ITEM 1. BUSINESS
GENERAL
The Presley Companies ("Presley" or the "Company") is primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona, New Mexico and Nevada. Since its founding in 1956, Presley has sold over 40,000 homes. The Company believes that it was one of the largest homebuilders in California in terms of both sales and homes delivered in 1996. Approximately 70% of the Company's home closings were derived from its California operations. In 1996, the Company had consolidated revenues of $319.0 million and delivered 1,838 homes. Beginning in early 1996, the Company's homebuilding operations are conducted under the name Presley Homes.
The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. The Company currently markets its homes through 22 sales locations in its eight master-planned communities and 24 sales locations at its other projects. In 1996, the average sales price for homes delivered was $173,000, with homes priced from $86,000 to $453,000.
The Company currently owns approximately 5,554 lots and controls an additional 460 lots on which to construct homes. Substantially all lots are entitled and approximately 57% are located in the Company's eight master-planned communities. Prior to 1994, the Company had focused on the development of master-planned communities as a source of supply of developed lots for its homebuilding operations. As used in this Annual Report on Form 10-K, "entitled" land has a Development Agreement and/or Vesting Tentative Map, or a final recorded plat or map from the appropriate county or city government. Development Agreements and Vesting Tentative Maps generally provide for the right to develop the land in accordance with the provisions of the Development Agreement or Vesting Tentative Map unless an issue arises concerning health, safety or general welfare. Development of master-planned communities, which generally takes five to fifteen years from the date of initial land acquisition to completion, includes selecting sites and acquiring large parcels of undeveloped land, obtaining all necessary government approvals to build, and developing land, infrastructure and finished lots. The Company estimates that its current inventory of land is adequate to supply its homebuilding operations at current operating levels for approximately two years.
Beginning in 1994, the Company's land acquisition strategy, to the extent permitted by the Company's financing arrangements, has been to undertake projects with shorter life-cycles in order to reduce development and market risk while maintaining an inventory of lots sufficient for construction of homes over a two or three year period. As part of this strategy, the Company's current plans are to: (i) acquire and develop parcels of land with up to approximately 300 lots, (ii) expand its homebuilding operations in the Southwest, particularly in Phoenix, Arizona and Albuquerque, New Mexico where the Company has had, at various times, a significant market presence, and in Nevada, where the Company entered the market in 1995 and (iii) continue to evaluate opportunities in land development and master-planned communities with the intention that any such projects would be funded in significant part by sources other than the Company.
The Company will continue to utilize its current inventory of lots and future land acquisitions to conduct its operating strategy which consists of: (i) offering a diverse product line at a variety of prices to suit a wide range of consumer tastes, (ii) limiting completed housing inventory exposure, (iii) emphasizing well-designed cost-effective products, (iv) utilizing market research to allow for a quick response to local market conditions, (v) maintaining budget and control systems to facilitate effective cost controls and (vi) using extensive marketing and sales efforts.
The Company had total revenues from operations of $319.0 million, $285.5 million and $270.2 million for the years ended December 31, 1996, 1995 and 1994, respectively. Homes closed by the Company were 1,838, 1,425 and 1,442 for the years ended December 31, 1996, 1995 and 1994, respectively.
Presley's operations are dependent to a significant extent on debt financing. The Company's principal credit sources are 12 1/2% Senior Notes, a Working Capital Facility and various Joint Venture Facilities. The Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the
sale of $200.0 million of 12 1/2% Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Working Capital Facility is a revolving line of credit facility with a maximum commitment of $72.0 million. The Working Capital Facility is secured by substantially all of the Company's assets. At December 31, 1996, the outstanding principal amount under the Working Capital Facility was $12.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Notes 2 and 5 of "Notes to Consolidated Financial Statements."
The Company's principal executive offices are located at 19 Corporate Plaza, Newport Beach, California 92660 and its telephone number is (714) 640-6400. The Company was incorporated in the State of Delaware on August 7, 1991.
THE COMPANY'S MARKETS
The Company is currently operating through five geographic regions: the Southern California Region, the Northern California Region, the New Mexico Region, the Arizona Region and the Nevada Region. Larger regions have area offices which allow for closer management of a diverse geographical market within a region. Each of the regions/areas has responsibility for the Company's homebuilding and development operations as well as new land acquisitions within the geographic boundaries of the region/area.
The following table sets forth sales from real estate operations attributable to each of Presley's homebuilding regions during the preceding three fiscal years:
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(1) The Southern California Region consists of operations in Los Angeles, Orange, Riverside, San Bernardino and San Diego Counties.
(2) The Northern California Region consists of operations in Alameda, Contra Costa, El Dorado, Sacramento and San Joaquin Counties.
(3) The Arizona Region consists of operations in Phoenix and Tucson, Arizona.
(4) The New Mexico Region consists of operations in Albuquerque and Santa Fe, New Mexico.
(5) The Nevada Region consists of operations in the Las Vegas area.
(6) Operations in Illinois have been discontinued and are in the process of winding down.
HOMEBUILDING
The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its markets. The Company's products include entry-level, move-up and luxury homes and lots for custom homes, although it primarily emphasizes sales to the entry-level and move-up home markets. The Company believes that this diversified product strategy enables it to mitigate some of the risks inherent in the homebuilding industry and to meet a variety of market conditions. In order to reduce exposure to local market conditions, the Company's sales locations are geographically dispersed. The Company currently has 46 sales locations, including 22 in its master-planned communities and 24 at its other projects.
Because the decision as to which product to develop is based on the Company's assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Company's attached housing ranges in size from 761 to 1,634 square feet, and the Company's detached housing ranges from 814 to 3,924 square feet.
Due to Presley's product and geographic diversification strategy, the prices of Presley's homes also vary substantially. Prices for Presley's attached housing range from approximately $93,000 to $209,000 and prices for detached housing range from approximately $86,000 to $453,000. The average sales price of Presley's homes for the year ended December 31, 1996 was $173,000.
The Company generally standardizes and limits the number of home designs within any given product line. This standardization permits on-site mass production techniques and bulk purchasing of materials and components, thus enabling the Company to better control and sometimes reduce construction costs.
Presley contracts with a number of architects and other consultants who are involved in the design process of Presley homes. Designs are constrained by zoning requirements, building codes, energy efficiency laws and local architectural guidelines, among other factors. Engineering, landscaping, master-planning and environmental impact analysis work are subcontracted to independent firms which are familiar with local requirements.
Substantially all construction work is done by subcontractors with Presley acting as the general contractor. The Company manages subcontractor activities with on-site supervisory employees and management control systems. The Company does not have long-term contractual commitments with its subcontractors or suppliers. However, the Company generally has been able to obtain sufficient materials and subcontractors during times of material shortages. The Company believes its relationships with its suppliers and subcontractors are good.
DESCRIPTION OF PROJECTS
During the year ended December 31, 1996 approximately 60% of the homes closed by the Company were in the Company's eight master-planned communities. Presley's master-planned communities usually involve the development of hundreds of acres of raw land into a large community providing homeowners with the opportunity for employment, recreation, shopping and education within the community or in close proximity to it. The homes within these communities include a wide variety of detached and attached entry-level, move-up and luxury homes, and may also contain apartments. Within these communities Presley also may sell individual lots for custom homes, multiple lots for construction of homes by other builders and parcels for commercial, industrial and apartment development. These communities typically offer a variety of recreational amenities which may include golf courses, equestrian centers, tennis courts and swimming pools, among others.
The Company's master-planned communities normally take five to fifteen years to complete depending on the project's size, economic conditions prevailing at the time, geological conditions at the site and the Company's strategy for the particular project. Presley's other homebuilding projects usually take two to five years to develop. Substantially all of the Company's master-planned communities are in the later stages of land development.
The following table presents information by region relating to the Company's existing projects.
- --------------- (1) The estimated number of homes to be built at completion is subject to change, and there can be no assurance that the Company will build these homes.
(2) Backlog consists of homes sold under sales contracts that have not yet closed, and there can be no assurance that closings of sold homes will occur.
(3) Sales price range reflects base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project.
(4) Of the total homes subject to pending sales contracts as of December 31, 1996, 252 represent homes completed or under construction and 30 represent homes not yet under construction.
