-----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, BWrnchRqSky1fe5rN0wtOxDVw2CT36OLwBJK+R0o1IOzaysou/hA0+FCoSoZFEmx 24yVPlNxH3TvTblxU1cXNg== 0000892569-99-002618.txt : 19991018 0000892569-99-002618.hdr.sgml : 19991018 ACCESSION NUMBER: 0000892569-99-002618 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990331 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-Q/A SEC ACT: SEC FILE NUMBER: 001-10830 FILM NUMBER: 99724180 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-Q/A 1 FORM 10-Q/A FOR THE QUARTER ENDED 3/31/99. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-18001 THE PRESLEY COMPANIES (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0475923 (STATE OR JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 19 CORPORATE PLAZA 92660 NEWPORT BEACH, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(949) 640-6400 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
OUTSTANDING AT CLASS OF COMMON STOCK SEPTEMBER 30, 1999 --------------------- ------------------ Series A, par value $.01 34,792,732 Series B, restricted voting convertible, par value $.01 17,402,946
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE PRESLEY COMPANIES INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998.................................................. 3 Consolidated Statements of Operations -- Three Months Ended March 31, 1999 and 1998................................... 4 Consolidated Statement of Stockholders' Equity -- Three Months Ended March 31, 1999............................... 5 Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1999 and 1998................................... 6 Notes to Consolidated Financial Statements.................. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 21 ITEM 3. NOT APPLICABLE. PART II. OTHER INFORMATION........................................... 32 SIGNATURES........................................................... 33
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. THE PRESLEY COMPANIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE) (NOTE 2) ASSETS
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) Cash and cash equivalents................................... $ 2,084 $ 23,955 Receivables................................................. 10,750 8,613 Real estate inventories..................................... 164,697 174,502 Investments in and advances to unconsolidated joint ventures -- Note 3........................................ 33,516 30,462 Property and equipment, less accumulated depreciation of $3,464 and $3,156 at March 31, 1999 and December 31, 1998, respectively.............................................. 2,711 2,912 Deferred loan costs......................................... 2,993 3,381 Other assets................................................ 2,629 2,579 --------- --------- $ 219,380 $ 246,404 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 17,019 $ 17,364 Accrued expenses............................................ 23,471 27,823 Notes payable............................................... 26,765 55,393 12 1/2% Senior Notes due 2001 -- Notes 4 and 5.............. 140,000 140,000 --------- --------- 207,255 240,580 --------- --------- Stockholders' equity Common stock: Series A common stock, par value $.01 per share; 100,000,000 shares authorized; 34,792,732 issued and outstanding at March 31, 1999 and December 31, 1998, respectively.......................................... 348 348 Series B restricted voting convertible common stock, par value $.01 per share; 50,000,000 shares authorized; 17,402,946 shares issued and outstanding at March 31, 1999 and December 31, 1998, respectively.......................................... 174 174 Additional paid-in capital -- Note 1...................... 117,154 116,249 Accumulated deficit from January 1, 1994 -- Note 1........ (105,551) (110,947) --------- --------- 12,125 5,824 --------- --------- $ 219,380 $ 246,404 ========= =========
See accompanying notes. 3 4 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS) (UNAUDITED) (NOTE 2)
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 -------- -------- Sales Homes..................................................... $ 82,071 $ 64,391 Lots, land and other...................................... 226 2,087 -------- -------- 82,297 66,478 -------- -------- Operating costs Cost of sales -- homes.................................... (68,020) (56,750) Cost of sales -- lots, land and other..................... (675) (1,901) Sales and marketing....................................... (4,075) (5,087) General and administrative................................ (3,931) (3,681) -------- -------- (76,701) (67,419) -------- -------- Income (loss) from unconsolidated joint ventures............ 2,945 (26) -------- -------- Operating income (loss)..................................... 8,541 (967) Interest expense, net of amounts capitalized................ (2,215) (2,631) Financial advisory expenses -- Note 2....................... (692) -- Other income (expense), net................................. 667 400 -------- -------- Income (loss) before income taxes........................... 6,301 (3,198) Provision for income taxes -- Note 1........................ (905) -- -------- -------- Net income (loss)........................................... $ 5,396 $ (3,198) ======== ======== Basic and diluted earnings per common share -- Note 1....... $ 0.10 $ (0.06) ======== ========
See accompanying notes. 4 5 THE PRESLEY COMPANIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS) (UNAUDITED) (NOTE 2)
COMMON STOCK ------------------------------------ ACCUMULATED SERIES A SERIES B ADDITIONAL DEFICIT FROM ---------------- ---------------- PAID-IN JANUARY 1, SHARES AMOUNT SHARES AMOUNT CAPITAL 1994 TOTAL ------ ------ ------ ------ ---------- ------------ ------- Balance -- December 31, 1998.............. 34,793 $348 17,403 $174 $116,249 $(110,947) $ 5,824 Net income................................ -- -- -- -- -- 5,396 5,396 Income tax benefits relating to temporary differences existing prior to the quasi- reorganization -- Note 1................ -- -- -- -- 905 -- 905 ------ ---- ------ ---- -------- --------- ------- Balance -- March 31, 1999................. 34,793 $348 17,403 $174 $117,154 $(105,551) $12,125 ====== ==== ====== ==== ======== ========= =======
See accompanying notes. 5 6 THE PRESLEY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) (NOTE 2)
