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 SEPTEMBER 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 at the end of the fiscal quarter was 14,968,229.
PACIFIC GREYSTONE CORPORATION
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1997 and 1996 3
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 16
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenues $ 158,407 $ 112,546 $ 408,486 $ 267,561
Cost of sales (130,747) (93,023) (337,318) (222,085)
---------- ---------- ---------- ----------
Gross margin 27,660 19,523 71,168 45,476
Selling, general and administrative expenses (14,830) (11,191) (39,449) (28,940)
Interest and other, net 448 507 1,295 635
---------- ---------- ---------- ----------
Pretax income 13,278 8,839 33,014 17,171
Provision for income taxes (5,417) (3,607) (13,469) (7,006)
---------- ---------- ---------- ----------
Net income $ 7,861 $ 5,232 $ 19,545 $ 10,165
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share $ 0.53 $ 0.35 $ 1.31
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of
shares outstanding 14,967 14,960 14,962
---------- ---------- ----------
---------- ---------- ----------
Pro forma earnings per share $ 0.68
----------
----------
Pro forma weighted average
number of shares outstanding 14,960
----------
----------
SEE ACCOMPANYING NOTES
3
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- ---------
(UNAUDITED)
Cash and cash equivalents $ 26,222 $ 31,142
Housing inventories 346,689 301,934
Other assets 18,422 17,393
--------- ---------
Total assets $ 391,333 $ 350,469
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities $ 29,146 $ 32,532
Notes payable 64,866 40,254
Senior unsecured notes payable 125,000 125,000
--------- ---------
Total liabilities 219,012 197,786
Shareholders' equity:
Common stock 150 150
Additional paid-in capital 132,575 132,482
Retained earnings 39,596 20,051
--------- ---------
Total shareholders' equity 172,321 152,683
--------- ---------
Total liabilities and shareholders' equity $ 391,333 $ 350,469
--------- ---------
--------- ---------
SEE ACCOMPANYING NOTES
4
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
Nine Months
Ended September 30,
-------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES:
Net income $ 19,545 $ 10,165
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 905 671
Deferred portion of provision for income taxes 273 6,559
Net changes in operating assets and liabilities:
Housing inventories (42,210) (77,603)
Other assets (2,114) (1,760)
Accounts payable and accrued liabilities (3,386) (1,818)
--------- ---------
Net cash used in operating activities (26,987) (63,786)
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 32,000 37,000
Repayments of notes payable (9,933) (7,553)
--------- ---------
Net cash provided by financing activities 22,067 36,545
--------- ---------
Net decrease in cash and cash equivalents (4,920) (27,241)
Cash and cash equivalents at beginning of period 31,142 49,294
--------- ---------
Cash and cash equivalents at end of period $ 26,222 $ 22,053
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 13,801 $ 447
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Housing inventories acquired through seller
financing $ 2,545 $ 6,809
--------- ---------
--------- ---------
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 10-Q. 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, as amended by Form 10-K/A, dated September 26, 1997.
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 nine months ended September 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.
6
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. PROPOSED MERGER (continued)
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.
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 depending upon the effective date of the
Merger). 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. 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.
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.
7
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. EARNINGS PER SHARE (continued)
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.