SALES AND MARKETING
The management team responsible for a specific project develops marketing objectives, formulates pricing and sales strategies and develops advertising and public relations programs for approval of senior management. The Company makes extensive use of advertising and other promotional activities, including newspaper advertisements, brochures, television and radio commercials, direct mail and the placement of
strategically located sign boards in the immediate areas of its developments. In general, the Company's advertising emphasizes Presley's strengths with respect to the quality and value of its products.
The Company normally builds, decorates, furnishes and landscapes three to five model homes for each product line and maintains on-site sales offices, which typically are open seven days a week. Management believes that model homes play a particularly important role in the Company's marketing efforts. Consequently, the Company expends a significant amount of effort in creating an attractive atmosphere at its model homes. Interior decorations vary among the Company's models and are carefully selected based upon the lifestyles of targeted buyers. Structural changes in design from the model homes are not generally permitted, but home buyers may select various other optional construction and design amenities.
Presley employs in-house commissioned sales personnel and, on a limited basis, outside brokers in the selling of its homes. Presley typically engages its sales personnel on a long-term, rather than a project-by-project basis, which it believes results in a more motivated sales force with an extensive knowledge of the Company's operating policies and products. Sales personnel are trained by the Company and attend weekly meetings to be updated on the availability of financing, construction schedules and marketing and advertising plans.
The Company strives to provide a high level of customer service during the sales process and after a home is sold. The participation of the sales representatives, on-site construction supervisors and the post-closing customer service personnel, working in a team effort, is intended to foster the Company's reputation for quality and service, and ultimately lead to enhanced customer retention and referrals.
In the past, and more so during the recent California recession, Presley has used a variety of incentives in order to attract buyers. Sales incentives may include upgrades in interior design features such as carpet or fixtures, or added amenities such as a fireplace or an outdoor deck. The use of incentives depends largely on prevailing economic conditions and the Company's success in marketing its products.
The Company's homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyer's ability to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at Presley's projects was approximately 22% during 1996. The Company believes its cancellation rate compares favorably to that of its competitors.
The Company generally provides a one-year limited warranty of workmanship and materials with each of its homes. From January 1, 1992 through March 31, 1995, the Company provided a five-year limited warranty for certain homes in the Company's Southern California Region. This five-year warranty exceeded the warranty offered by competitors and served as a marketing tool for the Company. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims. The Company's historical experience is that one-year warranty claims generally fall within the one percent reserve. In addition, California law provides that consumers can seek redress for patent defects in new homes within four years from when the defect is discovered, or should have been discovered, provided that if the defect is latent there is an outside limit for seeking redress which is ten years from the completion of construction. In addition, because the Company generally subcontracts its homebuilding work to qualified subcontractors who generally provide the Company with an indemnity and a certificate of insurance prior to receiving payment from the Company for their work, the Company generally has recourse against the subcontractors or their insurance carriers for claims relating to the subcontractors' workmanship or materials.
CUSTOMER FINANCING -- PRESLEY MORTGAGE COMPANY
The Company seeks to assist its home buyers in obtaining financing by arranging with mortgage lenders to offer qualified buyers a variety of financing options. Substantially all home buyers utilize long-term mortgage financing to purchase a home and mortgage lenders will usually make loans only to qualified borrowers. The Company attempts to minimize potential risks relating to customer financing by acquiring mortgage financing commitments that lock in the availability of funds and interest costs at specified levels.
Presley Mortgage Company, a wholly owned subsidiary, began operations effective December 1, 1994 and is in operation to service all of the Company's operating regions. The mortgage company operates as a mortgage broker/loan correspondent and originates conventional, FHA and VA loans.
SALE OF LOTS AND LAND
In the ordinary course of business, the Company continually evaluates land sales and has sold, and expects that it will continue to sell, land as market and business conditions warrant. Presley also sells both multiple lots to other builders (bulk sales) and improved individual lots for the construction of custom homes where the presence of such homes adds to the quality of the community. In addition, the Company may acquire sites with commercial, industrial and multi-family parcels which will generally be sold to third-party developers.
INFORMATION SYSTEMS AND CONTROLS
The Company assigns a high priority to the development and maintenance of its budget and cost control systems and procedures. The Company's regional and area offices are connected to corporate headquarters through a fully integrated accounting, financial and operational management information system. Through this system, management regularly evaluates the status of its projects in relation to budgets to determine the cause of any variances and, where appropriate, adjusts its operations to capitalize on favorable variances or to limit adverse financial impacts.
COMPETITION
The homebuilding industry is highly competitive, particularly in the low and medium-price range where the Company currently concentrates its activities. Although Presley is one of California's largest homebuilders, the Company does not believe it has a significant market position in any geographic area which it serves due to the fragmented nature of the market. Due in significant part to the recent recession and its effect on the housing market, the Company has, since 1990, had to reduce its sales prices and offer greater incentives to buyers in order to effectively compete for sales in several of its markets. A number of Presley's competitors have larger staffs, larger marketing organizations, and substantially greater financial resources than those of Presley. However, the Company believes that it competes effectively in its existing markets as a result of its product and geographic diversity, substantial development expertise, and its reputation as a low-cost producer of quality homes. Further, the Company sometimes gains a competitive advantage in locations where changing regulations make it difficult for competitors to obtain entitlements and/or government approvals which the Company has already obtained.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
The Company and its competitors are subject to various local, state and Federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can ultimately be built within the boundaries of a particular project. The Company and its competitors may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future in the states in which it operates. Because the Company usually purchases land with entitlements, the Company believes that the moratoriums would adversely affect the Company only if they arose from unforeseen health, safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in when the Company receives entitlements.
The Company and its competitors are also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause the Company and its competitors to incur substantial compliance and other costs,
and may prohibit or severely restrict development in certain environmentally sensitive regions or areas. The Company's projects in California are especially susceptible to restrictive government regulations and environmental laws. However, environmental laws have not, to date, had a material adverse impact on the Company's operations.
CORPORATE ORGANIZATION AND PERSONNEL
Each of the Company's operating areas has responsibility for the Company's homebuilding and development operations within the geographical boundaries of that area. Larger regions have area offices, which allow for closer management of a diverse geographical market within a region.
The Company's eleven executive officers at the corporate and operating levels average more than 20 years of experience in the homebuilding and development industries within California and the Southwest. The Company combines decentralized management in those aspects of its business where detailed knowledge of local market conditions is important (such as governmental processing, construction, land development and sales and marketing), with centralized management in those functions where the Company believes central control is required (such as financial, personnel and legal matters). Land acquisition and certain other strategic decisions combine centralized management, for financial and strategic control, with decentralized management, for identification of opportunistic purchases and in-depth knowledge of local market conditions.
As of December 31, 1996, Presley's real estate development and homebuilding operations employed approximately 366 full-time and 73 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, engineering, land acquisition, sales and marketing activities.
Presley believes that its relations with its employees have been good. Some employees of the subcontractors which Presley utilizes are unionized, but virtually none of Presley's employees are union members. Although there have been temporary work stoppages in the building trades in Presley's areas of operation, to date none has had any material impact upon Presley's overall operations.
ITEM 2.
ITEM 2. PROPERTIES
Headquarters
Presley owns a 15,800 square foot building on leased land in Newport Beach, California which it uses for its corporate headquarters. The Company leases or owns properties for its area offices, but none of these properties is material to the operation of Presley's business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, most of which relate to routine litigation and some of which are covered by insurance. In the opinion of the Company's management, none of the uninsured claims involve realistic claims which are material and unreserved or will have a material adverse effect on the financial condition of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Series A Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol PDC. Public trading of the Series A Common Stock commenced on October 11, 1991. Prior to that date, there was no public market for the Series A Common Stock. The following table sets forth the high and low sales prices for the Series A Common Stock as reported on the NYSE for the periods indicated.
As of March 6, 1997, the closing price for the Company's Series A Common Stock as reported on the NYSE was $1 1/8.
As of March 6, 1997, there were 381 holders of record of the Company's Series A Common Stock.
The Company has not paid any cash dividends on its Common Stock during the last two fiscal years and expects that for the foreseeable future it will follow a policy of retaining earnings in order to help finance its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements, general economic conditions and operating and financial condition of the Company, among other factors. In addition, the effect of the Company's principal financing agreements currently prohibits the payment of dividends by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity" and Notes 2 and 5 of "Notes to Consolidated Financial Statements."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company have been derived from the Consolidated Financial Statements of the Company and other available information. The summary should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere herein.