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 -------- -------- Operating activities Net income (loss)......................................... $ 5,396 $ (3,198) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization.......................... 308 313 Equity in earnings of joint ventures................... (2,945) -- Provision for income taxes............................. 905 -- Net changes in operating assets and liabilities: Other receivables.................................... (2,051) (109) Real estate inventories.............................. 11,441 7,720 Deferred loan costs.................................. 388 413 Other assets......................................... (50) 313 Accounts payable..................................... (345) 2,269 Accrued expenses..................................... (4,352) (5,249) -------- -------- Net cash provided by operating activities................. 8,695 2,472 -------- -------- Investing activities Investment in unconsolidated joint ventures............... (109) (5,498) Issuance of notes receivable.............................. (98) -- Principal payments on notes receivable.................... 12 502 Property and equipment, net............................... (106) (92) -------- -------- Net cash used in investing activities..................... (301) (5,088) -------- -------- Financing activities Proceeds from borrowing on notes payable.................. 17,185 28,300 Principal payments on notes payable....................... (47,450) (28,080) -------- -------- Net cash provided by (used in) financing activities....... (30,265) 220 -------- -------- Net decrease in cash and cash equivalents................... (21,871) (2,396) Cash and cash equivalents -- beginning of period............ 23,955 4,569 -------- -------- Cash and cash equivalents -- end of period.................. $ 2,084 $ 2,173 ======== ======== Supplemental disclosures of cash flow information Cash paid during the period for interest, net of amounts capitalized............................................ $ 6,798 $ 7,767 ======== ======== Issuance of notes payable for land acquisitions........... $ 1,637 $ 2,748 ======== ========
See accompanying notes. 6 7 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998. Effective as of January 1, 1994, the Company completed a capital restructuring and quasi-reorganization. The quasi-reorganization resulted in the adjustment of assets and liabilities to estimated fair values and the elimination of an accumulated deficit effective January 1, 1994. 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 paid-in capital. During the three months ended March 31, 1999 income tax benefits of $905,000 were excluded from results of operations and credited to paid-in capital. The interim consolidated financial statements have been prepared in accordance with the Company's customary accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a presentation in accordance with generally accepted accounting principles have been included. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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 have been eliminated in consolidation. 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 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 three months ended March 31, 1999 and 1998, 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, including income from the Company's investment in unconsolidated joint ventures, totaled $8.5 million and ($1.0) million for the three months ended March 31, 1999 and 1998, respectively. All other segment measurements are disclosed in the Company's consolidated financial statements. 7 8 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 the three months ended March 31, 1999 and 1998. 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 March 31, 1999 and December 31, 1998 and revenues and expenses for the periods presented. Accordingly, actual results could differ materially from those estimates in the near-term. 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 the three months ended March 31, 1999 and 1998 are based on 52,195,678 shares of Series A and Series B common stock outstanding. 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 March 31, 1999, the Company's stockholders equity totaled $12,125,000. 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. 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. The letter of intent provided that, subject to the fiduciary duties of their respective boards of directors, Presley and William Lyon Homes would negotiate exclusively with each other toward a definitive agreement until March 31, 1999. 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 8 9 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 would purchase shares from each tendering stockholder on a pro rata basis. The tender offer would 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 provided that the transaction would be structured to permit William Lyon or his affiliates, prior to consummation of the transaction and consistent with applicable securities laws, to sell shares of Presley common stock owned by them up to a maximum of 4% of the total number of shares of Presley common stock presently outstanding. On March 30, 1999, the parties amended the letter of intent to extend its term and the period of exclusive negotiation to April 30, 1999. 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 agreed that William Lyon Homes could participate in discussions and negotiations with the holders of Presley's Series B Common Stock regarding the purchase by William Lyon Homes of such percentage of the Series B 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 could 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.William Lyon Homes was required to notify the Special Committee regarding the details of any such discussions and negotiations. William Lyon Homes could 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. On May 4, 1999, the Company announced that after approval by the Special Committee of its Board of Directors, it has entered into a revised letter of intent with 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 a cash purchase price of $48,000,000 and the assumption of all or substantially all of the liabilities of William Lyon Homes; and (ii) the proposed purchase by William Lyon Homes of a portion of the