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 September 30, 1997 and December 31, 1996, the finished homes and
completed model portion of housing inventories was $68,953,000 and
$75,189,000, respectively. An analysis of interest incurred is as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ----------------------
1997 1996 1997 1996
-------- -------- --------- ---------
(in thousands)
Interest incurred $ 4,630 $ 4,554 $ 13,630 $ 13,181
Less: interest capitalized (4,618) (4,486) (13,581) (12,894)
-------- -------- --------- ---------
Net interest expense $ 12 $ 68 $ 49 $ 287
-------- -------- --------- ---------
-------- -------- --------- ---------
Interest paid $ 7,941 $ 8,059 $ 16,992 $ 16,540
-------- -------- --------- ---------
-------- -------- --------- ---------
Amortization of capitalized interest
included in cost of sales $ 5,255 $ 5,092 $ 13,015 $ 11,356
-------- -------- --------- ---------
-------- -------- --------- ---------
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 103/4% 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 7.3% at
September 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
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(in thousands)
Cash and cash equivalents $ 23,335 $ 22,594
Housing inventories 346,689 301,934
Other assets 16,289 17,034
------------- ------------
Total assets $ 386,313 $ 341,562
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and other liabilities $ 23,606 $ 24,011
Intercompany payable to the Company 5,019 3,675
Notes payable 64,866 40,254
Senior unsecured notes payable 125,000 125,000
------------- ------------
Total liabilities 218,491 192,940
Shareholder's equity 167,822 148,622
------------- ------------
Total liabilities and shareholder's equity $ 386,313 $ 341,562
------------- ------------
------------- ------------
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in thousands)
Revenues $ 158,407 $ 112,546 $ 408,486 $ 267,561
Cost of sales (130,747) (93,023) (337,318) (222,085)
--------- --------- --------- ---------
Gross margin 27,660 19,523 71,168 45,476
Selling, general and administrative expenses (14,787) (11,173) (39,289) (28,896)
Interest and other, net 153 340 790 373
--------- --------- --------- ---------
Pretax income 13,026 8,690 32,669 16,953
Provision for income taxes (5,417) (3,607) (13,469) (7,006)
--------- --------- --------- ---------
Net income $ 7,609 $ 5,083 $ 19,200 $ 9,947
--------- --------- --------- ---------
--------- --------- --------- ---------
9
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
8. SUBSEQUENT EVENTS
On October 31, 1997, the Company completed its merger with Lennar
Corporation, following the spin-off of Lennar's real estate investment and
management business. Pacific Greystone and Lennar Corporation both held a
Special Meeting of Stockholders on October 31, 1997 and each approved the
Plan and Agreement of Merger, dated June 10, 1997, between Pacific Greystone
Corporation and Lennar Corporation. The combined entity comprises the
existing homebuilding operations and residential financial service operations
of both companies.
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, AS AMENDED ON FORM 10-K/A, DATED SEPTEMBER 26, 1997, 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 Nine Months
Ended September 30, Ended September 30,
-------- -------- -------- --------
HOUSING DATA: 1997 1996 1997 1996
-------- -------- -------- --------
Homes closed:
Northern California 195 154 570 422
Southern California 260 222 642 512
Outside California 219 148 550 312
-------- -------- -------- --------
Total 674 524 1,762 1,246
-------- -------- -------- --------
-------- -------- -------- --------
Joint Ventures - - - 5
-------- -------- -------- --------
-------- -------- -------- --------
Net new orders (net of
cancellations):
Northern California 133 207 550 604
Southern California 358 189 904 611
Outside California 263 192 726 507
-------- -------- -------- --------
Total 754 588 2,180 1,722
-------- -------- -------- --------
-------- -------- -------- --------
Joint Ventures - - - 2
-------- -------- -------- --------
-------- -------- -------- --------
Backlog (at period end):
Northern California 192 250
Southern California 403 208
Outside California 406 340
-------- --------
Total 1,001 798
-------- --------
-------- --------
Sales value of backlog
(at period end) $253,309 $172,576
-------- --------
-------- --------
Net income for the third quarter of 1997 increased by 50% to $7.9
million, or $0.53 per share, compared to $5.2 million, or $0.35 per share,
for the third quarter of 1996. For the first nine months of 1997, net income
was $19.6 million, or $1.31 per share, up 92% from $10.2 million, or $0.68
per share, for the first nine months in 1996. The performance for the periods
ended September 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 September 30, 1997, the Company had 754 net new
orders as compared to 588 units for the third quarter of 1996, an increase of
28%. For the first nine months of 1997, net new orders have increased 27%
compared to the same period last year. These increases were accomplished
despite high sales levels experienced during the first nine months of 1996.