As described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 2 of "Notes to Consolidated Financial Statements," the consolidated financial statements for 1994, 1995 and 1996 have been prepared after giving retroactive effect as of January 1, 1994 to a capital restructuring and quasi-reorganization. The restructuring and quasi-reorganization resulted in a reduction of the book value of the Company's real estate assets and liabilities as of January 1, 1994, and as a result, cost of sales and interest expense are lower in 1994, 1995 and 1996 than they would have been otherwise, affecting comparability of 1994, 1995 and 1996 results to 1993 and prior years.
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(1) Ratio of earnings to fixed charges is calculated by dividing income as adjusted by fixed charges. For this purpose, "income as adjusted" means income (loss) before (i) minority partners' interest in consolidated income (loss) and (ii) income taxes, plus (i) interest expense and (ii) amortization of capitalized interest included in cost of sales. For this purpose "fixed charges" means (i) interest expense and (ii) interest capitalized during the period.
(2) Earnings were not adequate to cover fixed charges by $21.1 million, $67.1 million, $13.9 million, $65.6 million, and $29.7 million for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. These deficits, as well as the operating income (loss), include the effect of an impairment loss on real estate assets of $16.8 million in 1995 and reductions of real estate assets to estimated net realizable value of $9.4 million, $46.6 million, and $26.0 million in 1995, 1993, and 1992, respectively.
(3) The amounts at January 1, 1994 include the effects of the capital restructuring and quasi-reorganization on the consolidated balance sheet as of December 31, 1993 as described in Note 2 of "Notes to Consolidated Financial Statements."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
OVERVIEW AND RECENT RESULTS. The Company's performance for the three years ended December 31, 1996 reflects the severe economic conditions encountered by the homebuilding industry in the Company's primary homebuilding markets in California. The declining economic conditions began to affect the Company's primary homebuilding markets during the fourth quarter of 1989 and continued off and on through the mid-1990's.
Homes sold, closed and in backlog as of and for the periods presented are as follows:
Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed as of December 31, 1996 was $52.7 million as compared to $51.3 million as of December 31, 1995 and $91.5 million as of September 30, 1996. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company's projects was approximately 22% during 1996.
The number of homes closed in the fourth quarter of 1996 was up 26 percent to 512 from 405 in the fourth quarter of 1995. Net new home orders for the quarter ended December 31, 1996 decreased 21 percent to 306 units from 389 for the quarter ended December 31, 1995. For the fourth quarter of 1996, net new orders decreased 29 percent to 306 from 429 units in the third quarter of 1996. The backlog of homes sold as of December 31, 1996 was 282, down 11 percent from 316 units as of December 31, 1995, and down 42 percent from 488 units at September 30, 1996. The Company's inventory of completed and unsold homes as of December 31, 1996 increased to 122 units from 110 units as of December 31, 1995.
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less cost of disposal. Under the new pronouncement, when an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. This was a significant change from the previous accounting standard that required homebuilders to carry real estate assets at the lower of cost or net realizable value. Although Statement No. 121 was effective for fiscal years beginning after December 15, 1995, the Company elected, as encouraged by the new pronouncement, to adopt its provisions in 1995. Accordingly, the net loss for the year ended December 31, 1995 included a non-cash charge of $16,118,000 to record impairment losses on certain of the Company's real estate assets. The new accounting standard could result in material additional adjustments to the Company's real estate assets in the future, and materially different results in the timing and amount of adjustments than would have been the case under the previous standards.
The Company periodically evaluates its real estate assets to determine whether such assets have been impaired and therefore would be required to be adjusted to fair value. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein.
Two of the Company's older master planned communities (Sun Lakes Country Club and Horsethief Canyon Ranch) are currently realizing substantial operating losses as a result of declines in the sales value of the homes in those projects in recent years. As a result of those declines, the Company's future results are likely to continue to be adversely impacted.
Prior to October 1, 1995, the Company evaluated its real estate inventories to determine if such assets were stated at the lower of cost or estimated net realizable value, as required by the then applicable accounting pronouncements. The evaluations considered the depressed nature of the real estate business in the Company's principal markets, the reduced demand from prospective homebuyers, decreased sales prices, increased sales incentives, future costs of development and holding costs during development. Based on these evaluations, reductions of certain real estate assets to estimated net realizable value amounting to $9,400,000 were recorded during 1995.
This Annual Report on Form 10-K does not attempt to discuss or describe all of the factors that influence or impact the evaluation of an impairment of or the net realizable value of the Company's real estate assets.
Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of product available for sale is expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expense during 1996, 1995, and 1994 was approximately $2,256,000, $2,226,000, and $6,961,000, respectively.
In general, housing demand is adversely affected by increases in interest and housing costs. Interest rates, the length of time that assets remain in inventory, and the proportion of inventory that is financed affect the Company's interest cost. If the Company is unable to raise sales prices sufficiently to compensate for higher costs, which has generally been the case recently, or if mortgage interest rates increase significantly, affecting prospective buyers' ability to adequately finance home purchases, the Company's sales, gross margins and net results may be adversely impacted. To a limited extent, the Company hedges against increases in interest costs by acquiring interest rate protection that locks in or caps interest rates for limited periods of time for mortgage financing for prospective homebuyers.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995. Sales (which represent recorded revenues from closings) for the year ended December 31, 1996 were $319.0 million, an increase of $33.5 million (11.7%), from sales of $285.5 million for the year ended December 31, 1995. Revenue from sales of homes increased $86.2 million to $317.4 million in 1996 from $231.2 million in 1995. This increase was due primarily to an increase in the number of homes closed to 1,838 in 1996 from 1,425 in 1995 and an increase in the average sales prices of homes to $173,000 in 1996 from $162,000 in 1995. Revenue from lots, land and other decreased $52.7 million to $1.6 million in 1996 from $54.3 million in 1995.
Total operating income (loss) changed from a loss of $41.3 million in 1995 to income of $0.2 million in 1996. The excess of revenue from sales of homes over the related cost of sales increased by $17.0 million, to $37.4 million in 1996 from $20.4 million in 1995 primarily due to increased sales prices and an increase in the number of homes closed as described above and decreases in buyer incentives. The excess of revenue from
sales of lots, land and other over the related cost of sales changed by $1.0 million to a loss of $0.4 million in 1996 from a loss of $1.4 million in 1995. Impairment losses on real estate assets amounting to $16.8 million were recorded in 1995 as compared to none in 1996. Reductions of real estate assets to estimated net realizable value amounting to $9.4 million were recorded in 1995 as compared to none in 1996. Sales and marketing expenses increased by $1.5 million to $22.9 million in 1996 from $21.4 million in 1995 primarily as a result of increased closing costs (directly related to revenue from increased closings) in 1996 compared to 1995. General and administrative expenses increased by $1.3 million to $14.0 million in 1996 from $12.7 million in 1995, primarily as a result of increased overhead from start-up operations in Arizona and Nevada. General and administrative expenses as a percentage of sales was 4.4% in both 1996 and 1995.
Total interest incurred during 1996 decreased $2.6 million (7.6%) from 1995 as a result of lower debt balances in 1996. Net interest expense increased slightly to $2.3 million in 1996 from $2.2 million for 1995.
Other (income) expense, net increased $0.3 million to a net income of $2.2 million in 1996 from a net income of $1.9 million in 1995 primarily as a result of (i) increased income from recreational facilities and (ii) increased income from mortgage and design center operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994. Sales (which represent recorded revenues from closings) for the year ended December 31, 1995 were $285.5 million, an increase of $15.3 million (5.7%), from sales of $270.2 million for the year ended December 31, 1994. Revenue from sales of homes decreased $31.7 million to $231.2 million in 1995 from $262.9 million in 1994. This decrease was due primarily to a decrease in the number of homes closed to 1,425 in 1995 from 1,442 in 1994 and a decrease in the average sales prices of homes to $162,000 in 1995 from $182,000 in 1994 which resulted primarily from reduced sales prices, increased buyer incentives and a change in the mix of product. Revenue from lots, land and other increased $47.0 million to $54.3 million in 1995 from $7.3 million in 1994, primarily as a result of the Company's progress in implementing its strategy of becoming primarily a merchant homebuilder rather than being primarily a developer of master-planned communities which can take many years to develop. Consistent with this strategy, during 1995 the Company sold lots and land which in most cases would not have been used by the Company for homebuilding for several years. The proceeds of these sales are being used to improve liquidity as well as being redeployed into acquisitions of lots which can be used in the near term by the Company for homebuilding.
