -- -- --------- --------- --------- Net income (loss)....................................... $ 9,855 $ (89,894) $ 152 ========= ========= ========= Basic and diluted earnings per common share: -- Note 1 Before extraordinary item............................. $ 0.14 $ (1.72) $ -- Extraordinary item.................................... $ 0.05 -- -- --------- --------- --------- After extraordinary item.............................. $ 0.19 $ (1.72) $ -- ========= ========= =========
See accompanying notes. 38 41 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) (NOTE 2)
RETAINED COMMON STOCK EARNINGS ---------------------------------- (ACCUMULATED SERIES A SERIES B ADDITIONAL DEFICIT FROM) --------------- ---------------- PAID-IN JANUARY 1, SHARES AMOUNT SHARES AMOUNT CAPITAL 1994 TOTAL ------ ------ ------- ------ ---------- -------------- -------- Balance -- December 31, 1995............ 17,839 $178 34,357 $ 344 $114,599 $ (31,060) $ 84,061 Net income.............................. -- -- -- -- -- 152 152 ------ ---- ------- ----- -------- --------- -------- Balance -- December 31, 1996............ 17,839 178 34,357 344 114,599 (30,908) 84,213 Net loss................................ -- -- -- -- -- (89,894) (89,894) ------ ---- ------- ----- -------- --------- -------- Balance -- December 31, 1997............ 17,839 178 34,357 344 114,599 (120,802) (5,681) Net income.............................. -- -- -- -- -- 9,855 9,855 Income tax benefits related to temporary differences existing prior to the quasi-reorganization -- Notes 3 and 9..................................... -- -- -- -- 1,650 -- 1,650 Conversion of Series B Common Stock to Series A Common Stock -- Note 3....... 16,954 170 (16,954) (170) -- -- -- ------ ---- ------- ----- -------- --------- -------- Balance -- December 31, 1998............ 34,793 $348 17,403 $ 174 $116,249 $(110,947) $ 5,824 ====== ==== ======= ===== ======== ========= ========
See accompanying notes. 39 42 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (NOTE 2)
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 --------- --------- --------- Operating activities Net income (loss)......................................... $ 9,855 $ (89,894) $ 152 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................... 1,059 907 585 Impairment loss on real estate assets.................. -- 74,000 -- Equity in earnings of joint ventures................... (3,499) -- -- Extraordinary gain on repurchase of Senior Notes....... (3,200) -- -- Provision for uncollectible notes receivable........... -- -- 145 Provision for income taxes............................. 1,650 -- -- Net changes in operating assets and liabilities: Other receivables.................................... (556) (4,273) (778) Real estate inventories.............................. 41,272 (680) 11,409 Deferred loan costs.................................. (655) 1,081 1,019 Other assets......................................... 17 6,470 (3,386) Accounts payable..................................... 4,510 (5,574) 7,877 Accrued expenses..................................... 4,687 3,819 (1,437) --------- --------- --------- Net cash provided by (used in) operating activities....... 55,140 (14,144) 15,586 --------- --------- --------- Investing activities Investment in unconsolidated joint ventures............... (19,886) (7,077) -- Proceeds from contribution of land to joint venture....... 25,431 -- -- Issuance of notes receivable.............................. (234) (637) -- Principal payments on notes receivable.................... 828 483 1,712 Purchases of property and equipment....................... (358) (1,473) (1,055) --------- --------- --------- Net cash provided by (used in) investing activities....... 5,781 (8,704) 657 --------- --------- --------- Financing activities Proceeds from borrowings on notes payable................. 132,953 171,964 107,891 Principal payments on notes payable....................... (138,228) (139,097) (123,801) Repurchase of 12 1/2% Senior Notes........................ (36,260) (20,000) -- Sale of 12 1/2% Senior Notes held in treasury............. -- 10,000 -- --------- --------- --------- Net cash provided by (used in) financing activities....... (41,535) 22,867 (15,910) --------- --------- --------- Net increase in cash and cash equivalents................... 19,386 19 333 Cash and cash equivalents -- beginning of period............ 4,569 4,550 4,217 --------- --------- --------- Cash and cash equivalents -- end of period.................. $ 23,955 $ 4,569 $ 4,550 ========= ========= ========= Supplemental disclosures of cash flow and non-cash financing activities Cash paid during the period for interest, net of amounts capitalized............................................ $ 12,025 $ 7,277 $ 2,517 ========= ========= ========= Issuance of notes payable for land acquisitions........... $ 2,748 $ 22,411 $ -- ========= ========= =========
See accompanying notes. 40 43 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations The Presley Companies (the "Company" or "Presley") is primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona, New Mexico and Nevada. Basis of Presentation The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries and joint ventures. Investments in joint ventures in which the Company has a 50% or less ownership interest are accounted for using the equity method. The accounting policies of the joint ventures are substantially the same as those of the Company. All significant intercompany accounts and transactions are eliminated in consolidation. Segment Information In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement No. 131 establishes new standards for segment reporting which are based on the way management organizes segments within the Company for making operating decisions and assessing performance. The adoption of Statement No. 131 did not affect the results of operations or financial position of the Company. The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. For internal reporting purposes, the Company is organized into six geographic home building regions and its mortgage operations. Because each of the Company's geographic home building regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building regions have been aggregated into a single home building segment. Mortgage company operations did not meet the materiality thresholds which would require disclosure under Statement No. 131 for the years ended December 31, 1998, 1997 and 1996, and accordingly, are not separately reported. The Company evaluates performance and allocates resources primarily on the operating income of individual home building projects. Operating income is defined by the Company as sales of homes, lots and land; less cost of sales, impairment losses on real estate, selling and marketing, and general and administrative expenses. Accordingly, operating income excludes certain expenses included in the determination of net income. Operating income (loss) from home building operations totaled $15.6 million, $(84.5 million), and $0.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. All other segment measurements are disclosed in the Company's consolidated financial statements. All revenues are from external customers and no revenues are generated from transactions with other segments. There were no customers that contributed 10% or more of the Company's total revenues during 1998, 1997, or 1996. Real Estate Inventories and Related Indebtedness Real estate inventories are carried at cost net of impairment losses and real estate valuation adjustments. Real estate inventories consist primarily of raw land, lots under development, houses under construction and completed houses. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally 41 44 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. Selling expenses and other marketing costs are expensed in the period incurred. A provision for warranty costs relating to the Company's limited warranty plans is included in cost of sales at the time the sale of a home is recorded. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. Interest incurred under the Working Capital Facility, the Senior Notes and other notes payable, as more fully discussed in Note 7, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less cost of disposal. When an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. The net loss for the year ended December 31, 1997 included a non-cash charge of $74,000,000 to record impairment losses on certain real estate assets held and used by the Company. The impairment losses related to three of the Company's master-planned communities. The impairment losses related to two communities, which are located in the Inland Empire area of Southern California, arose primarily from declines in home sales prices due to continued weak economic conditions and competitive pressures in that area of Southern California. The impairment loss relating to the other community, which is located in Contra Costa County in the East San Francisco Bay area of Northern California, was primarily attributable to lower than expected cash flow relating to one of the high end residential products in this community and to a deterioration in the value of the non-residential portion of the project. The significant deteriorations in the market conditions associated with these communities resulted in the undiscounted cash flows (excluding interest) estimated to be generated by these communities being less than their historical book values. Accordingly, the master-planned communities were written-down to their estimated fair value. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein. Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of projects are expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expensed during 1998, 1997 and 1996 was approximately $9,214,000, $7,812,000 and $2,256,000, respectively. 42 45 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to thirty-five years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the shorter of either their estimated useful lives or term of the lease. Deferred Loan Costs Deferred loan costs are amortized over the term of the applicable loans using a method which approximates the interest method. Included in deferred loan costs at December 31, 1998 and 1997, net of related amortization, are $1,643,000 and $2,958,000, respectively, of costs associated with the issuance of the Company's Senior Notes. Sales and Profit Recognition A sale is recorded and profit recognized when a sale is consummated, the buyer's initial and continuing investments are adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real Estate." When it is determined that the earnings process is not complete, profit is deferred for recognition in future periods. As of December 31, 1998 and 1997, there are no deferred profits. Income Taxes Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Financial Instruments Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash investments, receivables, and deposits. The Company typically places its cash investments in investment grade short-term instruments. Collateral on first trust deed notes receivable is primarily located in Southern California and Arizona. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers. For those instruments, as defined under Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," for which it is practical to estimate fair value, management has determined that the carrying amounts of the Company's financial instruments approximate their fair value at December 31, 1998, except for the 12 1/2% Senior Notes as described in Note 7. The Company is an issuer of, or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in connection with assessment district bonds. These off-balance sheet financial instruments are described in the applicable Notes. Cash and Cash Equivalents Short-term investments with a maturity of three months or less when purchased are considered cash equivalents. 