1997
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-11749
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PACIFIC GREYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4337490
(State of Incorporation) (I.R.S. Employer
Identification No.)
6767 FOREST LAWN DRIVE, SUITE 300
LOS ANGELES, CALIFORNIA 90068-1027
(213) 436-6300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
YES X NO
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock, par value $.01 per share, outstanding
as of July 28, 1997 was 14,967,229.
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PACIFIC GREYSTONE CORPORATION
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income--
Three and Six Months Ended June 30, 1997 and 1996.............. 3
Consolidated Balance Sheets--
June 30, 1997 and December 31, 1996............................ 4
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1997 and 1996........................ 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 6. Exhibits and Reports on Form 8-K................................ 16
SIGNATURES............................................................. 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data -- unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ----------------------
1997 1996 1997 1996
---------- --------- ---------- ----------
Revenues.................................................. $ 148,597 $ 91,796 $ 250,079 $ 155,015
Cost of sales............................................. (123,040) (77,222) (206,571) (129,062)
---------- --------- ---------- ----------
Gross margin.............................................. 25,557 14,574 43,508 25,953
Selling, general and administrative expenses.............. (13,243) (9,576) (24,619) (17,749)
Interest and other, net................................... 708 130 847 128
---------- --------- ---------- ----------
Pretax income............................................. 13,022 5,128 19,736 8,332
Provision for income taxes................................ (5,313) (2,092) (8,052) (3,399)
---------- --------- ---------- ----------
Net income................................................ $ 7,709 $ 3,036 $ 11,684 $ 4,933
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Earnings per share........................................ $ 0.52 $ 0.78
---------- ----------
---------- ----------
Weighted average number of shares outstanding............. 14,960 14,960
---------- ----------
---------- ----------
Pro forma earnings per share.............................. $ 0.20 $ 0.33
--------- ----------
--------- ----------
Pro forma weighted average number of shares outstanding... 14,960 14,960
--------- ----------
--------- ----------
SEE ACCOMPANYING NOTES
3
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
Cash and cash equivalents......................... $ 42,418 $ 31,142
Housing inventories............................... 321,389 301,934
Deferred tax asset................................ 4,207 4,480
Other assets...................................... 10,455 12,913
---------- -----------
Total assets.................................... $ 378,469 $ 350,469
---------- -----------
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities.......... $ 32,958 $ 32,532
Notes payable................................... 56,144 40,254
Senior unsecured notes payable.................. 125,000 125,000
---------- -----------
Total liabilities.......................... 214,102 197,786
Shareholders' equity:
Common stock.................................... 150 150
Additional paid-in capital..................... 132,482 132,482
Retained earnings............................... 31,735 20,051
---------- -----------
Total shareholders' equity.................... 164,367 152,683
---------- -----------
Total liabilities and shareholders' equity.... $ 378,469 $ 350,469
---------- -----------
---------- -----------
SEE ACCOMPANYING NOTES
4
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands -- unaudited)
SIX MONTHS
ENDED JUNE 30,
--------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES:
Net income......................................................... $ 11,684 $ 4,933
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization.................................. 565 414
Deferred portion of provision for income taxes................. 273 3,026
Net changes in operating assets and liabilities:
Housing inventories.............................................. (17,414) (54,161)
Other assets..................................................... 1,893 (1,143)
Accounts payable and accrued liabilities......................... 426 (1,451)
--------- ---------
Net cash used in operating activities.............................. (2,573) (48,382)
FINANCING ACTIVITIES:
Net proceeds from common stock issuance............................ -- 54,316
Redemption of preferred stock...................................... -- (44,747)
Cash dividends paid on preferred stocks............................ -- (2,471)
Net proceeds from revolving credit facility........................ 18,000 25,000
Repayments of notes payable........................................ (4,151) (1,662)
--------- ---------
Net cash provided by financing activities.......................... 13,849 30,436
--------- ---------
Net increase (decrease) in cash and cash equivalents............... 11,276 (17,946)
Cash and cash equivalents at beginning of period................... 31,142 49,294
--------- ---------
Cash and cash equivalents at end of period......................... $ 42,418 $ 31,348
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid.................................................. $ 7,720 $ 373
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Housing inventories acquired through seller financing.............. $ 2,041 $ 5,599
--------- ---------
--------- ---------
SEE ACCOMPANYING NOTES
5
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Pacific Greystone
Corporation (the "Company" or "Greystone") have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10Q. Accordingly, certain information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements have been condensed or omitted. In the opinion of the Company's
management, all adjustments, which include normal recurring accruals, considered
necessary for a fair presentation have been included. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The Company historically has experienced, and expects to continue to
experience, variability in quarterly sales and revenues. The consolidated
statements of income for the three and six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year. Certain
reclassifications have been made to the 1996 financial information to conform to
the current period presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates made by management relate primarily to accruals,
including warranty, project budgets, and the valuation of certain real estate.