Total operating income (loss) decreased from income of $14.3 million in 1994 to a loss of $41.3 million in 1995. The excess of revenue from sales of homes over the related cost of sales decreased by $24.8 million, to $20.4 million in 1995 from $45.2 million in 1994. These decreases were primarily due to decreased sales prices and a decrease in the number of homes closed as described above and increases in costs such as interest and development. The excess of revenue from sales of lots, land and other over the related cost of sales decreased by $1.8 million to a loss of $1.4 million in 1995 from income of $0.4 million in 1994. Impairment losses on real estate assets amounting to $16.8 million were recorded in 1995 as compared to none in 1994. Reductions of real estate assets to estimated net realizable value amounting to $9.4 million were recorded in 1995 compared to none in 1994. Sales and marketing expenses increased by $2.4 million (12.6%) to $21.4 million in 1995 from $19.0 million in 1994 primarily as a result of increased advertising and other selling expenses in 1995 compared to 1994. General and administrative expenses increased by $0.4 million (3.3%) to $12.7 million in 1995 from $12.3 million in 1994, primarily as the result of additional staffing in expanding operating units in Arizona and Nevada. General and administrative expenses decreased as a percentage of sales to 4.4% in 1995 from 4.6% in 1994.
Total interest incurred during 1995 increased $2.0 million (6.2%) from 1994 as a result of increased interest rates in 1995. Net interest expense decreased to $2.2 million in 1995 from $7.0 million for 1994. This decrease was due primarily to an increase in development activities in 1995 compared to 1994, resulting in increased interest capitalization offset by increased interest rates.
Other (income) expense, net decreased $0.6 million to a net income of $1.9 million in 1995 from a net income of $2.5 million in 1994 primarily as a result of (i) decreased interest income due in part to lower cash balances in 1995 compared to 1994, (ii) a decrease in management fee income, offset by (iii) increased income from mortgage operations.
FINANCIAL CONDITION AND LIQUIDITY
The Company provides for its ongoing cash requirements from internally generated funds from the sales of real estate and from outside borrowings. The Company currently maintains the following major credit facilities: 12 1/2% Senior Notes (the "Senior Notes"), a secured revolving lending facility (the "Working Capital Facility"), a revolving line of credit relating to Horsethief Canyon Partners, its wholly-owned joint venture partnership, a revolving line of credit relating to Carmel Mountain Ranch, its wholly-owned joint venture partnership (the latter two facilities collectively the "Joint Venture Facilities"), and a revolving line of credit relating to construction on certain real property located in Arizona and New Mexico (the "Other Facility") which are summarized below.
Capital Restructuring and Quasi-Reorganization
On March 28, 1994 the Company's Board of Directors approved a Plan for Capital Restructuring, which was approved by the Company's Stockholders at the Annual Meeting of Stockholders held on May 20, 1994.
In accordance with the Plan for Capital Restructuring, on March 29, 1994 the Company executed a definitive agreement with its lenders to restructure the Company's $340,000,000 revolving line of credit (the "Revolving Facility"). The Plan was approved at the Company's Annual Meeting held on May 20, 1994 and on that date the lender group under the Company's Revolving Facility converted $95,000,000 of outstanding debt under the Revolving Facility to equity through the issuance of 43,166,667 shares of a new series of common stock representing initially 70% of the outstanding shares of all series of common stock of the Company. As provided in the agreement with its lenders, when the Company completed its Senior Notes Offering of $200,000,000 on June 29, 1994, as described below, the lending group returned to the Company a total of 8,809,524 shares of the new series of common stock, reducing their aggregate equity interest in the Company to 65% from 70%. In order to implement the Plan for Capital Restructuring, the Company's Certificate of Incorporation was amended to redesignate existing common stock as Series A Common Stock (the "Series A Common"), to establish a second series of common stock which was issued to the lender group (the "Series B Common"), and to increase the number of directors of the Company to nine, of which six are elected by holders of outstanding shares of Series A Common, and the remaining three are elected by the holders of outstanding shares of Series B Common.
Concurrent with the conversion of debt to equity, under the Plan for Capital Restructuring, the Revolving Facility was reduced by $95,000,000 to a total of $245,000,000, comprised of a $150,000,000 term facility ("the Term Facility") and a $95,000,000 working capital facility ("the Working Capital Facility") (collectively, "the Debt Facilities"). In addition the lender group increased the Working Capital Facility by $20,000,000 to a total of $115,000,000. Revolving credit loans under the Working Capital Facility may be borrowed, repaid and reborrowed from time to time prior to the termination date of the Working Capital Facility. The lender group had therefore provided Debt Facilities totaling $265,000,000 to the Company.
As described more fully below, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Term Facility was repaid in full and the Working Capital Facility was reduced by $43,000,000 from a portion of the proceeds from the issuance of the Senior Notes.
The terms of the Working Capital Facility are described more fully below.
The Series B Common ranks pari passu with the Series A Common in any liquidation of the Company. The Company may not declare or pay any dividends on the Series A Common unless equal dividends are declared and paid on the Series B Common.
The Series B Common is convertible into Series A Common on a share-for-share basis at the option of the holder upon the occurrence of any one of the following: (1) after May 20, 1997; (2) if the holder sells the Series A Common into which the Series B Common is being converted in a public distribution or in open market sales under Rule 144, and the holder has made no arrangement for the purchase of such shares by any purchaser; (3) certain sales of Series A Common which result in a change of control; and (4) an event of default under the Working Capital Facility shall occur and be continuing.
As part of the Plan for Capital Restructuring, the Company's Board of Directors also approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented the quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with the Plan for Capital Restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting."
Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations.
The estimation process involved in the determination of the fair value of those assets as to which an adjustment was made is inherently uncertain since it required estimates and assumptions as to future events and conditions. Such future events and conditions include economic and market conditions, the availability and cost of governmental entitlements necessary to develop and build product, the cost of financing to fund development and construction activities, and the availability and cost of labor and materials necessary to develop, build and sell product.
Because the amount and timing of the realization of the investments by the Company and its subsidiaries in their respective real estate projects are dependent upon such future uncertain events and conditions, the actual timing and amounts may be materially different from the estimates and assumptions used in determining fair value estimates utilized for purposes of the Plan for Quasi-Reorganization.
The quasi-reorganization affects the comparability of operating statements for periods beginning after December 31, 1993 with those for periods beginning on or before December 31, 1993. Moreover, any income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences resulting from the quasi-reorganization, are excluded from the results of operations and credited to paid-in capital.
Senior Notes
The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a Delaware corporation ("Delaware Presley" or the "Company"), and are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly owned subsidiary of Delaware Presley ("California Presley"). However, California Presley has granted liens on substantially all of its assets as security for its obligations under the Working Capital Facility and other loans. Because the California Presley guarantee is not secured, holders are effectively junior to borrowings under the Working Capital Facility with respect to such assets. Delaware Presley and its consolidated subsidiaries are referred to collectively herein as "Presley" or the "Company." Interest on the Senior Notes is payable on January 1 and July 1 of each year, commencing January 1, 1995.
Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes are not redeemable by Presley prior to July 1, 1998. Thereafter, the Senior Notes will be redeemable at the option of Delaware Presley, in whole or in part, at the redemption prices set forth in the Indenture.
The Senior Notes are senior obligations of Presley and rank pari passu in right of payment to all existing and future unsecured indebtedness of Presley, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the Senior Notes.
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.
Presley is required to offer to repurchase certain Senior Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest to the date of repurchase if Delaware Presley's Consolidated Tangible Net Worth is less than $60,000,000 million for any two consecutive fiscal quarters and from the proceeds of certain asset sales.
The Indenture governing the Senior Notes restricts, among other things: (i) the payment of dividends on and redemptions of capital stock by Presley, (ii) the incurrence of indebtedness by Presley or the issuance of preferred stock by Delaware Presley's subsidiaries, (iii) the creation of certain liens, (iv) Delaware Presley's ability to consolidate or merge with or into, or to transfer all or substantially all of its assets to, another person, and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.
The net proceeds of this offering were used to repay amounts outstanding under the Term Facility and to reduce the outstanding debt and commitment level under the Working Capital Facility in connection with the Plan for Capital Restructuring as more fully described above.