outstanding shares of Common Stock of Presley. Under the terms of the revised letter of intent, William Lyon Homes will make offers to the holders of Presley's Series B Common Stock and a tender offer to the holders of Presley's Series A Common Stock to purchase, for a cash purchase price of $0.655 per share, an aggregate number of shares of Presley's Common Stock which when added to the number of shares of Presley already owned by William Lyon Homes and its affiliates, and after giving effect to a disposition of up to 8% of the total number of shares of Presley Common Stock currently outstanding by William Lyon Homes and/or its affiliates, will cause William Lyon Homes and its affiliates to own an aggregate of approximately 49% of the outstanding shares of Presley's Common Stock. The proposed transactions 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 the consummation of the transactions; the receipt of real estate appraisals satisfactory to Presley and William Lyon Homes with respect to the real estate assets of William Lyon Homes; the approval of a definitive agreement by the respective boards of directors of Presley and William Lyon Homes by July 15, 1999; receipt of all required regulatory approvals and third party consents, including any required lender consents; the possession of sufficient borrowing capacity or the receipt of financing by Presley in an amount sufficient to enable Presley to finance the transactions; the holders of Presley's Series B Common Stock not acquiring or disposing of any beneficial interest in Presley's Common Stock prior to closing; the purchase by William Lyon Homes of a 9 10 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) sufficient number of shares of Presley Common Stock to cause, when added to the number of shares already owned and after giving effect to the sale of up to 8% of Presley's Common Stock, William Lyon Homes to own at least 49% of Presley's Common Stock (but not more than 49.9%); and the absence of any material adverse change in the business or financial condition of either Presley or William Lyon Homes. The proposed transactions are also conditioned upon each holder of Presley's Series B Common Stock having consented to the transactions and executed a written agreement, in form and substance satisfactory to William Lyon Homes and Presley, to sell shares of Presley's Series B Common Stock to William Lyon Homes such that each holder will own less than 5% of the aggregate number of shares of Presley's Common Stock. In the case of Foothill Capital Corporation, which is the beneficial owner of less than 5% of the outstanding shares of Presley Common Stock, William Lyon Homes would purchase 710,574 shares of Series B Common Stock. If the proposed tender offer to the holders of Presley's Series A Common Stock is undersubscribed, each holder of Series B Common Stock would sell an additional number of shares pro rata and at the same price. Each of the holders of Presley Series B Common Stock would also agree that prior to the completion of the tender offer for the Series A Common Stock, they will not transfer or tender any Series A Common Stock that they may own or transfer or convert any of their remaining Series B Common Stock. William Lyon Homes would also agree not to sell for three years any shares of Presley Common Stock in excess of the number currently owned unless such sale occurs in a transaction in which all stockholders of Presley are treated equally. William Lyon Homes has advised Presley's Special Committee that each holder of Series B Common Stock has indicated its acceptance of these terms but has not entered into a binding or enforceable agreement. The letter of intent contemplates that each of the transactions will be structured so as to be subject to the successful completion of the others. The letter of intent also contemplates 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 will 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 July 15, 1999. The letter of intent does not constitute a binding agreement to consummate the transactions and there can be no assurance that the parties will enter into a definitive agreement with respect to the transactions or that the conditions to the transactions will be satisfied. In connection with these events, the Company has incurred costs of approximately $692,000 for the three months ended March 31, 1999 which are reflected in the Consolidated Statement of Operations as financial advisory expenses. 10 11 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3 -- 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 March 31, 1999 and December 31, 1998 and for the three months ended March 31, 1999 and 1998 is summarized as follows: CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ ASSETS Cash and cash equivalents................................... $ 2,770 $ 304 Receivables................................................. 1,407 851 Real estate inventories..................................... 159,215 168,417 Other assets................................................ 1,118 1,034 -------- -------- $164,510 $170,606 ======== ======== LIABILITIES AND OWNERS' CAPITAL Accounts payable............................................ $ 6,320 $ 6,453 Accrued expenses............................................ 3,264 2,098 Notes payable............................................... 28,760 29,024 Advances from The Presley Companies and subsidiaries........ 764 655 -------- -------- 39,108 38,230 -------- -------- Owners' capital The Presley Companies and subsidiaries.................... 32,752 29,807 Others.................................................... 92,650 102,569 -------- -------- 125,402 132,376 -------- -------- $164,510 $170,606 ======== ========
11 12 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 -------- ------- Sales Homes..................................................... $ 37,917 $ -- Operating costs Cost of sales -- homes.................................... (30,831) -- Sales and marketing....................................... (1,404) (26) -------- ------- Operating income............................................ 5,682 (26) Other income, net........................................... 177 -- -------- ------- Net income (loss)........................................... $ 5,859 $ (26) ======== ======= Allocation to owners The Presley Companies and subsidiaries.................... $ 2,945 $ (26) Others.................................................... 2,914 -- -------- ------- $ 5,859 $ (26) ======== =======