Actual results could differ from those original estimates.
2. PROPOSED MERGER
Greystone and Lennar Corporation, a Delaware corporation ("Lennar"), have
entered into a Plan and Agreement of Merger, dated June 10, 1997 (the "Merger
Agreement"), subject to the terms and conditions thereof, Lennar will be
merged (the "Merger") with and into Greystone with Greystone as the surviving
corporation (the "Surviving Corporation"). Prior to the Merger, among other
things, Lennar will (i) transfer to a newly formed Delaware corporation and
wholly-owned subsidiary of Lennar, LNR Property Corporation ("LNR"), its
Asset Management Business (as defined in the Merger Agreement) and distribute
100% of the equity of LNR to Lennar's stockholders (the "Spin Off") and (ii)
transfer certain real estate assets, largely consisting of land under
development, to a newly formed joint venture (the "Transfer") in which Lennar
and LNR will each own a 50% interest and with respect to which a subsidiary
of Lennar will act as the managing general partner. The Surviving Corporation
will be named Lennar Corporation, and will be comprised of the existing
homebuilding operations and residential financial service operations of both
companies.
The Merger Agreement provides for, among other things, the issuance of a
stock dividend immediately prior to the consummation of the Merger of 0.138 of a
share of common stock, par value $.01 per share, of Greystone ("Greystone Common
Stock") on each share of Greystone Common Stock then outstanding (the "Stock
Dividend"). Upon consummation of the Merger, (i) each outstanding share of
Greystone Common Stock will remain outstanding as a share of common stock of the
Surviving Corporation, (ii) each outstanding share of common stock of Lennar
will be converted into one share of common stock of the Surviving Corporation,
and (iii) each outstanding share of Class B common stock of Lennar will be
converted into one share of Class B common stock of the Surviving Corporation.
Upon consummation of the Merger, current Greystone shareholders will own 32%,
and current Lennar shareholders will own 68%, of the Surviving Corporation.
6
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. PROPOSED MERGER (continued)
The Merger Agreement provides that the consolidated net worth of Lennar as
of the Merger, giving effect to the Spin Off and the Transfer but not giving
effect to the Merger and subject to certain adjustments, will be $200 million
(subject to increases if the Merger is consummated after August 31, 1997). The
Merger Agreement also provides, among other things, for certain payments to be
made under certain conditions in the event the Merger is not consummated.
Additionally, consummation of the Merger is subject to the receipt of a ruling
from the Internal Revenue Service (or an opinion of counsel) with respect to
certain tax matters relating to the proposed transactions. Consummation of the
Merger is also subject to certain other conditions.
Leonard Miller and certain of his affiliates (collectively, "Miller")
entered into a voting agreement (the "Miller Voting Agreement"), dated June 10,
1997, with Lennar, Greystone and Warburg, Pincus Investors, L.P., a Delaware
limited partnership ("Warburg"), pursuant to which Miller agreed, among other
things, to vote all his equity in Lennar in favor of the Merger.
Warburg entered into a voting agreement (the "Warburg Voting Agreement"),
dated June 10, 1997, with Lennar and Greystone, subject to the terms and
conditions thereof, pursuant to which Warburg has agreed to vote at least 50% of
the outstanding Greystone Common Stock in favor of the Merger. Warburg also
agreed to make certain payments to Lennar under certain circumstances.