43 46 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Basic and Diluted Earnings Per Common Share Earnings per share amounts for all periods presented conform to Financial Accounting Standards Board Statement No. 128, Earnings Per Share. Basic and diluted earnings per common share for each of the three years in the period ended December 31, 1998 are based on 52,195,678 shares of Series A and Series B common stock outstanding. Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 1998 and 1997 and revenues and expenses for each of the three years in the period ended December 31, 1998. Accordingly, actual results could differ from those estimates in the near-term. NOTE 2 -- COMPANY ENGAGES FINANCIAL ADVISOR AND ENTERS INTO LETTER OF INTENT WITH WILLIAM LYON HOMES, INC. The Company announced on May 5, 1998 that it had engaged Warburg Dillon Read Inc. to explore various strategic alternatives including the refinancing/restructuring of its outstanding debt obligations or the sale of certain, or substantially all, of its assets. In conjunction with the engagement of the financial advisor, a Special Committee comprised of independent directors of the Company's Board of Directors was formed to evaluate strategic alternatives. The Company's actions were a direct result of the severe economic conditions encountered during the past several years, together with the Company's highly leveraged capital structure. The declining economic conditions began to affect the Company's primary home-building markets in California during 1989 and continued on and off since that time. In view of substantial declines in the value of certain of the Company's real estate assets since 1992, the Company has been required to write down the book value of these real estate assets in accordance with generally accepted accounting principles. The $89,894,000 loss for the year ended December 31, 1997, included a non-cash charge of $74,000,000 as a result of the recognition of impairment losses on certain of the Company's real estate assets. As a result of the substantial losses realized by the Company since 1992, the Company had a stockholders' deficit of $5,681,000 at December 31, 1997. As of December 31, 1998, the Company's stockholders' equity totaled $5,824,000. On December 31, 1998, the Company announced that, after unanimous approval by the Special Committee of independent directors, Presley had entered into a letter of intent with William Lyon Homes, Inc. ("William Lyon Homes") setting forth their preliminary understanding with respect to (i) the proposed acquisition by Presley of substantially all of the assets of William Lyon Homes for approximately $48,000,000 together with the assumption of related liabilities, and (ii) the concurrent purchase by William Lyon Homes pursuant to a tender offer for not less than 40% and not more than 49% of the outstanding shares of Presley common stock held by stockholders other than William Lyon at a price of $0.62 per share. William Lyon Homes, which is owned by William Lyon and his son, William H. Lyon, is a California-based homebuilder and real estate developer with projects currently under development in Northern and Southern California. Following the completion of the proposed transactions, William Lyon, who is the current Chairman of the Board of Presley, would beneficially own between 55% and 65% (depending on the number of shares tendered) of the outstanding shares of Presley common stock and the remaining shares would continue to be publicly traded. The execution of the letter of intent followed a review over several months by the Special Committee, together with its financial and legal advisors, of strategic alternatives available to Presley as well as a review of other proposals received from third parties. Under the terms of the letter of intent, the proposed transactions are subject to various conditions, including the successful negotiation and execution of a definitive agreement, the receipt of opinions of 44 47 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Presley's advisors with respect to the fairness of the transactions to Presley and its stockholders as well as the solvency of Presley following consummation of the transactions, the receipt of real estate appraisals satisfactory to Presley and William Lyon Homes with respect to the real estate assets of William Lyon Homes, the approval of a definitive agreement by the respective boards of directors of Presley and William Lyon Homes by March 31, 1999, receipt of all required regulatory approvals and third party consents, including any required lender consents, the receipt of agreements from certain significant stockholders of Presley to tender their shares pursuant to the tender offer, the receipt of financing by Presley in an amount sufficient to enable Presley to finance the transactions, and the absence of any material adverse change in the business or financial condition of either Presley or William Lyon Homes. In addition, the letter of intent contemplates that each of the transactions will be structured so as to be subject to the successful completion of the other and that the parties will structure the transactions (including, if necessary, by imposing limitations on certain transfers of shares) so as to avoid triggering the change of control tax provisions that would result in the loss of Presley's net operating losses for tax purposes. The letter of intent also contemplates that Presley's 12 1/2% Senior Notes due 2001 shall remain outstanding without modification. The letter of intent provides that, subject to the fiduciary duties of their respective boards of directors, Presley and William Lyon Homes will negotiate exclusively with each other toward a definitive agreement until March 31, 1999. The letter of intent does not constitute a binding agreement to consummate the transactions and there can be no assurances that the parties ultimately will enter into a definitive agreement with respect to the transactions or that the conditions to the transactions will be satisfied. On February 18, 1999 the company announced that it had received a letter from William Lyon, Chairman of the Board of William Lyon Homes and also Chairman of the Board of Presley, proposing a modification to the previously executed letter of intent with William Lyon Homes. Under the proposed modification, William Lyon Homes would make a tender offer for not more than 37% of the outstanding shares of common stock of Presley for a purchase price of $0.62 per share. In the event that more than 37% of the outstanding shares of common stock of Presley is tendered, William Lyon Homes will purchase shares from each tendering stockholder on a pro rata basis. The tender offer will be conditioned upon there being tendered and not withdrawn, a number of shares which constitutes at least 37% of the outstanding shares of Presley. The proposed modification also provides that the transaction will be structured to permit William Lyon or his affiliates, prior to consummation of the transaction and consistent with applicable securities laws, to sell shares of Presley common stock owned by them up to a maximum of 4% of the total number of shares of Presley common stock presently outstanding. The proposed modification is currently being considered by the Special Committee of independent directors. On March 30, 1999, the parties amended the letter of intent to extend its term and the period of exclusive negotiation to April 30, 1999. The condition included in the letter of intent that the boards of directors of Presley and William Lyon Homes must approve a definitive agreement by March 31, 1999 was also extended to April 30, 1999. The parties have also agreed that William Lyon Homes may participate in discussions and negotiations with the holders of Presley's Series B Common Stock regarding the purchase by William Lyon Homes of such percentage of the Series B holder's shares so as to reduce such Series B holder's ownership interest in Presley Common Stock to between 4.9% and 5% of Presley's outstanding Common Stock following consummation of the proposed transactions. William Lyon Homes may also seek commitments from the Series B holders to sell additional shares to the extent that the number of shares of Series A Common Stock tendered in the tender offer are below the minimum threshold set forth in a definitive agreement. Any such negotiations are to be conducted exclusively so as to obtain the consent of the Series B holders to the proposed transactions and to avoid triggering the change of control tax provisions that would result in the loss of Presley's net operating loss carryforwards for tax purposes. William Lyon Homes is required to notify the 45 48 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Special Committee regarding the details of any such discussions and negotiations. William Lyon Homes may not enter into any agreement with any Series B Holder prior to receiving the written approval from the Special Committee or Presley's Board of Directors. In connection with these events, the Company has incurred costs of approximately $1,286,000 for the year ended December 31, 1998 which are reflected in the Consolidated Statement of Operations as financial advisory expenses. NOTE 3 -- 1994 CAPITAL RESTRUCTURING AND QUASI-REORGANIZATION On March 28, 1994 the Company's Board of Directors approved a Plan for Capital Restructuring, which was approved by the Company's Stockholders at the Annual Meeting of Stockholders held on May 20, 1994. In accordance with the Plan for Capital Restructuring, on March 29, 1994 the Company executed a definitive agreement with its lenders to restructure the Company's $340,000,000 revolving line of credit. The Plan was approved at the Company's Annual Meeting held on May 20, 1994 and on that date the lender group under the Company's Revolving Debt Facility (see Note 7) converted $95,000,000 of outstanding debt under the Revolving Facility to equity through the issuance of 43,166,667 shares of a new series of common stock representing initially 70% of the outstanding shares of all series of common stock of the Company. As provided in the agreement with its lenders, when the Company completed its Senior Notes Offering of $200,000,000 on June 29, 1994, as described below, the lending group returned to the Company a total of 8,809,524 shares of the new series of common stock, reducing their aggregate equity interest in the Company to 65% from 70%. In order to implement the Plan for Capital Restructuring, the Company's Certificate of Incorporation was amended to redesignate existing common stock as Series A Common Stock (the "Series A Common"), to establish a second series of common stock which was issued to the lender group (the "Series B Common"), and to increase the number of directors of the Company to nine, of which six are elected by holders of outstanding shares of Series A Common, and the remaining three are elected by the holders of outstanding shares of Series B Common. Concurrent with the conversion of debt to equity, under the Plan for Capital Restructuring, the Revolving Debt Facility was reduced by $95,000,000 to a total of $245,000,000, comprised of a $150,000,000 term facility (the "Term Facility") and a $95,000,000 working capital facility (the "Working Capital Facility"), each described below (collectively, the "Debt Facilities"). In addition the lender group increased the Working Capital Facility by $20,000,000 to a total of $115,000,000. Revolving credit loans under the Working Capital Facility may be borrowed, repaid and reborrowed from time to time prior to the termination date of the Working Capital Facility. The lender group had therefore provided Debt Facilities totaling $265,000,000 to the Company. The terms of the Working Capital Facility are described more fully in Note 7. As described more fully in Note 7, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Term Facility was repaid in full and the Working Capital Facility was reduced by $43,000,000 from a portion of the proceeds from the issuance of the Senior Notes. The Series B Common ranks pari passu with the Series A Common in any liquidation of the Company. The Company may not declare or pay any dividends on the Series A Common unless equal dividends are declared and paid on the Series B Common. The Series B Common became convertible into Series A Common on a share-for-share basis at the option of the holder from and after May 20, 1997. On January 30, 1998 and June 30, 1998, the Company issued an aggregate 2,677,836 and 14,276,361 shares, respectively, of its Series A Common Stock as a result of the conversion of a like number of shares of its Series B Common Stock. The shares of the Series A Common 46 49 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) issued as a result of the conversion were not required to be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of Section 3(a)(9) of the Securities Act. Foothill Capital Corporation held 14,276,361 shares of Series B Common as managing general partner of Foothill Partners, L.P., a Delaware limited partnership and Foothill Partners II, L.P., a Delaware limited partnership (together, the "Partnerships"). The 14,276,361 shares of Series A Common have been issued in the names of the individual partners of the Partnerships, as the beneficial owners of such shares. A sufficient number of shares of Series A Common were listed with the New York Stock Exchange and reserved for issuance with ChaseMellon Shareholder Services, Inc., the transfer agent for the Company. As part of the Plan for Capital Restructuring, the Company's Board of Directors also approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented the quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with the Plan for Capital Restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting." Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations. The estimation process involved in the determination of the fair value of those assets as to which an adjustment was made is inherently uncertain since it required estimates and assumptions as to future events and conditions. Such future events and conditions include economic and market conditions, the availability and cost of governmental entitlements necessary to develop and build product, the cost of financing to fund development and construction activities, and the availability and cost of labor and materials necessary to develop, build and sell product. Because the amount and timing of the realization of the investments by the Company and its subsidiaries in their respective real estate projects are dependent upon such future uncertain events and conditions, the actual timing and amounts may be materially different from the estimates and assumptions used in determining fair value estimates utilized for purposes of the Plan for Quasi-Reorganization. The quasi-reorganization affects the comparability of operating statements for periods beginning after December 31, 1993 with those for periods beginning on or before December 31, 1993. Moreover, any income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences existing prior to or resulting from the quasi-reorganization, are excluded from the results of operations and credited to additional paid-in capital. 47 50 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effect of the capital restructuring and quasi-reorganization on the consolidated balance sheet as of December 31, 1993 is as follows as of January 1, 1994 (in thousands except number of shares and par value per share):
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. 48 51 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- RECEIVABLES Receivables consist of the following (in thousands):
DECEMBER 31, ---------------- 1998 1997 ------ ------ First trust deed notes secured by real estate sold, interest rates generally ranging from 8.00% to 12.00%........................................... $ 637 $1,165 Other notes receivable............................. 80 147 ------ ------ 717 1,312 Other receivables -- primarily escrow proceeds..... 7,896 7,340 ------ ------ $8,613 $8,652 ====== ======
Notes receivable as of December 31, 1998 mature through 2010 approximately as follows (in thousands): 1999.................................. $ 68 2000.................................. 637 2001.................................. -- 2002.................................. -- 2003.................................. -- Thereafter............................ 12 ---- $717 ====
NOTE 5 -- REAL ESTATE INVENTORIES Real estate inventories consist of the following (in thousands):
DECEMBER 31, 1998 ------------------------------------------------------- COMPLETED LAND AND INVENTORY, CONSTRUCTION INCLUDING COMPLETED REGION IN PROGRESS LOTS HELD FOR SALE MODELS TOTAL ------ ------------ ------------------- ------- -------- Southern California.................... $ 39,739 $10,385 $ 7,979 $ 58,103 San Diego.............................. 26,982 3,978 1,952 32,912 Northern California.................... 34,086 2,702 2,125 38,913 Arizona................................ 17,412 436 271 18,119 New Mexico............................. 6,793 546 1,276 8,615 Nevada................................. 14,869 1,345 1,173 17,387 Other.................................. 453 -- -- 453 -------- ------- ------- -------- $140,334 $19,392 $14,776 $174,502 ======== ======= ======= ========
49 52 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 ------------------------------------------------------- COMPLETED LAND AND INVENTORY, CONSTRUCTION INCLUDING COMPLETED REGION IN PROGRESS LOTS 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 0 18,539 Other.................................. 952 -- -- 952 -------- ------- ------- -------- $215,440 $28,694 $11,338 $255,472 ======== ======= ======= ========
NOTE 6 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES The Company and certain of its subsidiaries are general partners or members in twelve joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned and, accordingly, such joint ventures are not consolidated with the Company's financial statements. The Company's investments in unconsolidated joint ventures are accounted for using the equity method. Condensed combined financial information of these joint ventures as of December 31, 1998 and 1997 is summarized as follows (in thousands): CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1998 1997 -------- ------- ASSETS Cash and cash equivalents................................... $ 304 $ 18 Receivables................................................. 851 293 Real estate inventories..................................... 168,417 32,097 Other assets................................................ 1,034 750 -------- ------- $170,606 $33,158 ======== ======= LIABILITIES AND OWNERS' CAPITAL Accounts payable............................................ $ 6,453 $ 86 Accrued expenses............................................ 2,098 701 Notes payable............................................... 29,024 -- Advances from The Presley Companies and subsidiaries........ 655 127 -------- ------- 38,230 914 -------- ------- Owners' Capital The Presley Companies and subsidiaries.................... 29,807 6,950 Others.................................................... 102,569 25,294 -------- ------- 132,376 32,244 -------- ------- $170,606 $33,158 ======== =======
50 53 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------- 1998 1997 --------- ------- Sales Homes.................................................. $ 41,081 $ -- Operating costs Cost of sales -- homes................................. (32,883) -- Sales and marketing.................................... (1,861) -- -------- ------ Operating income......................................... 6,337 -- Other income, net........................................ 213 -- -------- ------ Net income............................................... $ 6,550 $ -- ======== ====== Allocation to owners The Presley Companies and subsidiaries................. $ 3,499 $ -- Others................................................. 3,051 -- -------- ------ $ 6,550 $ -- ======== ======
In January 1998, one of these joint ventures acquired land from the Company at the Company's approximate book value of $23,200,000 (which also approximated the land's current market value) and assumed the Company's non-recourse note payable of $12,500,000 relating to the purchase of land acquired from the Company. The Company received cash of approximately $5,600,000 and was credited with a capital contribution of approximately $5,100,000 upon the formation of this joint venture. In March 1998, one of these joint ventures acquired land from the Company at the Company's approximate book value of $6,300,000 (which also approximated the land's current market value) and repaid the Company's non-recourse note payable of $4,515,000 related to the purchase of this property. The Company received cash of approximately $1,260,000 and was credited with a capital contribution of approximately $525,000 upon the formation of this joint venture. In May 1998, the Company contributed land to one of these joint ventures at the Company's approximate book value of $29,381,000 (which also approximated the project's current market value). The Company received cash of approximately $25,431,000 and was credited with a capital contribution of approximately $3,950,000 upon the formation of this joint venture. The majority of these projects are currently in the initial development stages and, based upon current estimates, all future development and construction costs will be funded by the Company's venture partners or from the proceeds of non-recourse construction financing obtained by the joint ventures. NOTE 7 -- NOTES PAYABLE AND 12 1/2% SENIOR NOTES Notes payable and 12 1/2% Senior Notes consist of the following (in thousands):
DECEMBER 31, -------------------- 1998 1997 -------- -------- Notes payable: Working Capital Facility............................. $ 44,000 $ 43,000 Revolving line of credit -- consolidated joint venture........................................... 5,657 9,440 Purchase money notes payable -- land acquisitions.... 5,736 22,495 -------- -------- 55,393 74,935 12 1/2% Senior Notes due 2001.......................... 140,000 180,000 -------- -------- $195,393 $254,935 ======== ========
51 54 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Interest relating to the above debt consists of the following (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Interest incurred.................. $(31,475) $(32,970) $(31,571) Interest capitalized............... 22,261 25,158 29,315 -------- -------- -------- Interest expense................... $ (9,214) $ (7,812) $ (2,256) ======== ======== ========