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 4 -- 12 1/2% SENIOR NOTES DUE 2001 In accordance with the bond indenture 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. Because the Company's Consolidated Tangible Net Worth was less than $60,000,000 as of March 31, 1999, the Company would, effective on June 4, 1999, be required to make similar offers to purchase $20,000,000 in principal amount of the Senior Notes. In April 1999 the Company acquired Senior Notes with a face amount of $20,000,000 and therefore will not be required to make such offer effective on June 4, 1999. 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 March 31, 1999 the Company's Consolidated Tangible Net Worth was $9,132,000. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of certain 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 12 13 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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"), 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. 13 14 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 MARCH 31, 1999 (IN THOUSANDS)
UNCONSOLIDATED ---------------------------------------- DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY -------- ------------- ------------- ----------- ------------ ASSETS Cash and cash equivalents........... $ -- $ 699 $ 1,385 $ -- $ 2,084 Receivables......................... -- 9,303 1,447 -- 10,750 Real estate inventories............. -- 155,089 9,608 -- 164,697 Investments in and advances to unconsolidated joint ventures..... -- 3,501 30,015 -- 33,516 Property and equipment, net......... -- 2,408 303 -- 2,711 Deferred loan costs................. 1,479 1,510 4 -- 2,993 Other assets........................ -- 2,524 105 -- 2,629 Investments in subsidiaries......... 11,362 33,679 -- (45,041) -- Intercompany receivables............ 143,740 4,456 -- (148,196) -- -------- -------- ------- --------- -------- $156,581 $213,169 $42,867 $(193,237) $219,380 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable.................... $ -- $ 16,011 $ 1,008 $ -- $ 17,019 Accrued expenses.................... -- 21,958 1,513 -- 23,471 Notes payable....................... -- 22,670 4,095 -- 26,765 12 1/2% Senior Notes................ 140,000 -- -- -- 140,000 Intercompany payables............... 4,456 143,740 -- (148,196) -- -------- -------- ------- --------- -------- Total liabilities.............. 144,456 204,379 6,616 (148,196) 207,255 STOCKHOLDERS' EQUITY................ 12,125 8,790 36,251 (45,041) 12,125 -------- -------- ------- --------- -------- $156,581 $213,169 $42,867 $(193,237) $219,380 ======== ======== ======= ========= ========
14 15 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED -------------------------------------- DELAWARE PRESLEY NON-GUARANTOR ELIMINATING CONSOLIDATED 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 ======== ======== ======= ========= ========
15 16 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS)
UNCONSOLIDATED ---------------------------------------- DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY -------- ------------- ------------- ----------- ------------ Sales................................ $ -- $ 64,363 $ 17,934 $ -- $ 82,297 ------- -------- -------- -------- -------- Operating costs Cost of sales...................... -- (54,350) (14,345) -- (68,695) Sales and marketing................ -- (3,313) (762) -- (4,075) General and administrative......... -- (4,644) 713 -- (3,931) ------- -------- -------- -------- -------- -- (62,307) (14,394) -- (76,701) ------- -------- -------- -------- -------- Income from unconsolidated joint ventures........................... -- 168 2,777 -- 2,945 ------- -------- -------- -------- -------- Income from subsidiaries............. 6,088 6,009 -- (12,097) -- ------- -------- -------- -------- -------- Operating income..................... 6,088 8,233 6,317 (12,097) 8,541 Interest expense, net of amounts capitalized........................ -- (1,439) (776) -- (2,215) Financial advisory expenses.......... (692) -- -- -- (692) Other income (expense), net.......... -- 79 588 -- 667 ------- -------- -------- -------- -------- Income before income taxes........... 5,396 6,873 6,129 (12,097) 6,301 Provision for income taxes........... -- (905) -- -- (905) ------- -------- -------- -------- -------- Net income........................... $ 5,396 $ 5,968 $ 6,129 $(12,097) $ 5,396 ======= ======== ======== ======== ========
16 17 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED ------------------------------------------- DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY ----------- ------------- ------------- ----------- ------------ Sales............................... $ -- $ 48,309 $ 18,169 $ -- $ 66,478 ------- -------- -------- ------ -------- Operating costs Cost of sales..................... -- (43,175) (15,476) -- (58,651) Sales and marketing............... -- (3,844) (1,243) -- (5,087) General and administrative........ -- (3,788) 107 -- (3,681) ------- -------- -------- ------ -------- -- (50,807) (16,612) -- (67,419) ------- -------- -------- ------ -------- Loss from unconsolidated joint ventures.......................... -- -- (26) -- (26) ------- -------- -------- ------ -------- Income (loss) from subsidiaries..... (3,198) 1,985 -- 1,213 -- ------- -------- -------- ------ -------- Operating income (loss)............. (3,198) (513) 1,531 1,213 (967) Interest expense, net of amounts capitalized....................... -- (2,621) (10) -- (2,631) Other income (expense), net......... -- (140) 540 400 ------- -------- -------- ------ -------- Net income (loss)................... $(3,198) $ (3,274) $ 2,061 $1,213 $ (3,198) ======= ======== ======== ====== ========
17 18 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS)