The Company's backlog value at September 30, 1997 totaled $253.3 million, or
1,001 units, compared to $172.6 million, or 798 units, at September 30, 1996.
In addition, the Company's completed and unsold homes, excluding model homes,
totaled 67 units at September 30, 1997.
The following table sets forth, for the periods indicated, certain income
statement data as a percentage of total revenues:
Three Months Nine Months
Ended September 30, Ended September 30,
-------- -------- -------- --------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales (82.5) (82.7) (82.6) (83.0)
-------- -------- -------- --------
Gross margin 17.5 17.3 17.4 17.0
Selling, general and
administrative expenses (9.4) (9.9) (9.7) (10.8)
Interest and other, net 0.3 0.5 0.4 0.2
-------- -------- -------- --------
Pretax income 8.4 7.9 8.1 6.4
Provision for income taxes (3.4) (3.2) (3.3) (2.6)
-------- -------- -------- --------
Net income 5.0% 4.7% 4.8% 3.8%
-------- -------- -------- --------
-------- -------- -------- --------
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Total revenues increased to $158.4 million on 674 homes closed in the
third quarter of 1997 from $112.5 million on 524 homes closed in the third
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 quarter. All regions produced solid growth with revenues
increasing by 42% and 82% 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 $235,000 for the three months ended September 30, 1997 from
$204,000 for the three months ended September 30, 1996, largely reflecting an
increased proportion of higher-priced homes from the Company's move-up
segment. There were no land sales for the third quarter of 1997 while the
Company recorded land sales totaling $5.6 million in the third quarter of
1996.
The gross margin increased to $27.7 million or 17.5% of revenues in the
current quarter from $19.5 million or 17.3% in the year-earlier quarter. The
increase in the gross margin percentage was largely a result of the continued
downward level of sales incentives offered in the Southern California region.
Gross margin from land sales totaled $0.8 million for the third quarter of
1996.
Selling, general and administrative ("SG&A") expenses as a percentage of
revenues decreased to 9.4% for the third quarter of 1997 from 9.9% for the
same period in 1996. Selling expenses as a percentage of revenues for the
three months ended September 30, 1997 and 1996 were 5.0% and 5.2%,
respectively. General and administrative expenses as a percentage of revenues
for the three months ended September 30, 1997 and 1996 were 4.4% and 4.7%,
respectively. The reduction in selling and general and administrative
expenses as a percentage of revenues is largely attributable to the increased
revenues in 1997.
12
For the quarter ended September 30, 1997, interest and other, net
decreased by $0.1 million to $0.4 million from $0.5 million for the quarter
ended September 30, 1996. Included in interest and other, net is interest
incurred, less amounts capitalized to housing inventories and interest
income. For the three months ended September 30, 1997 and 1996, the Company
incurred interest of $4.6 million and $4.6 million and capitalized interest
to housing inventories of $4.6 million and $4.5 million, respectively.
The Company's effective tax rate was 40.8% for the quarters ended
September 30, 1997 and 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Total revenues for the nine months ended September 30, 1997 increased to
$408.5 million from $267.6 million for the nine months ended September 30,
1996, an increase of 53%, while homes closed increased to 1,762 from 1,246 an
increase of 41%. The largest revenue increase for the first nine months in
1997 was in California where revenues increased by $108.0 million to $339.0
million from $231.0 million for the same period last year. The revenue growth
was largely attributable to strong housing demand that resulted in a 30%
increase in the number of homes closed in California. For the nine months
ended September 30, 1997 and 1996, the Company's operations outside of
California accounted for 17% and 12% of total revenues on 550 and 312 homes
closed, respectively. The Company's average sales price on homes closed for
the nine months ended September 30, 1997 increased to $232,000 from $210,000
for the nine months ended September 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 nine months of 1997 while the
Company recorded land sales totaling $5.6 million for the first nine months
of 1996.
The gross margin increased to $71.2 million or 17.4% of revenues for the
nine months ended September 30, 1997 from $45.5 million or 17.0% in the
year-earlier period. The gross margin percentage has improved due to lower
sales incentives, particularly in the Southern California region.