Senior Notes In accordance with the bond indenture agreement governing the Company's Senior Notes which are due in 2001, if the Company's Consolidated Tangible Net Worth is less than $60,000,000 for two consecutive fiscal quarters, the Company is required to offer to purchase $20,000,000 in principal amount of the Senior Notes. Because the Company's Consolidated Tangible Net Worth has been less than $60,000,000 beginning with the quarter ended June 30, 1997, the Company would, effective on December 4, 1997, June 4, 1998 and December 4, 1998, have been required to make offers to purchase $20,000,000 of the Senior Notes at par plus accrued interest, less the face amount of Senior Notes acquired by the Company after September 30, 1997, March 31, 1998 and September 30, 1998, respectively. The Company acquired Senior Notes with a face amount of $20,000,000 after September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and prior to June 4, 1998, and again after September 30, 1998 and prior to December 4, 1998, and therefore was not required to make said offers. As a result of these transactions, the Company recognized as an extraordinary item a net gain from retirement of debt totaling $2,741,000 during the year ended December 31, 1998, after giving effect to income taxes and amortization of related loan costs. Each six months thereafter, until such time as the Company's Consolidated Tangible Net Worth is $60,000,000 or more at the end of a fiscal quarter, the Company will be required to make similar offers to purchase $20,000,000 of Senior Notes. At December 31, 1998, the Company's Consolidated Tangible Net Worth was $2,443,000. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of the holders of the Senior Notes with respect to modifying this repurchase provision of the bond indenture agreement. To date, no agreement has been reached to modify this repurchase provision. Any such change in the terms or conditions of the bond indenture agreement requires the affirmative vote of at least a majority in principal amount of the Senior Notes outstanding. No assurances can be given that any such change will be made. Because of the Company's obligation to offer to purchase $20,000,000 principal amount of the Senior Notes each six months so long as the Company's Consolidated Tangible Net Worth is less than $60,000,000, the Company is restricted in its ability to acquire, hold and develop real estate projects. The Company changed its operating strategy during 1997 to finance certain projects by forming joint ventures with venture partners that would provide a substantial portion of the capital necessary to develop these projects. The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a Delaware corporation ("Delaware Presley"), are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly owned subsidiary of Delaware Presley. However, Presley Homes has granted liens on substantially all of its assets as security for its obligations under the Working Capital Facility and other loans. Because the Presley Homes guarantee is not secured, holders of the Senior Notes are effectively junior to borrowings under the Working Capital Facility with respect to such assets. Delaware Presley and its consolidated subsidiaries are referred to collectively herein as "Presley" or the "Company." Interest on the Senior Notes is payable on January 1 and July 1 of each year, commencing January 1, 1995. 52 55 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes were not redeemable by Presley prior to July 1, 1998. Thereafter, the Senior Notes are redeemable at the option of Delaware Presley, in whole or in part, at the redemption prices set forth in the Indenture. The Senior Notes are senior obligations of Presley and rank pari passu in right of payment to all existing and future unsecured indebtedness of Presley, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the Senior Notes. Upon certain changes of control as described in the Indenture, Presley must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. The letter of intent with William Lyon Homes described in Note 2 contemplates that the transaction would be structured so as to not constitute a change of control as described in the Indenture. The Indenture governing the Senior Notes restricts, among other things: (i) the payment of dividends on and redemptions of capital stock by Presley, (ii) the incurrence of indebtedness by Presley or the issuance of preferred stock by Delaware Presley's subsidiaries, (iii) the creation of certain liens, (iv) Delaware Presley's ability to consolidate or merge with or into, or to transfer all or substantially all of its assets to, another person, and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions. As of December 31, 1998, the 12 1/2% Senior Notes with a face value of $140,000,000 have a fair value of approximately $120,000,000 to $122,000,000, based on quotes from industry sources. 53 56 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Supplemental consolidating financial information of the Company, specifically including information for Presley Homes, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of Presley Homes are not provided, as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of assets held and the operations of the combined groups. CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------- DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- ------------- ------------- ----------- ------------ ASSETS Cash and cash equivalents.......... $ -- $ 22,605 $ 1,350 $ -- $ 23,955 Receivables........................ -- 7,157 1,456 -- 8,613 Real estate inventories............ -- 161,667 12,835 -- 174,502 Investments in and advances to unconsolidated joint ventures.... -- 3,225 27,237 -- 30,462 Property and equipment, net........ -- 2,614 298 -- 2,912 Deferred loan costs................ 1,643 1,708 30 -- 3,381 Other assets....................... -- 2,440 139 -- 2,579 Investments in subsidiaries........ 4,369 31,553 -- (35,922) -- Intercompany receivables........... 143,740 3,928 -- (147,668) -- -------- -------- ------- --------- -------- $149,752 $236,897 $43,345 $(183,590) $246,404 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................... $ -- $ 15,867 $ 1,497 $ -- $ 17,364 Accrued expenses................... -- 25,965 1,858 -- 27,823 Notes payable...................... -- 49,736 5,657 -- 55,393 12 1/2 Senior Notes................ 140,000 -- -- -- 140,000 Intercompany payables.............. 3,928 143,740 -- (147,668) -- -------- -------- ------- --------- -------- Total liabilities............. 143,928 235,308 9,012 (147,668) 240,580 STOCKHOLDERS' EQUITY............... 5,824 1,589 34,333 (35,922) 5,824 -------- -------- ------- --------- -------- $149,752 $236,897 $43,345 $(183,590) $246,404 ======== ======== ======= ========= ========
54 57 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS)
UNCONSOLIDATED -------------------------------------- DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- -------- ------------- ----------- ------------ ASSETS Cash and cash equivalents........... $ -- $ 4,377 $ 192 $ -- $ 4,569 Receivables......................... -- 6,905 1,747 -- 8,652 Real estate inventories............. -- 235,583 19,889 -- 255,472 Investments in and advances to unconsolidated joint ventures..... -- 1,165 5,912 -- 7,077 Property and equipment, net......... -- 3,407 206 -- 3,613 Deferred loan costs................. 2,958 290 18 -- 3,266 Other assets........................ -- 2,439 156 -- 2,595 Investments in subsidiaries......... (5,681) 16,398 -- (10,717) -- Intercompany receivables............ 180,000 2,958 -- (182,958) -- -------- -------- ------- --------- -------- $177,277 $273,522 $28,120 $(193,675) $285,244 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable.................... $ -- $ 11,870 $ 984 $ -- $ 12,854 Accrued expenses.................... -- 22,669 467 -- 23,136 Notes payable....................... -- 65,495 9,440 -- 74,935 12 1/2% Senior Notes................ 180,000 -- -- -- 180,000 Intercompany payables............... 2,958 180,000 -- (182,958) -- -------- -------- ------- --------- -------- Total liabilities.............. 182,958 280,034 10,891 (182,958) 290,925 STOCKHOLDERS' EQUITY (DEFICIT)...... (5,681) (6,512) 17,229 (10,717) (5,681) -------- -------- ------- --------- -------- $177,277 $273,522 $28,120 $(193,675) $285,244 ======== ======== ======= ========= ========
55 58 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- --------- ------------- ----------- ------------ Sales................................ $ -- $ 261,394 $106,888 $ -- $368,282 ------- --------- -------- -------- -------- Operating costs Cost of sales...................... -- (228,629) (90,144) -- (318,773) Sales and marketing................ -- (16,275) (5,188) -- (21,463) General and administrative......... -- (17,587) 1,622 -- (15,965) ------- --------- -------- -------- -------- -- (262,491) (93,710) -- (356,201) ------- --------- -------- -------- -------- Income from unconsolidated joint ventures........................... -- 6 3,493 -- 3,499 ------- --------- -------- -------- -------- Income from subsidiaries............. 8,400 17,955 -- (26,355) -- ------- --------- -------- -------- -------- Operating income..................... 8,400 16,864 16,671 (26,355) 15,580 Interest expense, net of amounts capitalized........................ -- (7,784) (1,430) -- (9,214) Financial advisory expenses.......... (1,286) -- -- -- (1,286) Other income (expense), net.......... -- (392) 3,617 -- 3,225 ------- --------- -------- -------- -------- Income before income taxes and extraordinary item................. 7,114 8,688 18,858 (26,355) 8,305 Provision for income taxes........... -- (1,191) -- -- (1,191) ------- --------- -------- -------- -------- Income before extraordinary item..... 7,114 7,497 18,858 (26,355) 7,114 Extraordinary item -- gain from retirement of debt net of applicable income taxes............ 2,741 -- -- -- 2,741 ------- --------- -------- -------- -------- Net income........................... $ 9,855 $ 7,497 $ 18,858 $(26,355) $ 9,855 ======= ========= ======== ======== ========
56 59 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- --------- ------------- ----------- ------------ Sales.............................. $ -- $ 270,284 $ 59,658 $ -- $ 329,942 -------- --------- -------- ------- --------- Operating costs Cost of sales.................... -- (248,655) (53,546) -- (302,201) Impairment loss on real estate assets........................ -- (74,000) -- -- (74,000) Sales and marketing.............. -- (18,492) (3,787) -- (22,279) General and administrative....... -- (15,777) (219) -- (15,996) -------- --------- -------- ------- --------- -- (356,924) (57,552) -- (414,476) -------- --------- -------- ------- --------- Income (loss) from subsidiaries.... (89,894) 3,730 -- 86,164 -- -------- --------- -------- ------- --------- Operating income (loss)............ (89,894) (82,910) 2,106 86,164 (84,534) Interest expense, net of amounts capitalized...................... -- (7,677) (135) -- (7,812) Other income (expense), net........ -- 91 2,361 -- 2,452 -------- --------- -------- ------- --------- Net income (loss).................. $(89,894) $ (90,496) $ 4,332 $86,164 $ (89,894) ======== ========= ======== ======= =========
57 60 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------- DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- ------------- ------------- ----------- ------------ Sales............................... $ -- $ 309,599 $9,398 $ -- $ 318,997 ---- --------- ------ ----- --------- Operating costs Cost of sales..................... -- (274,144) (7,835) -- (281,979) Sales and marketing............... -- (22,221) (656) -- (22,877) General and administrative........ -- (13,856) (122) -- (13,978) ---- --------- ------ ----- --------- -- (310,221) (8,613) -- (318,834) ---- --------- ------ ----- --------- Income from subsidiaries............ 152 745 -- (897) -- ---- --------- ------ ----- --------- Operating income.................... 152 123 785 (897) 163 Interest expense, net of amounts capitalized....................... -- (2,203) (53) -- (2,256) Other income (expense), net......... -- 1,571 674 2,245 ---- --------- ------ ----- --------- Net income (loss)................... $152 $ (509) $1,406 $(897) $ 152 ==== ========= ====== ===== =========