UNCONSOLIDATED ---------------------------------------- DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY -------- ------------- ------------- ----------- ------------ Cash flows from operating activities: Net income.............................. $ 5,396 $ 5,968 $ 6,129 $(12,097) $ 5,396 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ -- 277 31 -- 308 Equity in earnings of joint ventures........................... -- (168) (2,777) -- (2,945) Equity in earnings of subsidiaries... (6,088) (6,009) -- 12,097 -- Provision for income taxes........... -- 905 -- -- 905 Net changes in operating assets and liabilities: Other receivables.................. -- (2,060) 9 -- (2,051) Intercompany receivables/payables............ 528 (528) -- -- -- Real estate inventories............ -- 8,214 3,227 -- 11,441 Deferred loan costs................ 164 198 26 -- 388 Other assets....................... -- (84) 34 -- (50) Accounts payable................... -- 144 (489) -- (345) Accrued expenses................... -- (4,007) (345) -- (4,352) ------- -------- ------- -------- -------- Net cash provided by operating activities.............................. -- 2,850 5,845 -- 8,695 ------- -------- ------- -------- -------- Cash flows from investing activities: Investment in unconsolidated joint ventures............................. -- (108) (1) -- (109) Issuance of/payments on notes receivable........................... -- (86) -- -- (86) Purchase of property and equipment...... -- (70) (36) -- (106) Investment in subsidiaries.............. -- 3,883 -- (3,883) -- ------- -------- ------- -------- -------- Net cash provided by (used in) investing activities........................... -- 3,619 (37) (3,883) (301) ------- -------- ------- -------- -------- Cash flows from financing activities: Proceeds from borrowings on notes payable............................ -- 10,001 7,184 -- 17,185 Principal payments on notes payable............................ -- (38,704) (8,746) -- (47,450) Distributions to/contributions from shareholders....................... -- 328 (4,211) 3,883 -- ------- -------- ------- -------- -------- Net cash used in financing activities..... -- (28,375) (5,773) 3,883 (30,265) ------- -------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents............................. -- (21,906) 35 -- (21,871) ------- -------- ------- -------- -------- Cash and cash equivalents at beginning of period.................................. -- 22,605 1,350 -- 23,955 ------- -------- ------- -------- -------- Cash and cash equivalents at end of period.................................. $ -- $ 699 $ 1,385 $ -- $ 2,084 ======= ======== ======= ======== ========
18 19 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS)
UNCONSOLIDATED ---------------------------------------- DELAWARE NON-GUARANTOR ELIMINATING CONSOLIDATED PRESLEY PRESLEY HOMES SUBSIDIARIES ENTRIES COMPANY -------- ------------- ------------- ----------- ------------ Cash flows from operating activities: Net income (loss)....................... $(3,198) $ (3,274) $ 2,061 $ 1,213 $ (3,198) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........ -- 298 15 -- 313 Equity in (earnings) loss of subsidiaries....................... 3,198 (1,985) -- (1,213) -- Net changes in operating assets and liabilities: Other receivables.................. -- (1,222) 1,113 -- (109) Intercompany receivables/payables............ (211) 211 -- -- -- Real estate inventories............ -- 9,048 (1,328) -- 7,720 Deferred loan costs................ 211 210 (8) -- 413 Other assets....................... -- 448 (135) -- 313 Accounts payable................... -- 2,161 108 -- 2,269 Accrued expenses................... -- (5,581) 332 -- (5,249) ------- -------- ------- ------- -------- Net cash provided by operating activities.............................. -- 314 2,158 -- 2,472 ------- -------- ------- ------- -------- Cash flows from investing activities: Investment in unconsolidated joint ventures............................. -- (424) (5,074) -- (5,498) Issuance of/payments on notes receivable........................... -- 502 -- -- 502 Purchases of property and equipment..... -- (113) 21 -- (92) Investment in subsidiaries.............. -- (4,069) -- 4,069 -- ------- -------- ------- ------- -------- Net cash used in investing activities..... -- (4,104) (5,053) 4,069 (5,088) ------- -------- ------- ------- -------- Cash flows from financing activities: Proceeds from borrowings on notes payable.............................. -- 23,677 4,623 -- 28,300 Principal payments on notes payable..... -- (22,389) (5,691) -- (28,080) Distributions to/contributions from shareholders......................... -- 120 3,949 (4,069) -- ------- -------- ------- ------- -------- Net cash provided by financing activities.............................. -- 1,408 2,881 (4,069) 220 ------- -------- ------- ------- -------- Net decrease in cash and cash equivalents............................. -- (2,382) (14) -- (2,396) Cash and cash equivalents at beginning of period.................................. -- 4,377 192 -- 4,569 ------- -------- ------- ------- -------- Cash and cash equivalents at end of period.................................. $ -- $ 1,995 $ 178 $ -- $ 2,173 ======= ======== ======= ======= ========
19 20 THE PRESLEY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5 -- SUBSEQUENT EVENT -- GAIN FROM RETIREMENT OF DEBT In April 1999, the Company purchased $20,000,000 principal amount of its outstanding Senior Notes at a cost of $17,700,000. The net gain resulting from the purchase, after giving effect to income taxes and amortization of related deferred loan costs, was $1,789,000. Such gain will be reflected as an extraordinary item in the Company's results of operations for the second quarter ending June 30, 1999. 20 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE PRESLEY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1, as well as the information presented in the Annual Report on Form 10-K/A for the year ended December 31, 1998. 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 $89,894,000 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 March 31, 1999, the Company's stockholders equity totaled $12,125,000. 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. 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. The letter of intent provided that, subject to the fiduciary duties of their respective boards of directors, Presley and William Lyon Homes would negotiate exclusively with each other toward a definitive agreement until March 31, 1999. 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 would purchase shares from each tendering stockholder on a pro rata basis. The tender offer would 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 provided that the transaction would be structured to permit William Lyon or his affiliates, prior to consummation of the transaction and consistent with applicable securities laws, 21 22 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. 