The proceeds of the offering were used as follows:
In April 1995, the Company purchased $10,000,000 principal amount of its outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of $724,000 after giving effect to related deferred loan costs and income taxes. Although it has no definitive program to purchase outstanding Senior Notes, the Company may make such purchases from time to time in the future if management believes such purchases are in the Company's best interest.
As of December 31, 1996, the outstanding 12 1/2% Senior Notes with a face value of $190,000,000 were valued at $180,500,000, based on discussions with analysts.
Working Capital Facility
The collateral for the loans provided by the Working Capital Facility includes substantially all real estate and other assets of the Company (excluding assets of partnerships and the portion of the partnership interests in the Carmel Mountain Ranch partnership which are currently pledged to other lenders). The maximum loan under the Working Capital Facility is limited to $72,000,000. The principal outstanding under the Working Capital Facility at December 31, 1996 was $12,000,000.
The Working Capital Facility has a termination date of May 20, 1997, with two one-year extensions at the Company's option. Upon any extension of the termination date, the Company would pay an extension fee of 1% of the Working Capital Facility commitment amount (in addition to the loan fee described below) for each year extended. Management intends to exercise the Company's option to extend the termination date of the Working Capital Facility to May 20, 1998.
Pursuant to the terms of the Working Capital Facility, outstanding advances bear interest at the prime rate plus 2%. An alternate option provides for interest based on a specified overseas base rate plus 4.44%, but not less than the prime rate option in effect at December 31, 1993 (8.00%). In addition, the Company pays a loan fee of 1% per annum, payable quarterly, on the total Working Capital Facility commitment amount.
The Working Capital Facility now provides that the Company must maintain a Tangible Effective Net Worth as of the last day of any fiscal quarter of not less than $70,000,000. The Working Capital Facility also
provides that as of the last day of any fiscal quarter the ratio of the Company's Total Liabilities (excluding non-recourse debt) to Tangible Effective Net Worth must not exceed 3.75 to 1 and that the ratio of Adjusted Total Liabilities (the Company's and its unconsolidated partnerships' Total Liabilities and Letters of Credit) (excluding non-recourse debt) to Tangible Effective Net Worth must not exceed 4.0 to 1. At December 31, 1996 the Company's Tangible Effective Net Worth was approximately $79,866,000, the ratio of the Company's Total Liabilities (excluding non-recourse debt) to Tangible Effective Net Worth was 3.10 to 1, and the ratio of Adjusted Total Liabilities (excluding non-recourse debt) to Tangible Effective Net Worth was 3.10 to 1.
The Working Capital Facility requires certain minimum cash flow and pre-tax and pre-interest tests. The Working Capital Facility also provides for negative covenants which, among other things, place limitations on the payment of cash dividends, merger transactions, transactions with affiliates, the incurrence of additional debt and the acquisition of new land as described in the following paragraph.
Under the terms of the Working Capital Facility, the Company may acquire new improved land for development of housing units of no more than 300 lots in any one location without approval from the lenders if certain conditions are satisfied. The Company may, however, acquire any new raw land or improved land provided the Company has obtained the prior written approval of lenders holding two-thirds of the obligations under the Working Capital Facility.
The Working Capital Facility requires that mandatory prepayments be made to reduce the outstanding balance of loans to the extent of all funds in excess of $20,000,000 in the principal operating accounts of the Company.
The Company is obligated under letters of credit, issued under terms of the Working Capital Facility, which totaled $144,000 at December 31, 1996. These letters of credit guarantee completion of construction related to various project improvements.
Joint Venture Facilities
Horsethief Canyon Partners ("HCP"), the partnership that owns the Horsethief Canyon master-planned community, is a California general partnership and is 100% owned by The Presley Companies and its wholly-owned subsidiary. Prior to October 4, 1996, the construction of the project was being financed through intract loans to prepare finished lots for the construction of homes and construction loans to finance the construction of homes.
Effective on October 4, 1996, HCP executed a master credit agreement with a maximum loan commitment of $10,000,000 to finance the development of lots for residential homes and the construction of single-family attached and detached production homes. At December 31, 1996, the revolving line of credit had an outstanding balance of $2,628,000. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on March 17, 1998. Availability under the line is subject to a number of limitations. The outstanding balance under this facility, together with the outstanding balances under the CMR facility and the Other Facility described below, may not exceed $29,000,000.
Carmel Mountain Ranch ("CMR"), the partnership that owns the Carmel Mountain Ranch master-planned community, is also a California general partnership and is 100% owned by The Presley Companies and its wholly-owned subsidiary. Effective in March 1995, the development and construction of Carmel Mountain Ranch ("CMR"), a consolidated joint venture, is financed through a revolving line of credit. The revolving line of credit consists of several components relating to production units, models and residential lots. At December 31, 1996, the revolving line of credit had no outstanding balance. Availability under the line is subject to a number of limitations, but in any case cannot exceed $29,000,000, and is subject to further limitations as described in the following paragraph. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on March 17, 1998.
Other Facility
Effective in October 1995, the Company executed a master credit agreement with a maximum loan commitment of $5,000,000 to finance the development of lots for residential homes and the construction of single-family attached and detached production homes on certain real property located in Arizona and New Mexico. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on November 30, 1998. The outstanding balance under this facility, together with the outstanding balance under the CMR facility described in the preceding paragraph, may not exceed $29,000,000. As of December 31, 1996 the outstanding balance under this agreement was $3,542,000.
Assessment District Bonds and Seller Financing
In some locations in which the Company develops its projects, assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the Company's other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When Presley's homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments.
Another potential source of financing available to the Company is seller-provided financing for land acquired by the Company. Although the Company has not used this form of financing significantly in the past few years, it is possible that such financing may be available and utilized to a greater extent in the future.
Cash Flows -- Comparison of Years Ended December 31, 1996 and 1995
Net cash provided by operating activities decreased from $27.7 million in 1995 to $15.6 million in 1996. The change was primarily due to reduced proceeds from reductions in land sales, offset by the net income in 1996 compared to a net loss in 1995.
Net cash provided by (used in) investing activities changed from a use of $0.4 million in 1995 to a source of $0.7 million for 1996. The change was due primarily to a reduction in the issuance of notes receivable, offset by a reduction in the principal payments on notes receivable and an increase in the purchase of property and equipment.
Net cash used in financing activities decreased $27.8 million to $15.9 million in 1996 from $43.7 million in 1995. The change was primarily due to the reduction of debt in 1995.
Cash Flows -- Comparison of Years Ended December 31, 1995 and 1994
Net cash provided by operating activities increased to $27.7 million in 1995 from $0.6 million in 1994. The change was primarily due to a reduction in the amount invested in real estate inventories, offset by an increase in the net loss in 1995 compared to 1994.
Net cash (used in) provided by investing activities changed from a source of $0.5 million in 1994 to a use of $0.4 million in 1995. The change was due primarily to an increase in the amount of new notes receivable issued, offset by an increase in principal payments received on notes receivable and a decrease in purchases of property and equipment.
Net cash used in financing activities increased $36.6 million to $43.7 million in 1995 from $7.1 million in 1994. The change was primarily due to the reduction of debt.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Presley's consolidated financial statements and the report of the independent auditors, listed under Item 14, are submitted as a separate section of this report beginning on page and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1997 Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1997 Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the Company's Proxy Statement for the 1997 Annual Meeting of Holders of Series A Common Stock to be held on May 14, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Company are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below:
(2) Financial Statement Schedules:
Schedules are omitted as the required information is not present, is not present in sufficient amounts, or is included in the Consolidated Financial Statements or Notes thereto.
(3) Listing of Exhibits:
- ------------
(1) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and incorporated herein by this reference.
(2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1992 and incorporated herein by this reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by this reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993 and incorporated herein by this reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1993 and incorporated herein by this reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993 and incorporated herein by this reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by this reference.
(8) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference.
(9) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference.
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by this reference.
(11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by this reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 and incorporated herein by this reference.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by this reference.
(14) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by this reference.
(b) Reports on Form 8-K
No Reports on Form 8-K have been filed by the Company during the quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE PRESLEY COMPANIES
By: DAVID M. SIEGEL ------------------------------------ David M. Siegel Senior Vice President, Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
THE PRESLEY COMPANIES
REQUIRED SCHEDULES
Schedules are omitted as the required information is not present, is not present in sufficient amounts, or is included in the Consolidated Financial Statements or Notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders The Presley Companies
We have audited the accompanying consolidated balance sheets of The Presley Companies (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Presley Companies at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Newport Beach, California February 18, 1997
THE PRESLEY COMPANIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
See accompanying notes.