58 61 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED -------------------------------------- DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- -------- ------------- ----------- ------------ Cash flows from operating activities: Net income.................................. $ 9,855 $ 7,497 $18,858 $(26,355) $ 9,855 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............ -- 988 71 -- 1,059 Equity in earnings of joint ventures..... -- (6) (3,493) -- (3,499) Equity in earnings of subsidiaries....... (8,400) (17,955) -- 26,355 -- Extraordinary gain on repurchase of Senior Notes........................... (3,200) -- -- -- (3,200) Provision for income taxes............... -- 1,650 -- -- 1,650 Net changes in operating assets and liabilities: Other receivables...................... -- (846) 290 -- (556) Intercompany receivables/payables...... 970 (970) -- -- -- Real estate inventories................ -- 34,218 7,054 -- 41,272 Deferred loan costs.................... 775 (1,418) (12) -- (655) Other assets........................... -- (1) 18 -- 17 Accounts payable....................... -- 3,997 513 -- 4,510 Accrued expenses....................... -- 3,296 1,391 -- 4,687 -------- -------- ------- -------- --------- Net cash provided by operating activities..... -- 30,450 24,690 -- 55,140 -------- -------- ------- -------- --------- Cash flows from investing activities: Investment in unconsolidated joint ventures................................. -- (2,054) (17,832) -- (19,886) Proceeds from contribution of land to joint venture.................................. -- 25,431 -- -- 25,431 Issuance of/payments on notes receivable.... -- 594 -- -- 594 Purchases of property and equipment......... -- (195) (163) -- (358) Investment in subsidiaries.................. -- 2,800 -- (2,800) -- Advances to affiliates...................... 36,260 -- -- (36,260) -- -------- -------- ------- -------- --------- Net cash provided by (used in) investing activities.................................. 36,260 26,576 (17,995) (39,060) 5,781 -------- -------- ------- -------- --------- Cash flows from financing activities: Proceeds from borrowings on notes payable... -- 95,873 37,080 -- 132,953 Principal payments on notes payable......... -- (97,365) (40,863) -- (138,228) Repurchase of 12 1/2% Senior Notes.......... (36,260) -- -- -- (36,260) Distributions to/contributions from shareholders............................. -- (1,046) (1,754) 2,800 -- Advances from affiliates.................... -- (36,260) -- 36,260 -- -------- -------- ------- -------- --------- Net cash used in financing activities......... (36,260) (38,798) (5,537) 39,060 (41,535) -------- -------- ------- -------- --------- Net increase in cash and cash equivalents..... -- 18,228 1,158 -- 19,386 Cash and cash equivalents at beginning of period...................................... -- 4,377 192 -- 4,569 -------- -------- ------- -------- --------- Cash and cash equivalents at end of period.... $ -- $ 22,605 $ 1,350 $ -- $ 23,955 ======== ======== ======= ======== =========
59 62 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
UNCONSOLIDATED -------------------------------------- DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- -------- ------------- ----------- ------------ Cash flows from operating activities: Net income (loss)........................ $(89,894) $(90,496) $ 4,332 $ 86,164 $(89,894) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization......... -- 844 63 -- 907 Impairment loss on real estate assets.............................. -- 74,000 -- -- 74,000 Equity in (earnings) loss of subsidiaries........................ 89,894 (3,730) -- (86,164) -- Net changes in operating assets and liabilities: Other receivables................... -- (2,975) (1,298) -- (4,273) Intercompany receivables/payables... (1,301) 1,301 -- -- -- Real estate inventories............. -- 4,719 (5,399) -- (680) Deferred loan costs................. 1,301 (202) (18) -- 1,081 Other assets........................ -- 6,405 65 -- 6,470 Accounts payable.................... -- (6,019) 445 -- (5,574) Accrued expenses.................... -- 3,812 7 -- 3,819 -------- -------- -------- -------- -------- Net cash used in operating activities...... -- (12,341) (1,803) -- (14,144) -------- -------- -------- -------- -------- Cash flows from investing activities: Investment in unconsolidated joint ventures.............................. -- (1,165) (5,912) -- (7,077) Issuance of/payments on notes receivable............................ -- (154) -- -- (154) Purchases of property and equipment...... -- (1,447) (26) -- (1,473) Investment in subsidiaries............... -- 2,354 -- (2,354) -- Advances to affiliates................... 10,000 -- -- (10,000) -- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities............................... 10,000 (412) (5,938) (12,354) (8,704) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from borrowings on notes payable............................... -- 133,026 38,938 -- 171,964 Principal payments on notes payable...... -- (109,599) (29,498) -- (139,097) Repurchase/sale of 12 1/2% Senior Notes................................. (10,000) -- -- -- (10,000) Distributions to/contributions from shareholders.......................... -- 626 (2,980) 2,354 -- Advances from affiliates................. -- (10,000) -- 10,000 -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities............................... (10,000) 14,053 6,460 12,354 22,867 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.............................. -- 1,300 (1,281) -- 19 Cash and cash equivalents at beginning of period................................... -- 3,077 1,473 -- 4,550 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period................................... $ -- $ 4,377 $ 192 $ -- $ 4,569 ======== ======== ======== ======== ========
60 63 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- --------- ------------- ----------- ------------ Cash flows from operating activities: Net income (loss)................... $ 152 $ (509) $ 1,406 $ (897) $ 152 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.... -- 585 -- -- 585 Equity in earnings of subsidiaries................... (152) (745) -- 897 -- Provision for uncollectible notes receivable..................... -- 145 -- -- 145 Net changes in operating assets and liabilities: Other receivables.............. -- (564) (214) -- (778) Intercompany receivable/payable.......... (945) 945 -- -- -- Real estate inventories........ -- 11,385 24 -- 11,409 Deferred loan costs............ 945 74 -- -- 1,019 Other assets................... -- (3,343) (43) -- (3,386) Accounts payable............... -- 8,393 (516) -- 7,877 Accrued expenses............... -- (1,061) (376) -- (1,437) ----- --------- ------- ------- --------- Net cash provided by operating activities.......................... -- 15,305 281 -- 15,586 ----- --------- ------- ------- --------- Cash flows from investing activities: Issuance of/payments on notes receivable....................... -- 1,712 -- -- 1,712 Purchases of property and equipment........................ -- (811) (244) -- (1,055) Investment in subsidiaries.......... -- (2,957) -- 2,957 -- ----- --------- ------- ------- --------- Net cash provided by (used in) investing activities................ -- (2,056) (244) 2,957 657 ----- --------- ------- ------- --------- Cash flows from financing activities: Proceeds from borrowings on notes payable.......................... -- 101,741 6,150 -- 107,891 Principal payments on notes payable.......................... -- (115,197) (8,604) -- (123,801) Distributions to/contributions from shareholders..................... -- 353 2,604 (2,957) -- ----- --------- ------- ------- --------- Net cash provided by (used in) financing activities................ -- (13,103) 150 (2,957) (15,910) ----- --------- ------- ------- --------- Net increase in cash and cash equivalents......................... -- 146 187 -- 333 Cash and cash equivalents at beginning of period........................... -- 2,931 1,286 -- 4,217 ----- --------- ------- ------- --------- Cash and cash equivalents at end of period.............................. $ -- $ 3,077 $ 1,473 $ -- $ 4,550 ===== ========= ======= ======= =========
61 64 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Working Capital Facility On July 6, 1998, the Company completed an agreement with the Agent of its existing lender group under its Working Capital Facility to (1) extend this loan facility to May 20, 2001, (2) increase the loan commitment to $100,000,000 and (3) decrease the fees and costs compared to the prior revolving facility. The collateral for the loans provided by the Working Capital Facility continues to include substantially all real estate and other assets of the Company (excluding assets of partnerships and the portion of the partnership interests in the Carmel Mountain Ranch partnership which are currently pledged to other lenders). The borrowing base is calculated based on specified percentages of book values of real estate assets. The borrowing base at December 31, 1998 was approximately $116,000,000; however, the maximum loan under the Working Capital Facility is limited to $100,000,000. The principal outstanding under the Working Capital Facility at December 31, 1998 was $44,000,000. In addition, $2,000,000 of available loan capacity is restricted for letters of credit outstanding under the Working Capital Facility. Pursuant to the terms of the Working Capital Facility, outstanding advances bear interest at the "reference rate" of Chase Manhattan Bank plus 2%. An alternate option provides for interest based on a specified overseas base rate plus 4.44%, but not less than 8.0%. In addition, the Company pays a monthly fee of 0.25% on the average daily unused portion of the loan facility. Upon completion of the new Working Capital Facility agreement, the Company paid a one-time, non-refundable Facility Fee of $2,000,000, as well as a yearly non-refundable Administrative Fee of $100,000. The Working Capital Facility requires certain minimum cash flow and pre-tax and pre-interest tests. The Working Capital Facility also provides for negative covenants which, among other things, place limitations on the payment of cash dividends, merger transactions, transactions with affiliates, the incurrence of additional debt and the acquisition of new land as described in the following paragraph. Under the terms of the Working Capital Facility, the Company may acquire new improved land for development of housing units of no more than 300 lots in any one location without approval from the lenders if certain conditions are satisfied. The Company may, however, acquire any new raw land or improved land provided the Company has obtained the prior written approval of lenders holding two-thirds of the obligations under the Working Capital Facility. The Working Capital Facility requires that mandatory prepayments be made to reduce the outstanding balance of loans to the extent of all funds in excess of $20,000,000 in the principal operating accounts of the Company. Revolving Line of Credit -- Wholly-owned Joint Venture Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel Mountain Ranch master-planned community, is a California general partnership and is 100% owned by the Company. Effective in March 1995, the development and construction of CMR, a consolidated joint venture, is financed through a revolving line of credit. The revolving line of credit consists of several components relating to production units, models and residential lots. At December 31, 1998, the revolving line of credit had an outstanding balance of $5,657,000. Availability under the line is subject to a number of limitations, but in any case cannot exceed $10,000,000. Interest on the outstanding balance is at prime plus 1.00%. In August 1998, the maturity date of this line was extended to April 16, 1999. At the option of the borrower, the maturity date of this line may be extended from April 16, 1999 to August 16, 1999, subject to certain specified terms and conditions. Purchase Money Notes Payable -- Land Acquisitions At December 31, 1998, the Company had various notes payable outstanding related to land acquisitions for which seller financing was provided in the amount of $5,736,000. 