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 agreed that William Lyon Homes could participate in discussions and negotiations with the holders of Presley's Series B Common Stock regarding the purchase by William Lyon Homes of such percentage of the Series B 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 could 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. William Lyon Homes was required to notify the Special Committee regarding the details of any such discussions and negotiations. William Lyon Homes could 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. On May 4, 1999, the Company announced that after approval by the Special Committee of its Board of Directors, it has entered into a revised letter of intent with 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 a cash purchase price of $48 million and the assumption of all or substantially all of the liabilities of William Lyon Homes; and (ii) the proposed purchase by William Lyon Homes of a portion of the outstanding shares of Common Stock of Presley. Under the terms of the revised letter of intent, William Lyon Homes will make offers to the holders of Presley's Series B Common Stock and a tender offer to the holders of Presley's Series A Common Stock to purchase, for a cash purchase price of $0.655 per share, an aggregate number of shares of Presley's Common Stock which when added to the number of shares of Presley already owned by William Lyon Homes and its affiliates, and after giving effect to a disposition of up to 8% of the total number of shares of Presley Common Stock currently outstanding by William Lyon Homes and/or its affiliates, will cause William Lyon Homes and its affiliates to own an aggregate of approximately 49% of the outstanding shares of Presley's Common Stock. The proposed transactions 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 the consummation of the transactions; the receipt of real estate appraisals satisfactory to Presley and William Lyon Homes with respect to the real estate assets of William Lyon Homes; the approval of a definitive agreement by the respective boards of directors of Presley and William Lyon Homes by July 15, 1999; receipt of all required regulatory approvals and third party consents, including any required lender consents; the possession of sufficient borrowing capacity or the receipt of financing by Presley in an amount sufficient to enable Presley to finance the transactions; the holders of Presley's Series B Common Stock not acquiring or disposing of any beneficial interest in Presley's Common Stock prior to closing; the purchase by William Lyon Homes of a sufficient number of shares of Presley Common Stock to cause, when added to the number of shares already owned and after giving effect to the sale of up to 8% of Presley's Common Stock, William Lyon Homes to own at least 49% of Presley's Common Stock (but not more than 49.9%); and the absence of any material adverse change in the business or financial condition of either Presley or William Lyon Homes. The proposed transactions are also conditioned upon each holder of Presley's Series B Common Stock having consented to the transactions and executed a written agreement, in form and substance satisfactory to William Lyon Homes and Presley, to sell shares of Presley's Series B Common Stock to William Lyon Homes such that each holder will own less than 5% of the aggregate number of shares of Presley's Common Stock. In the case of Foothill Capital Corporation, which is the beneficial owner of less than 5% of the outstanding shares of Presley Common Stock, William Lyon Homes would purchase 710,574 shares of Series B Common Stock. If the proposed tender offer to the holders of Presley's Series A Common Stock is undersubscribed, each holder of Series B Common Stock would sell an additional number of shares pro rata and at the same 22 23 price. Each of the holders of Presley Series B Common Stock would also agree that prior to the completion of the tender offer for the Series A Common Stock, they will not transfer or tender any Series A Common Stock that they may own or transfer or convert any of their remaining Series B Common Stock. William Lyon Homes would also agree not to sell for three years any shares of Presley Common Stock in excess of the number currently owned unless such sale occurs in a transaction in which all stockholders of Presley are treated equally. William Lyon Homes has advised Presley's Special Committee that each holder of Series B Common Stock has indicated its acceptance of these terms but has not entered into a binding or enforceable agreement. The letter of intent contemplates that each of the transactions will be structured so as to be subject to the successful completion of the others. The letter of intent also contemplates 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 will 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 July 15, 1999. The letter of intent does not constitute a binding agreement to consummate the transactions and there can be no assurance that the parties will enter into a definitive agreement with respect to the transactions or that the conditions to the transactions will be satisfied. In connection with these events, the Company has incurred costs of approximately $692,000 for the three months ended March 31, 1999 which are reflected in the Consolidated Statement of Operations as financial advisory expenses. In accordance with the bond indenture 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. Because the Company's Consolidated Tangible Net Worth was less than $60 million as of March 31, 1999, the Company would, effective on June 4, 1999, have been required to make similar offers to purchase $20 million in principal amount of the Senior Notes. In April 1999 the Company acquired Senior Notes with a face amount of $20 million at a cost of $17.7 million and therefore will not be required to make such offer effective on June 4, 1999. The net gain resulting from the purchase, after giving effect to income taxes and amortization of related loan costs was $1.8 million. Such gain will be reflected in the Company's results of operations for the second quarter ending June 30, 1999. 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 March 31, 1999 the Company's Consolidated Tangible Net Worth was $9.1 million. The Company's management has previously held discussions, and may in the future hold discussions, with representatives of certain 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. 23 24 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 March 31, 1999, 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 3 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 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. 24 25 RESULTS OF OPERATIONS OVERVIEW AND RECENT RESULTS Homes sold, closed and in backlog for the Company and its unconsolidated joint ventures as of and for the periods presented are as follows:
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ---------------- 1999 1998 ------ ------ Number of homes sold Company................................................... 466 539 Unconsolidated joint ventures............................. 188 -- ------ ------ 654 539 ====== ====== Number of homes closed Company................................................... 401 337 Unconsolidated joint ventures............................. 116 -- ------ ------ 517 337 ====== ====== Backlog of homes sold but not closed at end of period Company................................................... 564 605 Unconsolidated joint ventures............................. 190 -- ------ ------ 754 605 ====== ====== Dollar amount of backlog of homes sold but not closed at end of period (in millions): Company................................................... $123.0 $140.0 Unconsolidated joint ventures............................. 76.7 -- ------ ------ $199.7 $140.0 ====== ======
Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed as of March 31, 1999 was $199.7 million, as compared to $140.0 million as of March 31, 1998 and $165.1 million as of December 31, 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 and approximately 16% during the first three months of 1999. The number of homes sold for the quarter ended March 31, 1999 increased 21 percent to 654 units from 539 a year ago. For the first quarter of 1999, the number of homes sold increased 52 percent to 654 from 429 units in the fourth quarter of 1998. The number of homes closed in the first quarter of 1999 increased 53 percent to 517 from 337 in the first quarter of 1998. The backlog of homes sold as of March 31, 1999 was 754, up 25 percent from 605 units a year earlier, and up 22 percent from 617 units at December 31, 1998. The Company's inventory of completed and unsold homes as of March 31, 1999 has decreased by 42 percent to 29 units from 50 units as of December 31, 1998. The increase in net new homes orders, closings and backlog for the first quarter of 1999 as compared with the first quarter of 1998 is primarily the result of improved market conditions in substantially all of the Company's markets. 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 25 26 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 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 recording of impairment losses on June 30, 1997:
FOR THE FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 MARCH 31, 1999 ------------------------ ------------------ ------------------ Sales................ $17,662,000 $54,828,000 $16,048,000 Gross profit......... $ 1,202,000 $ 5,850,000 2,245,000 Gross profit %....... 6.8% 10.7% 14.0%
The gross profits recognized on the three master-planned communities subsequent to the recordation of impairment losses has increased due to better than projected sales price increases beginning in 1998. 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 rate protection that locks in or caps interest rates for limited periods of time for mortgage financing for prospective homebuyers. COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED MARCH 31, 1998 Total sales (which represent recorded revenues from closings) for the three months ended March 31, 1999 were $82.3 million, an increase of $15.8 million (23.8%) from sales of $66.5 million for the three months ended March 31, 1998. Revenue from sales of homes increased $17.7 million to $82.1 million in the 1999 period from $64.4 million in the 1998 period. This increase was due primarily to an increase in the number of units closed and an increase in the average sales prices of homes to $204,700 in the 1999 period from $191,200 in the 1998 period. Total operating income changed from a loss of $1.0 million in the 1998 period to an income of $8.5 million in the 1999 period. The excess of revenue from sales of homes over the related cost of sales increased by $6.5 million, to $14.1 million in the 1999 period from $7.6 million in the 1998 period. This increase was primarily due to (1) an increase in the number of units closed to 401 units in the 1999 period from 337 units in the 1998 period and (2) an increase in the average sales price to $204,700 in the 1999 period from $191,200 in the 1998 period. Sales and marketing expenses decreased by $1.0 million to $4.1 million in the 1999 period from $5.1 million in the 1998 period 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 increased slightly by $0.2 million to $3.9 million in the 1999 26 27 period from $3.7 million in the 1998 period. Income from unconsolidated joint ventures amounting to $2.9 was recognized in the 1999 period, compared to an insignificant loss in the comparable period for 1998. The Company did not begin investing in unconsolidated joint ventures until the fourth quarter of 1997 and no significant operating results were realized in the first quarter of 1998. Total interest incurred decreased $2.4 million (28%) from $8.6 million in the 1998 period to $6.2 million in the 1999 period as a result of a decrease in the average amount of outstanding debt. Net interest expense decreased to $2.2 million in the 1999 period from $2.6 million in the 1998 period as a result of the decrease in the average amount of outstanding debt. As a result of the Company's engagement of a financial advisor in May 1998 as described previously, the Company has incurred costs of approximately $0.7 million for the three months ended March 31, 1999. Other income (expense), net increased to $0.7 million in the 1999 period from $0.4 million in the 1998 period primarily as a result of increased income from mortgage operations and design center operations. FINANCIAL CONDITION AND LIQUIDITY