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
See accompanying notes.
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes.
THE PRESLEY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
The Presley Companies (the "Company") is primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona, New Mexico and Nevada.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and all majority-owned or controlled subsidiaries and joint ventures. The equity interests of other partners are reflected as minority partners' interest. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company has less than a controlling interest are accounted for using the equity method. The accounting policies of the joint ventures are substantially the same as those of the Company.
Real Estate Inventories and Related Indebtedness
Real estate inventories are carried at cost net of impairment losses and real estate valuation adjustments. Real estate inventories consist primarily of raw land, lots under development, houses under construction and completed houses. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land and improvement costs are allocated within a project utilizing a method that approximates relative value. Selling expenses and other marketing costs are expensed in the period incurred. A provision for warranty costs relating to the Company's limited warranty plans is included in cost of sales at the time the sale of a home is recorded. The Company normally reserves one percent of the sales price of its homes against the possibility of future charges relating to its one-year limited warranty and similar potential claims.
Interest incurred under the Working Capital Facility, the Senior Notes and other notes payable, as more fully discussed in Note 5, is generally first capitalized to real estate projects under development. Excess interest charges related to real estate projects not under development are expensed in the period incurred.
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement No. 121") which requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets (excluding interest) are less than the carrying amount of the assets. Statement No. 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less cost of disposal. Under the new pronouncement, when an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. This was a significant change from the previous accounting standard that required homebuilders to carry real estate assets at the lower of cost or net realizable value. Although Statement No. 121 was effective for fiscal years beginning after December 15, 1995, the Company elected, as encouraged by the new pronouncement, to adopt its provisions in 1995. Accordingly, the net loss for the year ended December 31, 1995 included a non-cash charge of $16,811,000 to record impairment losses on certain of the Company's real estate assets. The new accounting standard could result in material additional adjustments to the Company's real estate assets in the future, and materially different results in the timing and amount of adjustments than would have been the case under the previous standards.
Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain since it
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Company's real estate projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from the estimated fair values as described herein.
Prior to October 1, 1995, the Company evaluated its real estate inventories to determine if such assets were stated at the lower of cost or estimated net realizable value, as required by the then applicable accounting pronouncements. The evaluations considered the depressed nature of the real estate business in the Company's principal markets, the reduced demand from prospective homebuyers, decreased sales prices, increased sales incentives, future costs of development and holding costs during development. Based on these evaluations, reductions of certain real estate assets to estimated net realizable value amounting to $9,400,000 were recorded during 1995.
Interest incurred during the period in which real estate projects are not under development or during the period subsequent to the completion of projects are expensed in the period incurred. Economic conditions in the real estate industry can cause a delay in the development of certain real estate projects and, as a result, can lengthen the periods when such projects are not under development and, accordingly, have a significant impact on profitability as a result of expensed interest. Interest expensed during 1996, 1995, and 1994 was approximately $2,256,000, $2,226,000 and $6,961,000, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated using various methods over their estimated useful lives ranging from three to thirty-five years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the shorter of either their estimated useful lives or term of the lease.
Deferred Loan Costs
Deferred loan costs are amortized over the term of applicable loans using a method which approximates the interest method. Included in deferred loan costs at December 31, 1996 and 1995, net of related amortization, are $4,259,000 and $5,205,000, respectively, of costs associated with the issuance of the Company's Senior Notes.
Sales and Profit Recognition
A sale is generally recorded and profit recognized when title has passed to a buyer who has met down payment and continuing investment criteria in accordance with the provisions of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate." When it is determined that the earnings process is not complete, unearned profit is deferred for recognition in future periods.
Income Taxes
Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Financial Instruments
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash investments, receivables, and deposits. The Company typically places its cash investments in investment grade short-term instruments. Collateral on first trust deed notes receivable is primarily located in Southern California and Arizona. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers.
For those instruments, as defined under Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," for which it is practical to estimate fair value,
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
management has determined that the carrying amounts of the Company's financial instruments approximate their fair value at December 31, 1996, except for the 12 1/2% Senior Notes as described in Note 5.
The Company is an issuer of, or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in connection with assessment district bonds. These off-balance sheet financial instruments are described in the applicable Notes.
Cash and Cash Equivalents
Short-term investments with a maturity of three months or less when purchased are considered cash equivalents.
Net Income (Loss) Per Common Share
Net income (loss) per common share for the years ended December 31, 1996 and 1995 is based on 52,195,678 shares of Series A and Series B common stock outstanding.
Net income per common share for the year ended December 31, 1994 is based on 57,197,941 weighted average total shares of Series A and Series B common stock outstanding after giving retroactive effect to the capital restructuring described in Note 2.
Use of Estimates
The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 1996 and 1995 and revenues and expenses for each of the three years in the period ended December 31, 1996. Accordingly, actual results could differ from those estimates in the near-term.
NOTE 2 -- CAPITAL RESTRUCTURING AND QUASI-REORGANIZATION
On March 28, 1994 the Company's Board of Directors approved a Plan for Capital Restructuring, which was approved by the Company's Stockholders at the Annual Meeting of Stockholders held on May 20, 1994.
In accordance with the Plan for Capital Restructuring, on March 29, 1994 the Company executed a definitive agreement with its lenders to restructure the Company's $340,000,000 revolving line of credit. The Plan was approved at the Company's Annual Meeting held on May 20, 1994 and on that date the lender group under the Company's Revolving Debt Facility (see Note 5) converted $95,000,000 of outstanding debt under the Revolving Facility to equity through the issuance of 43,166,667 shares of a new series of common stock representing initially 70% of the outstanding shares of all series of common stock of the Company. As provided in the agreement with its lenders, when the Company completed its Senior Notes Offering of $200,000,000 on June 29, 1994, as described below, the lending group returned to the Company a total of 8,809,524 shares of the new series of common stock, reducing their aggregate equity interest in the Company to 65% from 70%. In order to implement the Plan for Capital Restructuring, the Company's Certificate of Incorporation was amended to redesignate existing common stock as Series A Common Stock (the "Series A Common"), to establish a second series of common stock which was issued to the lender group (the "Series B Common"), and to increase the number of directors of the Company to nine, of which six are elected by holders of outstanding shares of Series A Common, and the remaining three are elected by the holders of outstanding shares of Series B Common.
Concurrent with the conversion of debt to equity, under the Plan for Capital Restructuring, the Revolving Debt Facility was reduced by $95,000,000 to a total of $245,000,000, comprised of a $150,000,000 term facility ("the Term Facility") and a $95,000,000 working capital facility ("the Working Capital Facility"), each described below (collectively, "the Debt Facilities"). In addition the lender group increased the Working Capital Facility by $20,000,000 to a total of $115,000,000. Revolving credit loans under the Working Capital Facility may be borrowed, repaid and reborrowed from time to time prior to the termination date of the
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Working Capital Facility. The lender group had therefore provided Debt Facilities totaling $265,000,000 to the Company.
As described more fully in Note 5, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued. The Term Facility was repaid in full and the Working Capital Facility was reduced by $43,000,000 from a portion of the proceeds from the issuance of the Senior Notes.
The terms of the Working Capital Facility are described more fully in Note 5.
The Series B Common ranks pari passu with the Series A Common in any liquidation of the Company. The Company may not declare or pay any dividends on the Series A Common unless equal dividends are declared and paid on the Series B Common.
The Series B Common is convertible into Series A Common on a share-for-share basis at the option of the holder upon the occurrence of any one of the following: (1) after May 20, 1997; (2) if the holder sells the Series A Common into which the Series B Common is being converted in a public distribution or in open market sales under Rule 144, and the holder has made no arrangement for the purchase of such shares by any purchaser; (3) certain sales of Series A Common which result in a change of control; and (4) an event of default under the Working Capital Facility shall occur and be continuing.
As part of the Plan for Capital Restructuring, the Company's Board of Directors also approved a Plan for Quasi-Reorganization retroactive to January 1, 1994. The Company implemented the quasi-reorganization at that time because it was implementing a substantial change in its capital structure in accordance with the Plan for Capital Restructuring. A quasi-reorganization allows certain companies which are undergoing a substantial change in capital structure to utilize "fresh start accounting."