Copies of each of the Merger Agreement, the Miller Voting Agreement and
the Warburg Voting Agreement were filed as exhibits to the Company's Current
Report on Form 8-K, dated June 17, 1997, and are hereby incorporated herein
by reference. The foregoing summary is qualified in its entirety by reference
thereto. Furthermore, the information hereby is incorporated herein by
reference into Part II of this Report. The Merger will be subject to the
completion of a joint proxy statement / prospectus filed on Form S-4 with the
Securities and Exchange Commission.
3. EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of common shares and common share equivalents outstanding during the
period. Common share equivalents include dilutive stock options using the
treasury stock method.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share", which supersedes Accounting Principles Board Opinion ("APB") No. 15,
the existing authoritative guidance. SFAS No. 128 is effective for financial
statements for both interim and annual periods after December 15, 1997 and
requires restatement of all prior period per share data presented. Earlier
adoption of this standard is not permitted. The new standard modifies the
calculations of primary and fully-diluted per share data and replaces them
with basic and diluted per share data. The Company has determined that the
adoption of SFAS No. 128 will not have a material impact on its current
reported per share data.
7
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. PRO FORMA DATA
The Company completed its initial public offering (the "Offering") on
June 20, 1996 and sold 5,000,000 shares of common stock. Earnings per share
data included in the Company's registration statement for the Offering
excluded historical per share data calculated in accordance with APB No. 15,
since such information was not indicative of the continuing capital structure
of the Company. Pro forma earnings per share data included herein was
calculated as if (a) the Offering was consummated on January 1, 1996 and (b)
the changes in the capital structure as discussed in Note 1 and Note 9 of the
Company's consolidated financial statements, which are included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
occurred on such date.
5. HOUSING INVENTORIES
As of June 30, 1997 and December 31, 1996, the finished homes and completed
model portion of housing inventories was $57,279,000 and $75,189,000,
respectively. An analysis of interest incurred is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- -------- --------- ---------
(IN THOUSANDS)
Interest incurred.................................... $ 4,809 $ 4,715 $ 9,000 $ 8,627
Less: interest capitalized........................... (4,796) (4,607) (8,963) (8,408)
--------- --------- --------- ---------
Net interest expense................................. $ 13 $ 108 $ 37 $ 219
--------- --------- --------- ---------
--------- --------- --------- ---------
Interest paid........................................ $ 1,493 $ 1,178 $ 9,051 $ 8,481
--------- --------- --------- ---------
--------- --------- --------- ---------
Amortization of capitalized interest included
in cost of sales.................................. $ 4,787 $ 4,184 $ 7,760 $ 6,264
--------- --------- --------- ---------
--------- --------- --------- ---------
6. UNSECURED REVOLVING CREDIT FACILITY
On June 25, 1997, the Company increased its unsecured revolving credit
facility to $150,000,000, of which $125,000,000 has been committed by its
lenders. The new facility provides for interest on borrowings at either the
Bank Reference Rate or the London Interbank Offered Rate plus an applicable
spread based on the bond rating on the Company's 10 3/4% senior notes (the
"Notes"). A quarterly commitment fee of 0.125% on the unused portion is
payable quarterly in arrears. The Notes are rated Ba3 and B+ by Moody's
Investors Service and Standard & Poor's Corporation, respectively. The
Company's interest rate on borrowings under the new facility was 7.5% at June
30, 1997.
8
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC.
Summarized consolidated financial information for Greystone Homes, Inc.
("Greystone Homes") is presented below. In accordance with the Company's
management agreement, corporate general and administrative expenses are
allocated based upon the gross revenues of the companies. Such allocation of
corporate general and administrative expenses is included in Greystone Homes'
selling, general and administrative expenses presented below.
