UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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
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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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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,
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1997 1996 1997 1996
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HOUSING DATA:
Homes closed:
Northern California................................................... 234 155 375 268
Southern California................................................... 215 181 382 290
Outside California.................................................... 191 83 331 164
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Total............................................................... 640 419 1,088 722
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Joint Ventures........................................................ -- 2 -- 5
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Net new orders (net of cancellations):
Northern California................................................... 196 209 417 397
Southern California................................................... 304 224 546 422
Outside California.................................................... 247 210 463 315
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Total............................................................... 747 643 1,426 1,134
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Joint Ventures........................................................ -- 1 -- 2
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Backlog (at period end):
Northern California................................................... 254 197
Southern California................................................... 305 241
Outside California.................................................... 362 296
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Total............................................................... 921 734
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Sales value of backlog (at period end).................................. $ 234,075 $ 147,807
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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.
2
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,
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1997 1996 1997 1996
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Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................................. (82.8) (84.1) (82.6) (83.3)
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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
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Pretax income.............................................. 8.8 5.6 7.9 5.4
Provision for income taxes................................. (3.6) (2.3) (3.2) (2.2)
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Net income................................................. 5.2% 3.3% 4.7% 3.2%
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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.
3
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.
4
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.
In particular, the Facility will provide that (i) the Company may not
have a leverage ratio greater than 1.95 to 1.00; (ii) the Company must have a
minimum consolidated tangible net worth greater than $110 million plus 50% of
positive net income; (iii) the Company must maintain at all times a cash
balance in principal not less than $5 million; (iv) the Company may not have
a fixed charge coverage ratio less than 2.00 to 1.00; (v) the Company's off
balance sheet liabilities may not exceed 40% of consolidated tangible net
worth; (vi) the Company and its subsidiaries cannot incur more than $15
million of secured debt (not including debt incurred with joint ventures or
purchase money promissory notes given in connection with purchase of land);
and (vii) the Company cannot invest more than $25 million in any partnerships
or joint ventures.
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. For the six months ended June 30, 1997, cost of sales
included approximately $140,000 of deposits and capitalized predevelopment
costs that were expensed from housing inventories. 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. For the first six months
of 1997, the Company experienced a cancellation rate of 19%. The Company
anticipates that all of the homes in backlog, after considering
cancellations, will be delivered within three to six months.
5
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.
6
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
September 26, 1997 /S/ JACK R. HARTER
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JACK R. HARTER
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
September 26, 1997 /S/ ANTONIO B. MON
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ANTONIO B. MON
VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER
7