Under the Plan for Quasi-Reorganization, the Company implemented an overall accounting readjustment effective January 1, 1994, which resulted in the adjustment of assets and liabilities to estimated fair values, and the elimination of the accumulated deficit. The net amount of such revaluation adjustments and costs related to the capital restructuring, together with the accumulated deficit as of the date thereof, was transferred to paid-in capital in accordance with the accounting principles applicable to quasi-reorganizations.
The estimation process involved in the determination of the fair value of those assets as to which an adjustment was made is inherently uncertain since it required estimates and assumptions as to future events and conditions. Such future events and conditions include economic and market conditions, the availability and cost of governmental entitlements necessary to develop and build product, the cost of financing to fund development and construction activities, and the availability and cost of labor and materials necessary to develop, build and sell product.
Because the amount and timing of the realization of the investments by the Company and its subsidiaries in their respective real estate projects are dependent upon such future uncertain events and conditions, the actual timing and amounts may be materially different from the estimates and assumptions used in determining fair value estimates utilized for purposes of the Plan for Quasi-Reorganization.
The quasi-reorganization affects the comparability of operating statements for periods beginning after December 31, 1993 with those for periods beginning on or before December 31, 1993. Moreover, any income tax benefits resulting from the utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences resulting from the quasi-reorganization, are excluded from the results of operations and credited to paid-in capital.
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effect of the capital restructuring and quasi-reorganization on the consolidated balance sheet as of December 31, 1993 is as follows as of January 1, 1994 (in thousands except number of shares and par value per share):
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(A) To reflect the conversion of $95,000,000 of the Company's Revolving Debt Facility to equity through the issuance of 43,166,667 shares of Series B common stock.
(B) To reflect the readjustment of the Company's accounts to estimated fair values and the elimination of the accumulated deficit against additional paid-in capital as of January 1, 1994.
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- RECEIVABLES
Receivables consist of the following (in thousands):
Notes receivable as of December 31, 1996 mature through 2010 approximately as follows (in thousands):
NOTE 4 -- REAL ESTATE INVENTORIES
Real estate inventories consist of the following (in thousands):
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- 12 1/2% SENIOR NOTES AND NOTES PAYABLE
12 1/2% Senior Notes and notes payable consist of the following (in thousands):
Interest costs relating to the above notes consist of the following (in thousands):
Senior Notes
The Company filed with the Securities and Exchange Commission a Registration Statement on Form S-1 for the sale of $200,000,000 of Senior Notes which became effective on June 23, 1994. The offering closed on June 29, 1994 and was fully subscribed and issued.
The 12 1/2% Senior Notes due 2001 were offered by The Presley Companies, a Delaware corporation ("Delaware Presley"), are unconditionally guaranteed on a senior basis by Presley Homes (formerly The Presley Companies), a California corporation and a wholly owned subsidiary of Delaware Presley ("California Presley"). However, California Presley has granted liens on substantially all of its assets as security for its obligations under the Working Capital Facility and other loans. Because the California Presley guarantee is not secured, holders are effectively junior to borrowings under the Working Capital Facility with respect to such assets. Delaware Presley and its consolidated subsidiaries are referred to collectively herein as "Presley" or the "Company." Interest on the Senior Notes is payable on January 1 and July 1 of each year, commencing January 1, 1995.
Except as set forth in the Indenture Agreement (the "Indenture"), the Senior Notes are not redeemable by Presley prior to July 1, 1998. Thereafter, the Senior Notes will be redeemable at the option of Delaware Presley, in whole or in part, at the redemption prices set forth in the Indenture.
The Senior Notes are senior obligations of Presley and rank pari passu in right of payment to all existing and future unsecured indebtedness of Presley, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the Senior Notes.
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Upon a Change of Control as described in the Indenture, Presley must offer to repurchase Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase.
Presley is required to offer to repurchase certain Senior Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest to the date of repurchase if Delaware Presley's Consolidated Tangible Net Worth is less than $60,000,000 for any two consecutive fiscal quarters and from the proceeds of certain asset sales.
The Indenture governing the Senior Notes restricts, among other things: (i) the payment of dividends on and redemptions of capital stock by Presley, (ii) the incurrence of indebtedness by Presley or the issuance of preferred stock by Delaware Presley's subsidiaries, (iii) the creation of certain liens, (iv) Delaware Presley's ability to consolidate or merge with or into, or to transfer all or substantially all of its assets to, another person, and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.
The net proceeds of this offering were used to repay amounts outstanding under the Term Facility and to reduce the outstanding debt and commitment level under the Working Capital Facility in connection with the Plan for Capital Restructuring as more fully described in Note 2.
The proceeds of the offering were used as follows:
In April 1995, the Company purchased $10,000,000 principal amount of its outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of $724,000 after giving effect to related deferred loan costs and income taxes. Although it has no definitive program to purchase outstanding Senior Notes, the Company may make such purchases from time to time in the future if management believes such purchases are in the Company's best interests.
As of December 31, 1996, the outstanding 12 1/2% Senior Notes with a face value of $190,000,000 have a fair value of $180,500,000, based on discussions with analysts.
Working Capital Facility
The collateral for the loans provided by the Working Capital Facility includes substantially all real estate and other assets of the Company (excluding assets of partnerships and the portion of the partnership interests in the Carmel Mountain Ranch partnership which are currently pledged to other lenders). The borrowing base is calculated based on specified percentages of book values of real estate assets. The borrowing base at December 31, 1996 was approximately $190,000,000; however, the maximum loan under the Working Capital Facility is limited to $72,000,000. The principal outstanding under the Working Capital Facility at December 31, 1996 was $12,000,000.
The Working Capital Facility has a termination date of May 20, 1997, with two one-year extensions at the Company's option. Upon any extension of the termination date, the Company would pay an extension fee of 1% of the Working Capital Facility commitment amount (in addition to the loan fee described below) for each year extended. Management intends to exercise the Company's option to extend the termination date of the Working Capital Facility to May 20, 1998.
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the terms of the Working Capital Facility, outstanding advances bear interest at the prime rate plus 2%. An alternate option provides for interest based on a specified overseas base rate plus 4.44%, but not less than the prime rate option in effect at December 31, 1993 (8.00%). In addition, the Company pays a loan fee of 1% per annum, payable quarterly, on the total Working Capital Facility commitment amount.
The Working Capital Facility now provides that the Company must maintain a Tangible Effective Net Worth as of the last day of any fiscal quarter of not less than $70,000,000. The Working Capital Facility also provides that as of the last day of any fiscal quarter the ratio of the Company's Total Liabilities (excluding non-recourse debt) to Tangible Effective Net Worth must not exceed 3.75 to 1 and that the ratio of Adjusted Total Liabilities (the Company's and its unconsolidated partnerships' Total Liabilities and Letters of Credit) (excluding non-recourse debt) to Tangible Effective Net Worth must not exceed 4.0 to 1. At December 31, 1996 the Company's Tangible Effective Net Worth was approximately $79,866,000, the ratio of the Company's Total Liabilities (excluding non-recourse debt) to Tangible Effective Net Worth was 3.10 to 1, and the ratio of Adjusted Total Liabilities (excluding non-recourse debt) to Tangible Effective Net Worth was 3.10 to 1.
The Working Capital Facility requires certain minimum cash flow and pre-tax and pre-interest tests. The Working Capital Facility also provides for negative covenants which, among other things, place limitations on the payment of cash dividends, merger transactions, transactions with affiliates, the incurrence of additional debt and the acquisition of new land as described in the following paragraph.
Under the terms of the Working Capital Facility, the Company may acquire new improved land for development of housing units of no more than 300 lots in any one location without approval from the lenders if certain conditions are satisfied. The Company may, however, acquire any new raw land or improved land provided the Company has obtained the prior written approval of lenders holding two-thirds of the obligations under the Working Capital Facility.
The Working Capital Facility requires that mandatory prepayments be made to reduce the outstanding balance of loans to the extent of all funds in excess of $20,000,000 in the principal operating accounts of the Company.
The Company is obligated under letters of credit, issued under terms of the Working Capital Facility, which totaled $144,000 at December 31, 1996. These letters of credit guarantee completion of construction related to various project improvements.
Joint Venture Facilities
Horsethief Canyon Partners ("HCP"), the partnership that owns the Horsethief Canyon master-planned community, is a California general partnership and is 100% owned by The Presley Companies and its wholly-owned subsidiary. Prior to October 4, 1996, the construction of the project was being financed through intract loans to prepare finished lots for the construction of homes and construction loans to finance the construction of homes.