SUMMARY CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
---------- -------------
(IN THOUSANDS)
Cash and cash equivalents................... $ 39,431 $ 22,594
Housing inventories......................... 321,389 301,934
Deferred tax asset.......................... 4,207 4,480
Other assets................................ 8,705 12,554
---------- -------------
Total assets............................ $ 373,732 $ 341,562
---------- -------------
---------- -------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and other liabilities........ $ 25,932 $ 24,011
Intercompany payable to the Company........... 6,443 3,675
Notes payable................................. 56,144 40,254
Senior unsecured notes payable................ 125,000 125,000
---------- -------------
Total liabilities........................... 213,519 192,940
Shareholder's equity............................ 160,213 148,622
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Total liabilities and shareholder's equity.. $ 373,732 $ 341,562
---------- -------------
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SUMMARY CONSOLIDATED STATEMENTS OF INCOME
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
(in thousands)
Revenues................ $ 148,597 $ 91,796 $ 250,079 $ 155,015
Cost of sales........... (123,040) (77,222) (206,571) (129,062)
---------- --------- ---------- ---------
Gross margin............ 25,557 14,574 43,508 25,953
Selling, general and
administrative expenses (13,204) (9,559) (24,502) (17,723)
Interest and other, net. 473 33 637 33
---------- --------- ---------- ---------
Pretax income........... 12,826 5,048 19,643 8,263
Provision for income
taxes................. (5,313) (2,092) (8,052) (3,399)
---------- --------- ---------- ---------
Net income.............. $ 7,513 $ 2,956 $ 11,591 $ 4,864
---------- --------- ---------- ---------
---------- --------- ---------- ---------
9
7. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC. (continued)
Greystone Homes is a wholly-owned subsidiary of the Company and is the
obligor on the Notes. The Notes are fully and unconditionally guaranteed by the
Company, except for certain subsidiaries of the Company which are considered
inconsequential individually and in the aggregate to the Company on a
consolidated basis. Separate financial statements and other related disclosures
for Greystone Homes are not presented, as the Company's management does not
consider the information material to investors.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements. Such statements involve
known and unknown risks, uncertainties and other factors that may cause
actual results to differ materially. Such risks, uncertainties and other
factors include, but are not limited to, those risks discussed herein,
changes in the general economic conditions, fluctuations in interest rates,
increases in labor and raw material costs, labor shortages, inclement weather
conditions, levels of competition and other factors described in detail in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
and other documents filed by the Company with the Securities and Exchange
Commission from time to time.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, selected housing
data of the Company (dollar amounts in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- --------------------
1997 1996 1997 1996
---------- ---------- --------- ---------
HOUSING DATA:
Homes closed:
Northern California................................................... 234 155 375 268
Southern California................................................... 215 181 382 290
Outside California.................................................... 191 83 331 164
---------- ---------- --------- ---------
Total............................................................... 640 419 1,088 722
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Joint Ventures........................................................ -- 2 -- 5
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Net new orders (net of cancellations):
Northern California................................................... 196 209 417 397
Southern California................................................... 304 224 546 422
Outside California.................................................... 247 210 463 315
---------- ---------- --------- ---------
Total............................................................... 747 643 1,426 1,134
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Joint Ventures........................................................ -- 1 -- 2
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Backlog (at period end):
Northern California................................................... 254 197
Southern California................................................... 305 241
Outside California.................................................... 362 296
---------- ----------
Total............................................................... 921 734
---------- ----------
---------- ----------
Sales value of backlog (at period end).................................. $ 234,075 $ 147,807
---------- ----------
---------- ----------
Net income for the second quarter of 1997 increased by 154% to $7.7 million,
or $0.52 per share, compared to $3.0 million, or $0.20 per share, for the second
quarter of 1996. For the first six months of 1997, net income was $11.7 million,
or $0.78 per share, up 137% from $4.9 million, or $0.33 per share, for the first
six months in 1996. The performance for the periods ended June 30, 1997 was
driven by strong housing demand, particularly in California, that resulted in
higher volume and improved margins, as well as a reduction in the selling,
general and administrative ratio.
11
For the quarter ended June 30, 1997, the Company had 747 net new orders
as compared to 643 units for the second quarter of 1996. For the first six
months of 1997, net new orders have increased 26% compared to the same period
last year. These increases were accomplished despite high sales levels
experienced during the first half of 1996. The Company's backlog value at
June 30, 1997 totaled $234.1 million, or 921 units, compared to $147.8
million, or 734 units, at June 30, 1996. In addition, the Company's completed
and unsold homes, excluding model homes, totaled 58 units at June 30, 1997,
representing the lowest level since 1995.