62 65 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The prime rate averaged 8.35%, 8.46% and 8.27% for 1998, 1997 and 1996, respectively, and was 7.75% and 8.50% at December 31, 1998 and 1997, respectively. NOTE 8 -- STOCK OPTIONS AND INCENTIVE COMPENSATION PLANS Stock Option Plan Effective May 20, 1994, Delaware Presley amended the 1991 Stock Option Plan (the "Plan") to increase the number of shares authorized for options to be granted to 2,642,000 shares of Series A Common Stock. Under the Plan, options may be granted from time to time to key employees, officers, directors, consultants and advisors of the Company. The Plan is administered by the Stock Option Committee of the Board of Directors (the "Committee"). The Committee is generally empowered to interpret the Plan, prescribe rules and regulations relating thereto, determine the terms of the option agreements, amend them with the consent of the optionee, determine the employees to whom options are to be granted, and determine the number of shares subject to each option and the exercise price thereof. The per share exercise price for options will not be less than 100% of the fair market value of a share of the Series A Common Stock on the date the option is granted. The options will be exercisable for a term determined by the Committee, not to exceed ten years from the date of grant or upon a change of control. On May 20, 1994, Delaware Presley issued options to purchase a total of 2,035,000 shares of Series A Common Stock at $2.875 per share. Subsequently, options to purchase 440,000 shares were canceled due to employee terminations, resulting in 1,595,000 options outstanding at December 31, 1998. The options outstanding vested at various times and became fully vested on May 20, 1997 and expire five years from the date of vesting. In connection with a new incentive compensation plan (as described below), 725,000 stock options currently outstanding were repriced effective January 1, 1997 from $2.875 to $1.00. Pursuant to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation", issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB Opinion 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been recognized in the financial statements related to stock options awarded to officers, directors and employees under the Stock Option Plan. As required by Statement No. 123, for disclosure purposes only, the Company has measured the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The Company estimated the fair value of the stock options at date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.25%; a dividend yield of 0.00%, a volatility factor for the market price of the Company's common stock of 0.514; and a weighted average expected life of four years for the stock options. Incentive Compensation Plan Effective on January 1, 1997, the Company's Board of Directors approved a new incentive compensation plan for all of the Company's full-time, salaried employees, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), Executives, Managers, Field Construction Supervisors, and certain other employees. Under the terms of this new plan, the CEO and CFO are eligible to receive bonuses at the discretion of the Compensation Committee of the Board; in addition, the stock options currently outstanding and held by the CEO and CFO (totaling 725,000 options) were repriced from $2.875 to $1.00. In addition, the 1998 Executive Bonus Plan stipulates annual setting of individual bonus targets, expressed as a percent of each executive's salary, with awards based on performance against goals pertaining to each participant's operating area. 63 66 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) All awards are prorated downward if the sum of all calculated awards for the entire Company exceeds 20% of the Company's consolidated pre-tax income before bonuses. Awards are paid out over three years, with 50% paid following the determination of bonus awards, 25% paid one year later and 25% paid two years later. The deferred amounts will be forfeited in the event of termination for any reason except retirement, death or disability. NOTE 9 -- INCOME TAXES The following summarizes the provision for income taxes (in thousands):
YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 -------- ---- ---- Current Federal................................................ $ -- $-- $-- State.................................................. (7) (6) (4) ------- --- --- (7) (6) (4) ------- --- --- Deferred Federal................................................ (1,191) -- -- State.................................................. 7 6 4 ------- --- --- (1,184) 6 4 ------- --- --- Provision for income taxes before extraordinary item..... (1,191) -- -- Provision for income taxes on extraordinary item......... (459) -- -- ------- --- --- $(1,650) $-- $-- ======= === ===
Income taxes differ from the amounts computed by applying the applicable Federal statutory rates due to the following (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 -------- -------- ---- (Provision) credit for Federal income taxes at the statutory rate....................................... $ (2,907) $ 31,463 $(53) (Provision) credit for state income taxes, net of Federal income tax benefits.......................... (661) 2,583 (20) Extraordinary item -- gain from retirement of debt..... (1,120) -- -- Valuation allowance for deferred tax asset............. 3,038 (34,046) Other.................................................. -- -- 73 -------- -------- ---- $ (1,650) $ -- $ -- ======== ======== ====
64 67 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, -------------------- 1998 1997 -------- -------- Deferred tax assets Reserves deducted for financial reporting purposes not allowable for tax purposes............................. $ 27,785 $ 33,720 Compensation deductible for tax purposes when paid.............................................. 1,231 326 Net operating loss and alternative minimum tax credit carryovers............................................. 49,930 64,184 Valuation allowance....................................... (96,331) (99,369) State income tax provisions deductible when paid for Federal tax purposes................................... 15,315 17,281 Effect of book/tax differences for joint ventures......... 5,221 945 Other..................................................... (280) 67 -------- -------- 2,871 17,154 -------- -------- Deferred tax liabilities Interest capitalized for financial reporting purposes and deducted currently for tax purposes.................... (2,871) (17,154) -------- -------- (2,871) (17,154) -------- -------- $ -- $ -- ======== ========
As discussed in Note 3, the Company implemented a quasi-reorganization effective January 1, 1994. Income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences existing prior to the quasi-reorganization, are excluded from results of operations and credited to additional paid-in capital. Income tax benefits of $1,650,000 related to temporary differences resulting from the quasi-reorganization have been excluded from the results of operations and credited to additional paid-in capital for the year ended December 31, 1998. At December 31, 1998 the Company has net operating loss carryforwards for Federal tax purposes (both pre and post quasi-reorganization) of approximately $117,875,000, of which $5,066,000 expires in 2007, $17,542,000 expires in 2008, $27,378,000 expires in 2009, $35,840,000 expires in 2010, $13,668,000 expires in 2011, $16,402,000 expires in 2012 and $1,979,000 expires in 2013. Due to the transactions discussed in Note 3, the future benefits associated with the utilization of the net operating loss carryforwards may be substantially limited. NOTE 10 -- GAIN FROM RETIREMENT OF DEBT In June 1998, the Company purchased $20,000,000 principal amount of its outstanding Senior Notes at a cost of $18,825,000. The net gain resulting from the purchase, after giving effect to income taxes and amortization of related deferred loan costs, was $522,000. In October 1998, the Company purchased $20,000,000 principal amount of its outstanding Senior Notes at a cost of $17,435,000. The net gain resulting from the purchase, after giving effect to income taxes and amortization of related deferred loan costs, was $2,219,000. NOTE 11 -- RELATED PARTY TRANSACTIONS Sales of lots, land and other for the year ended December 31, 1998 include a bulk lot sale of $6,996,000 to William Lyon Homes, Inc., a majority-owned corporation of William Lyon, Chairman of the Board and 65 68 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stockholder of the Company. The Company received the full purchase price in cash and recognized a gain of $265,000 on the sale. NOTE 12 -- COMMITMENTS AND CONTINGENCIES The Company's commitments and contingent liabilities include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Company's consolidated financial position. The Company is a defendant in various lawsuits related to its normal business activities. In the opinion of management, disposition of the various lawsuits will have no material effect on the consolidated financial statements of the Company. In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, "Accounting for Special Assessment and Tax Increment Financing Entities" issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, and recorded as liabilities in the Company's consolidated balance sheet, if the amounts are fixed and determinable. NOTE 13 -- UNAUDITED SUMMARIZED QUARTERLY FINANCIAL INFORMATION Summarized quarterly financial information for the years ended December 31, 1998, 1997 and 1996 is as follows (in thousands except per common share amounts):
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 --------- --------- ------------- ------------ Sales........................................ $ 66,478 $ 80,530 $ 89,509 $ 131,765 Costs and expenses, net...................... (69,676) (80,301) (86,007) (123,993) -------- --------- -------- --------- Income (loss) before income taxes and extraordinary item......................... (3,198) 229 3,502 7,772 Credit (provision) for income taxes.......... -- 363 (203) (1,351) -------- --------- -------- --------- Income (loss) before extraordinary item...... (3,198) 592 3,299 6,421 Extraordinary item -- gain from retirement of debt, net of applicable income taxes....... -- 522 -- 2,219 -------- --------- -------- --------- Net income (loss)............................ $ (3,198) $ 1,114 $ 3,299 $ 8,640 ======== ========= ======== ========= Basic and diluted earnings per common share-- Note 1 Before extraordinary item.................. $ (0.06) $ 0.01 $ 0.06 $ 0.13 Extraordinary item......................... -- 0.01 -- $ 0.04 -------- --------- -------- --------- After extraordinary item................... $ (0.06) $ 0.02 $ 0.06 $ 0.17 ======== ========= ======== =========
66 69 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 --------- --------- ------------- ------------ Sales........................................ $ 67,795 $ 97,566 $ 68,349 $ 96,232 Costs and expenses, net...................... (71,369) (173,020) (71,549) (103,898) -------- --------- -------- --------- Loss before income taxes..................... (3,574) (75,454) (3,200) (7,666) Credit (provision) for income taxes.......... -- -- -- -- -------- --------- -------- --------- Net loss(1).................................. $ (3,574) $ (75,454) $ (3,200) $ (7,666) ======== ========= ======== ========= Basic and diluted earnings per common share-- Note 1..................................... $ (0.07) $ (1.45) $ (0.06) $ (0.15) ======== ========= ======== =========
THREE MONTHS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 --------- -------- ------------- ------------ Sales.......................................... $ 61,071 $ 82,219 $ 79,550 $ 96,157 Costs and expenses, net........................ (63,392) (81,852) (78,867) (94,734) -------- -------- -------- -------- Income (loss) before income taxes.............. (2,321) 367 683 1,423 Credit (provision) for income taxes............ -- -- -- -- -------- -------- -------- -------- Net income (loss).............................. $ (2,321) $ 367 $ 683 $ 1,423 ======== ======== ======== ======== Basic and diluted earnings per common share -- Note 1.............................. $ (0.04) $ 0.01 $ 0.01 $ 0.03 ======== ======== ======== ========