Effective on October 4, 1996, HCP executed a master credit agreement with a maximum loan commitment of $10,000,000 to finance the development of lots for residential homes and the construction of single-family attached and detached production homes. At December 31, 1996, the revolving line of credit had an outstanding balance of $2,628,000. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on March 17, 1998. Availability under the line is subject to a number of limitations. The outstanding balance under this facility, together with the outstanding balances under the CMR facility and the Other Facility described below, may not exceed $29,000,000.
Effective in March 1995, the development and construction of Carmel Mountain Ranch ("CMR"), a consolidated joint venture, is financed through a revolving line of credit. The revolving line of credit consists of
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
several components relating to production units, models and residential lots. At December 31, 1996, the revolving line of credit had no outstanding balance. Availability under the line is subject to a number of limitations, but in any case cannot exceed $29,000,000, and is subject to further limitations, as described in the preceding and following paragraphs. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on March 17, 1998.
Other Facility
Effective in October 1995, the Company executed a master credit agreement with a maximum loan commitment of $5,000,000 to finance the development of lots for residential homes and the construction of single-family attached and detached production homes on certain real property located in Arizona and New Mexico. Interest on the outstanding balance is at prime plus 1.00% and the loan matures on November 30, 1998. The outstanding balance under this facility, together with the outstanding balances under the CMR facility and the HCP facility described in the preceding paragraphs, may not exceed $29,000,000. As of December 31, 1996 the outstanding balance under this agreement was $3,542,000.
The prime rate averaged 8.27%, 8.83% and 7.14% for 1996, 1995 and 1994, respectively, and was 8.25% and 8.50% at December 31, 1996 and 1995, respectively.
NOTE 6 -- STOCKHOLDERS' EQUITY AND INCENTIVE COMPENSATION
Management Stock
In 1990, California Presley and certain members of management ("Management") entered into an agreement wherein common stock was issued to Management in place of a then-existing incentive compensation plan. California Presley issued 15,875 shares of common stock (approximately 1,574,800 equivalent shares of Delaware Presley) to Management for $10,670,000, comprised of $6,935,000 in cash and $3,735,000 in promissory notes. A portion of the stock issued was pledged back to the Company as security for the promissory notes. The promissory notes bore interest at 10%, were payable in installments over 30 years and were classified as a reduction of stockholders' equity in the consolidated balance sheets. Principal payments have been reflected as reductions of the promissory notes when received; $36,000 was received in 1994.
Effective December 30, 1994, Management surrendered the pledged shares back to the Company in satisfaction of the promissory note obligations. Because the unpaid principal of the notes had been carried as a reduction of stockholders' equity in the consolidated balance sheets, no charge against income resulted from the transaction. The total principal cancelled was $2,955,000 and 661,465 shares of Series A Common Stock were surrendered back to the Company.
Stock Option Plan
Effective May 20, 1994, Delaware Presley amended the 1991 Stock Option Plan (the "Plan") to increase the number of shares authorized for options to be granted to 2,642,000 shares of Series A Common Stock. Under the Plan, options may be granted from time to time to key employees, officers, directors, consultants and advisors of the Company. The Plan is administered by the Stock Option Committee of the Board of Directors (the "Committee"). The Committee is generally empowered to interpret the Plan, prescribe rules and regulations relating thereto, determine the terms of the option agreements, amend them with the consent of the optionee, determine the employees to whom options are to be granted, and determine the number of shares subject to each option and the exercise price thereof. The per share exercise price for options will not be less than 100% of the fair market value of a share of the Series A Common Stock on the date the option is granted. The options will be exercisable for a term determined by the Committee, not to exceed ten years from the date of grant or upon a change of control.
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On May 20, 1994, Delaware Presley issued options to purchase a total of 2,035,000 shares of Series A Common Stock at $2.875 per share. The options outstanding at December 31, 1996 vest at various times and will be fully vested on May 20, 1997 and expire five years from the date of vesting. In connection with a new incentive compensation plan (as described below), 725,000 stock options currently outstanding were repriced effective January 1, 1997 from $2.875 to $1.00.
Pursuant to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation", issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB Opinion 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been recognized in the financial statements related to stock options awarded to officers, directors and employees under the Stock Option Plan. As required by Statement No. 123, for disclosure purposes only, the Company has measured the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The Company estimated the fair value of the stock options at date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.25%; a dividend yield of 0.00%, a volatility factor for the market price of the Company's common stock of 0.514; and a weighted average expected life of four years for the stock options.
Incentive Compensation Plan
Effective on January 1, 1997, the Company's Board of Directors approved a new incentive compensation plan for all of the Company's full-time, salaried employees -- including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), Executives, Managers, Field Construction Supervisors, and certain other employees. Under the terms of this new plan, the CEO and CFO will be eligible to receive bonuses at the discretion of the Compensation Committee of the Board; in addition, the stock options currently outstanding and held by the CEO and CFO (totaling 725,000 options) were repriced from $2.875 to $1.00.
In addition, the 1997 Executive Bonus Plan stipulates annual setting of individual bonus targets, expressed as a percent of each executive's salary, with awards based on performance against goals pertaining to each participant's operating area.
All awards will be prorated downward if the sum of all calculated awards for the entire Company exceeds 20% of the Company's consolidated pre-tax income before bonuses. Awards will be paid out over three years, with 50% paid following the determination of bonus awards, 25% paid one year later and 25% paid two years later. The deferred amounts will be forfeited in the event of termination for any reason except retirement, death or disability.
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES
The following summarizes the credit (provision) for income taxes (in thousands):
Income taxes differ from the amounts computed by applying the applicable Federal statutory rates due to the following (in thousands):
Temporary differences giving rise to deferred income taxes consist of the following (in thousands):
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996 the Company has net operating loss carryforwards for Federal tax purposes of approximately $111,997,000, of which $5,066,000 expires in 2007, $17,543,000 expires in 2008, $27,378,000 expires in 2009, $35,840,000 expires in 2010 and $26,170,000 expires in 2011. Due to the transactions discussed in Note 2, the future benefits associated with the utilization of the net operating loss carryforwards may be substantially limited.
NOTE 8 -- GAIN FROM RETIREMENT OF DEBT
In April 1995, the Company purchased $10,000,000 principal amount of its outstanding Senior Notes at a cost of $8,465,000, resulting in a net gain of $724,000 after giving effect to related deferred loan costs and income taxes. Although it has no definitive program to purchase outstanding Senior Notes, the Company may make such purchases from time to time in the future if management believes such purchases are in the Company's best interests.
In September 1995, the Company retired a land acquisition and development loan at its wholly-owned partnership, Horsethief Canyon Partners, resulting in a net gain of $1,964,000, after giving effect to income taxes.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, "Accounting for Special Assessment and Tax Increment Financing Entities" issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, and recorded as liabilities in the Company's consolidated balance sheet, if the amounts are fixed and determinable.
The Company's commitments and contingent liabilities include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Company's consolidated financial position.
The Company is a defendant in various lawsuits related to its normal business activities. In the opinion of management, disposition of the various lawsuits will have no material effect on the consolidated financial statements of the Company.
NOTE 10 -- UNAUDITED SUMMARIZED QUARTERLY FINANCIAL INFORMATION
Summarized quarterly financial information for the years ended December 31, 1996, 1995 and 1994 is as follows (in thousands except per common share amounts):
THE PRESLEY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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(1) Results for the three months ended June 30, 1995 were adversely affected by a $9,400,000 reduction of certain real estate assets to their estimated net realizable value as described in Note 1.
(2) Results for the three months ended December 31, 1995 were adversely affected due to recognition of an impairment loss on real estate assets amounting to $16,811,000 as described in Note 1.
INDEX TO EXHIBITS
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(1) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto, (S.E.C. Registration No. 33-42161) and incorporated herein by this reference.
(2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1992 and incorporated herein by this reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by this reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993 and incorporated herein by this reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1993 and incorporated herein by this reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993 and incorporated herein by this reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by this reference.
(8) Previously filed as an exhibit to the Company's Proxy Statement for Annual Meeting of Stockholders held on May 20, 1994 and incorporated herein by this reference.
(9) Previously filed in connection with the Company's Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated herein by this reference.
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by this reference.
(11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by this reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 and incorporated herein by this reference.
(13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by this reference.
(14) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by this reference.