On June 25, 1997, the Company increased its unsecured bank credit
facility to $150 million, of which $125 million has been committed by its
lenders. The new facility provides for lower borrowing costs and
administrative costs, as well as less restrictive covenants. Interest on
outstanding borrowings is based on the bond rating on the Company's 10 3/4%
senior notes (the "Notes"). In April 1997, the bond rating on the Notes was
upgraded to Ba3 and B+ by Moody's Investors Service and Standard & Poor's
Corporation, respectively. The Company's interest rate on borrowings under
the new facility was 7.5% at June 30, 1997.
The following table sets forth, for the periods indicated, certain income
statement data as a percentage of total revenues:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................................. (82.8) (84.1) (82.6) (83.3)
--------- --------- --------- ---------
Gross margin............................................... 17.2 15.9 17.4 16.7
Selling, general and administrative expenses............... (8.9) (10.4) (9.8) (11.4)
Interest and other, net.................................... 0.5 0.1 0.3 0.1
--------- --------- --------- ---------
Pretax income.............................................. 8.8 5.6 7.9 5.4
Provision for income taxes................................. (3.6) (2.3) (3.2) (2.2)
--------- --------- --------- ---------
Net income................................................. 5.2% 3.3% 4.7% 3.2%
--------- --------- --------- ---------
--------- --------- --------- ---------
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Total revenues increased to $148.6 million on 640 homes closed in the
second quarter of 1997 from $91.8 million on 419 homes closed in the second
quarter of 1996. The increased revenues were largely driven by the increased
number of homes closed, which was due to the stronger backlog levels of homes
from the previous quarters. All regions produced solid growth with revenues
increasing by 49% and 200% in California and outside of California,
respectively. The improvement in California was driven by strong housing
demand that resulted in a higher volume of homes closed. Operations outside
of California benefited from a greater number of actively selling projects
from the previous quarters which produced an increased volume of homes closed
in the current quarter. The overall average sales price on homes closed
increased to $232,000 for the three months ended June 30, 1997 from $219,000
for the three months ended June 30, 1996, largely reflecting an increased
proportion of higher-priced homes from the Company's move-up segment. There
were no land sales in the second quarter of 1997 or 1996.
The gross margin increased to $25.6 million or 17.2% of revenues in the
current quarter from $14.6 million or 15.9% in the year-earlier quarter. The
increase in the gross margin percentage was largely a result of the continued
downward levels of sales incentives offered in the Southern California
region, as well as the Company's ability to raise sales prices on selected
projects. The gross margin percentage in California has increased 140 basis
points to 17.1% in the second quarter of 1997 from 15.7% for the second
quarter of 1996.
12
Selling, general and administrative ("SG&A") expenses as a percentage of
revenues decreased to 8.9% for the second quarter of 1997 from 10.4% for the
same period in 1996. Selling expenses as a percentage of revenues for the
three months ended June 30, 1997 and 1996 were 5.2% and 5.8%, respectively.
General and administrative expenses as a percentage of revenues for the three
months ended June 30, 1997 and 1996 were 3.7% and 4.6%, respectively. The
reduction in selling and general and administrative expenses as a percentage
of revenues is largely attributable to the increased revenues in 1997.
For the quarter ended June 30, 1997, interest and other, net increased by
$0.6 million to $0.7 million from $0.1 million for the quarter ended June 30,
1996, primarily due to an increase in interest income. Included in interest and
other, net is interest incurred, less amounts capitalized to housing inventories
and interest income. For the three months ended June 30, 1997 and 1996, the
Company incurred interest of $4.8 million and $4.7 million and capitalized
interest to housing inventories of $4.8 million and $4.6 million, respectively.