- --------------- (1) Results for the three months ended June 30, 1997 were adversely affected by a $74,000,000 reduction of certain real estate assets to their estimated net realizable value as described in Note 1. 67 70 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders The Presley Companies We have audited the accompanying combined balance sheet of the Significant Subsidiaries of The Presley Companies, as defined in Note 1, as of December 31, 1998, and the related combined statements of operations, members' capital and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Significant Subsidiaries of The Presley Companies at December 31, 1998, and the combined results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Newport Beach, California February 16, 1999 68 71 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- (UNAUDITED) Cash........................................................ $ 374,000 $ 18,000 Accounts receivable......................................... 784,000 750,000 Real estate inventories (Note 2)............................ 97,595,000 22,869,000 ----------- ----------- $98,753,000 $23,637,000 =========== =========== LIABILITIES AND MEMBERS' CAPITAL Accounts payable and accrued liabilities.................... $ 5,786,000 $ 709,000 Amounts due to members (Note 4)............................. 410,000 73,000 Note payable (Note 3)....................................... 9,375,000 -- ----------- ----------- 15,571,000 782,000 Commitments and contingencies (Note 5) Members' capital............................................ 83,182,000 22,855,000 ----------- ----------- $98,753,000 $23,637,000 =========== ===========
See accompanying notes. 69 72 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- (UNAUDITED) REVENUES Sales of homes.............................................. $26,725,000 $ -- Interest and other income................................... 127,000 -- ----------- ------ 26,852,000 -- ----------- ------ COSTS AND EXPENSES Cost of homes sold.......................................... 19,801,000 -- Sales, marketing and administrative expenses................ 1,091,000 -- ----------- ------ 20,892,000 -- ----------- ------ NET INCOME.................................................. $ 5,960,000 $ -- =========== ======
See accompanying notes. 70 73 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES COMBINED STATEMENTS OF MEMBERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
COMMON TOTAL PRESLEY UNAFFILIATED MEMBERS' MEMBER MEMBER CAPITAL ------------- ------------ ------------ Initial contributions (unaudited)................. $ 5,912,000 $ 16,943,000 $ 22,855,000 ----------- ------------ ------------ BALANCE -- December 31, 1997 (unaudited).......... 5,912,000 16,943,000 22,855,000 Contributions..................................... 10,396,000 70,099,000 80,495,000 Distributions..................................... (506,000) (25,622,000) (26,128,000) Net income........................................ 3,276,000 2,684,000 5,960,000 ----------- ------------ ------------ BALANCE -- December 31, 1998...................... $19,078,000 $ 64,104,000 $ 83,182,000 =========== ============ ============
See accompanying notes. 71 74 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 5,960,000 $ -- Adjustments to reconcile net income to net cash used in operating activities Cost of homes sold..................................... 19,801,000 -- Increase in accounts receivable........................ (34,000) (750,000) Additions to real estate inventories................... (94,527,000) (22,869,000) Increase in accounts payable and accrued liabilities... 5,076,000 709,000 Increase in amounts due to members..................... 338,000 73,000 ------------ ------------ Net cash used in operating activities....................... (63,386,000) (22,837,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Contributions from members.................................. 80,495,000 22,855,000 Distributions to members.................................... (26,128,000) -- Proceeds from notes payable................................. 9,375,000 -- ------------ ------------ Net cash provided by financing activities................... 63,742,000 22,855,000 ------------ ------------ NET INCREASE IN CASH........................................ 356,000 18,000 CASH -- beginning of year................................... 18,000 -- ------------ ------------ CASH -- end of year......................................... $ 374,000 $ 18,000 ============ ============
See accompanying notes. 72 75 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The combined financial statements are presented in accordance with Rule 3-09 of SEC Regulation S-X ("Rule 3-09") and represent the combined financial position, results of operations and cash flows of the subsidiaries of The Presley Companies ("Presley") which have a common unaffiliated member and are deemed "significant" when aggregated for purposes of Rule 3-09 (collectively, the "Significant Subsidiaries of The Presley Companies") as of December 31, 1998. The significant subsidiaries of The Presley Companies were not deemed "significant" when aggregated for purposes of Rule 3-09 as of December 31, 1997, and as such, unaudited combined financial statements are presented as of and for the year ended December 31, 1997. Organization The Significant Subsidiaries of The Presley Companies are all Delaware limited liability companies consisting of second-tier wholly-owned Presley subsidiaries (the "Presley Member") as one member and an unaffiliated common member (the "Unaffiliated Member") as the other member. The Significant Subsidiaries of The Presley Companies were formed for the purpose of acquiring, developing and selling single-family homes in the state of California. Net income per the respective Limited Liability Company Operating Agreements (the "Agreements") are generally allocated first, to the Presley Member, to the extent that net losses charged to the Presley Member exceed the net income allocated to the Presley Member; second, to the Unaffiliated Member to the extent that the amount of net losses charged to the Unaffiliated Member exceeds the net income allocated to the Unaffiliated Member; thereafter, to the members in accordance with the allocation of net income, including preferred returns, anticipated to be generated as reflected in the then approved project pro forma. Net losses are generally allocated first, to the members to the extent that allocations of net income exceed the net losses charged to the members; second, to the Presley Member until and to the extent required to reduce positive balance of its capital account to zero; third, to the Unaffiliated Member in a like amount to that charged against the Presley Member; fourth, to the members in equal shares until the amounts charged against the Unaffiliated Member pursuant to this section have reduced the remaining positive balance of its capital account to zero; thereafter to the Presley Member. The Agreements provide, among other things, that the members shall be entitled to receive a preferred return on unrecovered contributed capital that ranges from prime plus 1.0% to prime plus 4.75%. Preferred returns are included in the allocation of net income reflected in the Significant Subsidiaries of The Presley Companies' approved project pro forma. Cash flow, as defined in the Agreements, is generally distributed first, to the members in the ratio that, in the case of the Unaffiliated Member, the unpaid preferred return on its additional capital contributed and, in the case of the Presley Member, the unpaid preferred return on its base additional capital contributed, bears to the aggregate of the unpaid preferred return on additional capital contributed by the Presley Member, until and to the extent required to reduce the unpaid preferred return on all such additional capital to zero; second, to the members in the ratio that, in the case of the Unaffiliated Member, the additional capital contributed by the Unaffiliated Member and, in the case of the Presley Member, the base additional capital contributed by the Presley Member, bears to the aggregate of the additional capital contributed by the Unaffiliated Member plus the base additional capital contributed by the Presley Member, until and to the extent required to repay to each member such additional capital contributed by such member; third, to the Unaffiliated Member until and to the extent required to reduce the balance of the unpaid preferred return due to the Unaffiliated Member to zero; fourth, to the Unaffiliated Member until and to the extent required to reduce the balance of the Unaffiliated Member's unrecovered capital account to zero; fifth, to the Presley Member until and to the 73 76 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) extent required to reduce the balance of the unpaid preferred return due to the Presley Member to zero; sixth, to the Presley Member until and to the extent required to reduce the balance of the Presley Member's unrecovered capital account (exclusive of additional capital contributions by the Presley Member in excess of the base additional capital contributed by the Presley Member) to zero; seventh, between 40% to 75% to the Unaffiliated Member and between 25% to 60% to the Presley Member until the Unaffiliated Member has received specified returns pursuant to this section; thereafter, except as otherwise provided, between 50% to 80% to the Presley Member and between 20% to 50% to the Unaffiliated Member. In addition, certain Agreements provide low priority distributions to the Presley Member and to the Unaffiliated Member until each have received a specified amount. Use of Estimates The preparation of the Significant Subsidiaries of The Presley Companies' combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 1998 and 1997 and the revenues and expenses for the years then ended. Actual results could materially differ from these estimates in the near term. Real Estate Inventories Real estate inventories are carried at cost. Project costs include direct and indirect land costs, offsite costs and onsite improvement costs, as well as carrying charges (principally interest and property taxes) which are capitalized to real estate inventories while under active development. Selling costs are expensed as incurred. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to individual homes within a phase based upon the relative sales value of the homes. The Significant Subsidiaries of The Presley Companies account for their real estate inventories in accordance with Financial Accounting Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("Statement No. 121"). Statement No. 121 requires impairment losses to be recorded on assets to be held and used by the Significant Subsidiaries of The Presley Companies when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets, excluding future interest, are less than the carrying amount of the assets. Under Statement No. 121, when an asset to be held and used by the Significant Subsidiaries of The Presley Companies is determined to be impaired, the related carrying amount of the asset is adjusted to its estimated fair value. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less costs of disposal. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties; that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Significant Subsidiaries of The Presley Companies' projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Significant Subsidiaries of The Presley Companies may be materially different from the estimated fair values as described herein. Management has evaluated the projects and determined that no indicators of impairment are present as of December 31, 1998 and 1997. 74 77 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Revenue and Profit Recognition A sale is recorded and profit recognized when a sale is consummated, the buyer's initial and continuing investments are adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real Estate." When it is determined that the earnings process is not complete, profit is deferred for recognition in future periods. As of December 31, 1998, there are no deferred profits. Warranty Costs The Significant Subsidiaries of The Presley Companies account for warranty costs under the reserve method. As homes are sold, an estimate of warranty costs is charged to the cost of homes sold and an accrual for future warranty costs is established. As actual costs are incurred, the warranty reserve is reduced. Income Taxes The Significant Subsidiaries of The Presley Companies are not taxable entities and the results of operations are included in the tax returns of the members. Accordingly, no provision for income taxes is reflected in the combined financial statements. 2. REAL ESTATE INVENTORIES Real estate inventories consist of the following as of December 31:
1998 1997 ----------- ----------- (UNAUDITED) Land under development............................ $75,784,000 $22,869,000 Construction in process........................... 21,811,000 -- ----------- ----------- $97,595,000 $22,869,000 =========== ===========
3. NOTE PAYABLE The note payable is collateralized by a first deed of trust on a real estate project in Northern California with an inventory balance of $26,970,000 as of December 31, 1998, and bears interest at 8% per annum. Future maturities of the note payable at December 31, 1998 are as follows: 1999........................................................ $3,125,000 2000........................................................ 3,125,000 2001........................................................ 3,125,000 ---------- $9,375,000 ==========
During the year ended December 31, 1998, the Significant Subsidiaries incurred $938,000 of interest cost, all of which was capitalized to the real estate project. 4. RELATED PARTY TRANSACTIONS The Agreements provide for builder overhead fees to be paid to the Presley Member in monthly installments during construction of the projects and a project commitment fee to the Unaffiliated Member, one-third to one-half of which is paid upon the Unaffiliated Member's initial capital funding with the remaining balance paid in equal monthly installments. 75 78 SIGNIFICANT SUBSIDIARIES OF THE PRESLEY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The following fees were incurred and capitalized to real estate inventories during the years ended December 31, 1998 and 1997:
1998 1997 ---------- ----------- (UNAUDITED) Presley Member...................................... $1,885,000 $135,000 Unaffiliated Member................................. 671,000 360,000 ---------- -------- $2,556,000 $495,000 ========== ========
As of December 31, 1998 and 1997, $410,000 and $73,000, respectively, is due the members for fees. 5. COMMITMENTS AND CONTINGENCIES The Significant Subsidiaries of The Presley Companies' commitments and contingencies include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Significant Subsidiaries of The Presley Companies' financial position or results of operations. 6. IMPACT OF YEAR 2000 (UNAUDITED) The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the computer programs or hardware utilized by the Presley Member, which manages the activities of the Significant Subsidiaries of The Presley Companies, that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions or engage in normal business activities. The Presley Member has been required to modify and upgrade the hardware and software used by its accounting and office systems to address the Year 2000 Issue. The Presley Member presently believes the modifications and replacements it is making to its computer systems will mitigate the Year 2000 Issue. In considering the impact of the Year 2000 Issue on its external agents such as significant subcontractors, service providers and business partners, management of the Significant Subsidiaries of The Presley Companies' believes that, with respect to the Year 2000 Issue, external agents will not have a significant impact on the operations of the Significant Subsidiaries of The Presley Companies'. Based on its assessment of the remaining risks associated with the Year 2000 Issue, management of the Significant Subsidiaries of The Presley Companies' does not believe the development of contingency plans is warranted at this time. Ultimately, the potential impact of the Year 2000 Issue will depend not only on the measures undertaken by the Significant Subsidiaries of The Presley Companies and the Presley Member, but also on the way in which the issue is addressed by businesses and other entities whose financial condition and operational capability are important to the Significant Subsidiaries of The Presley Companies. 76 79 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION FILE ------- ----------- ------------ 3.1(1) Certificate of Incorporation of the Company................. 3.3(1) Bylaws of the Company....................................... 4.1(1) Specimen certificate of Common Stock........................ 10.1(1) Form of Indemnity Agreement, dated October 18, 1991, between the Company and Messrs. Lyon and Cable as Directors, and dated December 12, 1991 as to the other Directors........... 10.2(1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and William Lyon.................. 10.3(1) Form of Registration Rights Agreement, dated October 7, 1991, between the Company and each of the existing stockholders other than William Lyon........................ 10.4(1) 1991 Stock Option Plan...................................... 10.5(2) Agreement for Redemption of Partnership Interest dated December 30, 1992 between Carmel Mountain Ranch, a California general partnership, The Presley Companies, a California corporation, Presley CMR, Inc., a California corporation, Home Capital Corporation, a California corporation and Humboldt Financial Services Corp., a California corporation...................................... 10.6(2) Amended Statement of Partnership of Carmel Mountain Ranch dated December 30, 1992..................................... 10.7(2) Amendment to Amended and Restated Partnership Agreement of Carmel Mountain Ranch dated December 29, 1992............... 10.8(3) Agreement to Issue and Purchase Stock as dated for reference purposes the 25th day of March, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994)....... 10.9(4) First Amendment to the Agreement to Issue and Purchase Stock dated as of April 8, 1994 by and among The Presley Companies, a Delaware corporation, and Foothill Capital Corporation, Continental Illinois Commercial Corporation, First Plaza Group Trust (Mellon Bank, N.A., acting as trustee as directed by General Motors Investment Management Corporation), Pearl Street, L.P., International Nederlanden (U.S.) Capital Corporation, and Whippoorwill/Presley Obligations Trust -- 1994 (Continental Stock Transfer & Trust Company, as trustee under that certain trust agreement dated as of January 11, 1994)............................... 10.10(4) Form of Registration Rights Agreement dated as of May 20, 1994, by and among The Presley Companies, a Delaware corporation and each of the holders of shares of the Series B Common Stock.............................................. 10.11(4) Amended and Restated 1991 Stock Option Plan of The Presley Companies, a Delaware corporation...........................
80
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION FILE ------- ----------- ------------ 10.12(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and Wade H. Cable....................... 10.13(5) Forms of Stock Option Agreements, dated as of May 20, 1994, between the Company and David M. Siegel 10.14(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Nancy M. Harlan..................... 10.15(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Linda L. Foster..................... 10.16(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and W. Douglass Harris.................. 10.17(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and C. Dean Stewart..................... 10.18(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and Alan Uman........................... 10.19(5) Form of Stock Option Agreement, dated as of May 20, 1994, between the Company and William Lyon........................ 10.20(6) Agreement and Assignment; Mutual Releases, as of August 23, 1994, by and between Gateway Highlands, a California limited partnership, HSP Inc., a California corporation and The Presley Companies, a California corporation................. 10.21(7) Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, N.A., a national banking association dated as of February 15, 1995........................................... 10.22(8) First Amendment to Master Credit Agreement by and between Carmel Mountain Ranch, a California general partnership and Bank One, Arizona, NA dated as of October 10, 1995.......... 10.23(9) Second Amendment to Master Credit Agreement and Secured Promissory Note by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank"), dated as of October 4, 1996....................................... 10.24(10) Third Amendment to Master Credit Agreement, dated as of September 25, 1997, by and between Carmel Mountain Ranch, a California general partnership ("Borrower"), and Bank One, Arizona, NA, a national banking association ("Bank")........ 10.25(11) Fifth Amended and Restated Loan Agreement, dated as of July 6, 1998, between Presley Homes (formerly The Presley Companies), a California corporation, as the Borrower, and Foothill Capital Corporation, as the Lender................. 10.26(11) Modification to Master Credit Agreement dated as of March 17, 1998, between Carmel Mountain Ranch, a California general partnership, as Borrower, and Bank One, Arizona, NA, a national banking association, as Bank..................... 10.27(11) Modification to Master Credit Agreement dated as of June 16, 1998, between Carmel Mountain Ranch, a California general partnership, as Borrower, and Bank One, Arizona, NA, a national banking association, as Bank.......................
81
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION FILE ------- ----------- ------------ 10.28(12) Modification to Master Credit Agreement dated as of August 25, 1998, between Carmel Mountain Ranch, a California general partnership, as Borrower, and Bank One, Arizona, NA, a national banking association, as Bank..................... 10.29(12) Form of Severance Agreements dated September 24, 1998....... 10.30(14) Presley Homes 1998 Bonus Plan............................... 10.31(13) Letter of Intent dated December 31, 1998 by and among William Lyon Homes, Inc., a California corporation, The Presley Companies, a Delaware corporation and The Presley Companies, a California corporation. 10.32(14) Amendment to Letter of Intent dated March 30, 1999 by and among William Lyon Homes, Inc., a California corporation, The Presley Companies, a Delaware corporation and Presley Homes, a California corporation. 21.1(14) List of Subsidiaries of the Company......................... 23.1 Consent of Independent Auditors............................. 27(14) Financial Data Schedule.....................................
- --------------- (1) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and incorporated herein by this reference. (2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by this reference. (3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by this reference. (4) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference. (5) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference. (6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by this reference. (7) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by this reference. (8) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by this reference. (9) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by this reference. (10) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. (11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (12) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998. (13) Previously filed as an exhibit to the Company's Report on Form 8-K dated December 31, 1998. (14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by this reference. EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 16, 1999 included in the Annual Report of The Presley Companies for the year ended December 31, 1998, with respect to the consolidated financial statements, as amended, included in this Form 10-K/A. /s/ ERNST & YOUNG LLP Newport Beach, California October 4, 1999 -----END PRIVACY-ENHANCED MESSAGE-----