The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate and from outside borrowings and, beginning in 1997, by joint venture financing from newly formed joint ventures with venture partners that will provide a substantial portion of the capital required for certain projects. The Company currently maintains the following major credit facilities: 12 1/2% Senior Notes (the "Senior Notes"); a secured revolving lending facility (the "Working Capital Facility"); and a revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned joint venture partnership (the "CMR Facility"). The 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. SENIOR NOTES The Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of 12 1/2% Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The following discussion of the Senior Notes should be read in conjunction with the Registration Statement as filed with the Securities and Exchange Commission. The 12 1/2% Senior Notes due 2001 (the "Senior Notes") were offered by The Presley Companies, a Delaware corporation ("Delaware Presley" or the "Company"), and are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly-owned subsidiary of Delaware Presley ("California Presley"). However, California Presley has granted liens on substantially all of its assets as security for its obligations under the Working Capital Facility and other loans. Because the California Presley guarantee is not secured, holders 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. 27 28 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, and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions. WORKING CAPITAL FACILITY On July 6, 1998 California Presley 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 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 March 31, 1999 was approximately $113 million; however, the maximum loan under the Working Capital Facility, as stated above, is limited to $100 million. The principal outstanding under the Working Capital Facility at March 31, 1999 was $16.5 million. In addition, $2.8 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. 28 29 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 revolving line of credit. The revolving line of credit consists of several components relating to production units, models and residential lots. At March 31, 1999, the revolving line of credit had an outstanding balance of $4.1 million. Availability under the line is subject to a number of limitations, but in any case cannot exceed $5 million. Interest on the outstanding balance is at prime plus 1.00%. In April 1999, the maturity date of this line was extended to November 16, 1999. SELLER FINANCING Another source of financing available to the Company is seller-provided financing for land acquired by the Company. At March 31, 1999, the Company had various notes payable outstanding related to land acquisitions for which seller financing was provided in the amount of $6.2 million within the Company's Arizona, New Mexico and Nevada regions. JOINT VENTURE FINANCING As of March 31, 1999, 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 3 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 March 31, 1999, the Company's investment in such joint ventures was approximately $32.8 million and the Company's venture partners' investment in such joint ventures was approximately $92.7 million. In addition, certain joint ventures have obtained financing from land sellers or construction lenders which amounted to approximately $28.8 million at March 31, 1999. ASSESSMENT DISTRICT BONDS In some locations in which the Company develops its projects, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company's other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When Presley's homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. CASH FLOWS -- COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED MARCH 31, 1998 Net cash provided by operating activities increased to $8.7 million in the 1999 period from $2.5 million in the 1998 period primarily as a result of increased income and reductions in real estate inventories. Net cash used in investing activities decreased to $0.3 million in the 1999 period from $5.1 million in the 1998 period primarily as a result of decreased investments in unconsolidated joint ventures. 29 30 Net cash provided by (used in) financing activities changed from a source of $0.2 million in the 1998 period to a use of $30.3 million in the 1999 period primarily as a result of reduced net borrowings from notes payable. 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 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 30 31 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 $250,000. The Company currently anticipates that its operating system 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 Quarterly Report on Form 10-Q/A, 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 statements" 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. Forward-looking statements are not guarantees of future performance or results. The Company has no specific intention to update these statements and does not undertake any obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q/A or elsewhere. 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. 31 32 THE PRESLEY COMPANIES PART II. OTHER INFORMATION ITEMS 1, 2, 3, 4 AND 5. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. 10.1(1) 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. 27(2) Financial Data Schedule. - --------------- (1) 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. (2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by this reference. (b) REPORTS ON FORM 8-K. None 32 33 THE PRESLEY COMPANIES SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 4, 1999 By: /s/ DAVID M. SIEGEL ------------------------------------ DAVID M. SIEGEL Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: October 4, 1999 By: /s/ W. DOUGLASS HARRIS ------------------------------------ W. DOUGLASS HARRIS Vice President, Corporate Controller (Principal Accounting Officer) 33 34 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1(1) 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. 27(2) Financial Data Schedule
- --------------- (1) 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. (2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by this reference. -----END PRIVACY-ENHANCED MESSAGE-----