The Company's effective tax rate was 40.8% for the quarters ended June 30,
1997 and 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total revenues for the six months ended June 30, 1997 increased to $250.1
million from $155.0 million for the six months ended June 30, 1996, an
increase of 61%, while homes closed increased to 1,088 from 722, an increase
of 51%. The largest revenue increase for the first six months in 1997 was in
California where revenues increased by $69.3 million to $208.7 million from
$139.4 million for the same period last year. The revenue growth was largely
attributable to strong housing demand that resulted in a 36% increase in the
number of homes closed in California. For the first half of 1997 and 1996,
the Company's operations outside of California accounted for 17% and 10% of
total revenues on 331 and 164 homes closed, respectively. The Company's
average sales price on homes closed for the six months ended June 30, 1997
increased to $230,000 from $215,000 for the six months ended June 30, 1996.
This was due mainly to increased proportion of higher-priced homes from the
Company's move-up segment. There were no land sales in the first half of 1997
or 1996.
The gross margin increased to $43.5 million or 17.4% of revenues for the
six months ended June 30, 1997 from $26.0 million or 16.7% in the
year-earlier period. The gross margin percentage has improved due to lower
sales incentives, particularly in the Southern California region, as well as
the Company's ability to raise sales prices on selected projects. During the
first half of last year, the Company's home closings were heavily weighted
toward the higher margin projects in California causing an unusual product
mix.
SG&A as a percentage of revenues decreased to 9.8% for the six months ended
June 30, 1997 from 11.4% for the same period in 1996. Selling expenses as a
percentage of revenues for the six months ended June 30, 1997 and 1996 were 5.4%
and 6.0%, respectively. General and administrative expenses as a percentage of
revenues for the six months ended June 30, 1997 and 1996 were 4.4% and 5.4%,
respectively. The reduction in selling and general and administrative expenses
as a percentage of revenues is largely attributable to the increased revenues in
1997.
For the first half of 1997, interest and other, net increased by $0.7
million to $0.8 million from $0.1 million for the first half of 1996, primarily
due to an increase in interest income. For the first six months of 1997 and
1996, the Company incurred interest of $9.0 million and $8.6 million and
capitalized interest to housing inventories of $9.0 million and $8.4 million,
respectively.
The Company's effective tax rate was 40.8% for the six months ended June 30,
1997 and 1996.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are for the acquisition,
development, construction and marketing of its residential projects.
Historically, these activities have been financed through internally generated
operating results and external sources of debt and equity financing.
At June 30, 1997, the Company's financial position remained strong. The
Company's debt to equity ratio was 1.10 to 1.00 at June 30, 1997, while debt to
total capital was 52%. Total cash and cash equivalents totaled $42.4 million at
the end of June, up from $31.1 million at the beginning of the year.
On June 25, 1997, the Company increased its unsecured bank credit facility
(the "Facility") to $150 million, of which $125 million has been committed by
its lenders. The Facility provides for lower borrowing costs and administrative
costs, as well as less restrictive covenants. Interest on outstanding borrowings
is based on the bond rating on the Notes. In April 1997, the bond rating on the
Notes was upgraded to Ba3 and B+ by Moody's Investors Service and Standard &
Poor's Corporation, respectively. The Company's interest rate on borrowings
under the Facility was 7.5% at June 30, 1997.
At June 30, 1997, approximately $77 million was available for future use
under the provisions of the Facility. The Notes and the Facility, as well as
other construction and development loans, contain certain restrictive covenants
including limitations on additional indebtedness, minimum liquidity and net
worth requirements and limitations on the amount of debt to equity. The
indentures with respect to the Notes limit the ability of Greystone Homes to pay
cash dividends or make loans and advances to the Company. At June 30, 1997,
under the terms of the indentures, Greystone Homes could pay cash dividends or
make loans or advances to the Company in an amount of $56.9 million. The Notes
are fully and unconditionally guaranteed by the Company.
The Company has utilized, and will continue to utilize, options as a method
of controlling and subsequently acquiring land. By controlling land, through
options on the future discretionary purchase of land, the Company attempts to
minimize its cash outlays and reduce its risk from changing market conditions.
While the Company attempts to prudently manage its acquisition and development
of residential lots, the development of such projects can have a negative impact
on liquidity due to the timing of acquisition and development activities.
The Company believes that cash on hand, cash generated from operations and
funds available under the Facility will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next 18
months. Currently, the Company does not have any material commitments for
capital expenditures.
BACKLOG
The Company's backlog value at June 30, 1997 totaled $234.1 million, or 921
units, compared to $147.8 million, or 734 units, at June 30, 1996. This increase
was accomplished despite high sales levels experienced during the first half of
1996. California accounts for 80% of the backlog value at June 30, 1997. In the
current quarter, net new orders from the Northern California region declined
slightly largely due to lower number of actively selling projects as compared to
the same quarter last year. The average sales price in backlog at June 30, 1997
is $254,000, up 26% from $201,000 at June 30, 1996.
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INTEREST RATES AND INFLATION
The residential homebuilding industry is affected by changes in general
economic factors, particularly by the impact of inflation and its effect on
interest rates. Inflation can adversely affect the rates on funds borrowed by
the Company and the affordability of mortgage financing available to prospective
customers.
Increased construction costs, rising interest rates, as well as increased
material and labor costs, may reduce gross margins in the short-term,
however, the Company attempts to recover the increased costs through
increased sales prices without reducing sales volume. Inflation has not had a
significant adverse effect on the Company's results of operations presented
herein. However, there can be no assurance that inflation will not have a
material adverse impact on the Company's future results of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 16, 1997, a stockholder of Greystone filed suit in the Court of
Chancery of the State of Delaware, New Castle County against Greystone, its
directors, Warburg and Lennar, alleging that the individual defendants and
Warburg, among other things, "breached their fiduciary duties by undertaking
the sale of Greystone without adequate consideration to all feasible and
value-maximizing strategic alternatives." The suit alleges that Lennar
knowingly aided and abetted the alleged breaches of fiduciary duties and that
"the proposed transaction between Greystone and Lennar could not take place
without the knowing participation of Lennar."
The plaintiff seeks an order permitting the action to be maintained as a
class action, preliminarily and permanently enjoining the defendants from
proceeding with or closing the Merger, rescinding the Merger if it is
consummated, directing the defendants to account to the plaintiff for all
damages, profits and special benefits obtained from their alleged unlawful
conduct, and awarding the plaintiff costs for maintaining the action (including
reasonable attorneys' fees) and such other relief as the court deems just and
proper.
Greystone believes the suit is entirely without merit and intends to defend
it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 8, 1997.
Proxies were solicited by the Company pursuant to Regulation 14 under the
Securities Exchange Act of 1934 to elect directors of the Company. The following
is a separate tabulation with respect to the votes for each nominee:
TOTAL VOTES TOTAL VOTES
NAME FOR WITHHELD
- ----------------------------------------------------------- -------------- -------------------
David Kaplan............................................... 13,519,923 12,250
Reuben S. Leibowitz........................................ 13,521,723 10,450
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
2 Plan and Agreement of Merger, dated June 10, 1997, by and between Pacific Greystone
Corporation and Lennar Corporation, filed as an exhibit to the Company's Current
Report on Form 8-K dated June 17, 1997 and incorporated by reference herein.
10.1 Voting Agreement, dated June 10, 1997, by and among MFA Limited Partnership, LMM
Family Partnership, Leonard Miller, Pacific Greystone Corporation and Warburg, Pincus
Investors, L.P., filed as an exhibit to the Company's Current Report on Form 8-K
dated June 17, 1997 and incorporated by reference herein.
10.2 Voting Agreement, dated June 10, 1997, between Pacific Greystone Corporation, Lennar
Corporation and Warburg, Pincus Investors, L.P., filed as an exhibit to the Company's
Current Report on Form 8-K dated June 17, 1997 and incorporated by reference herein.
27 Financial Data Schedule.
Reports on Form 8-K
On June 17, 1997, the Company filed a Current Report on Form 8-K (Item 5
and 7) dated on event date--June 10, 1997 reporting its proposed merger with
Lennar Corporation.
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SIGNATURES
Pursuant to the requirements 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.
PACIFIC GREYSTONE CORPORATION
JULY 31, 1997 /S/ JACK R. HARTER
----------------------------
JACK R. HARTER
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
JULY 31, 1997 /S/ ANTONIO B. MON
----------------------------
ANTONIO B. MON
VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER
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