SG&A as a percentage of revenues decreased to 9.7% for the nine months
ended September 30, 1997 from 10.8% for the same period in 1996. Selling
expenses as a percentage of revenues for the nine months ended September 30,
1997 and 1996 were 5.3% and 5.7%, respectively. General and administrative
expenses as a percentage of revenues for the nine months ended September 30,
1997 and 1996 were 4.4% and 5.1%, 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 nine months of 1997, interest and other, net increased by
$0.7 million to $1.3 million from $0.6 million for the first nine months of
1996, primarily due to an increase in interest income. For the nine months
ended September 30, 1997 and 1996, the Company incurred interest of $13.6
million and $13.2 million and capitalized interest to housing inventories of
$13.6 million and $12.9 million, respectively.
The Company's effective tax rate was 40.8% for the nine months ended
September 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 September 30, 1997, the Company's financial position remained strong.
The Company's debt to equity ratio was 1.10 to 1.00 at September 30, 1997,
while debt to total capital was 52%. Total cash and cash equivalents totaled
$26.2 million at the end of the third quarter.
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 Company's 10 3/4% senior notes (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 7.3% at September 30, 1997.
In particular, the Facility provides 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 September 30, 1997, approximately $63 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 September 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 $60.7 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 nine months ended September 30, 1997, cost of
sales included approximately $0.4 million 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.
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BACKLOG
The Company's backlog value at September 30, 1997 totaled $253.3
million, or 1,001 units, compared to $172.6 million, or 798 units, at
September 30, 1996. This increase was accomplished despite high sales levels
experienced during the first nine months of 1996. California accounts for 78%
of the backlog value at September 30, 1997. In the current quarter, net new
orders from the Northern California region declined largely due to a
temporary absence of homes to sell in certain strong housing markets in
Northern California and fewer communities as compared to the same quarter
last year. The average sales price in backlog at September 30, 1997 is
$253,000, up 17% from $216,000 at September 30, 1996, primarily as a result
of a 19% increase in the average sales price in California to $334,000 from
$281,000. For the first nine months of 1997, the Company experienced a
cancellation rate of 20%. The Company anticipates that all of the homes in
backlog, after considering cancellations, will be delivered within three to
six months.
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." On August 26, 1997, another
Greystone stockholder filed a separate lawsuit in the same court, based on
substantially similar allegations and naming the same parties, except Lennar,
as defendants.
The plaintiff in both actions 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.
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On July 30, 1997, the plaintiff in the first stockholder lawsuit filed
with the court a notice dismissing that lawsuit as to Lennar only. On
September 23, 1997, the remaining parties to the two lawsuits entered into a
memorandum of understanding memorializing an agreement in principle for the
settlement of the lawsuits (the "Settlement"), subject to certain conditions,
including the preparation and execution of definitive documentation necessary
for the Settlement, and the approval of the Settlement by the Delaware
Chancery Court following a hearing that will be held upon appropriate notice
to Greystone stockholders who are members of the punitive class on whose
behalf the lawsuits were brought. As part of the Settlement, Warburg agreed
to the limitation on its vote, as described in the Warburg Voting Agreement,
if the stockholders of the Surviving Corporation approve the amendment
expected to be submitted at the 1998 Annual Meeting, and certain revisions
were made in the Joint Proxy Statement/Prospectus after consideration of
comments received by counsel for plaintiffs in the lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Special Meeting of Stockholders of the Company was held on October
31, 1997. Proxies were solicited by the Company to adopt the Plan and
Agreement of Merger, dated as of June 10, 1997, between Lennar Corporation
and Pacific Greystone Corporation. The following is a separate tabulation
with respect to the votes:
Total Votes For Total Votes Against Total Votes Withheld
--------------- ------------------- --------------------
Adoption of Plan and Agreement
of Merger, dated as of June 10, 1997,
between Pacific Greystone Corporation
and Lennar Corporation 11,795,150 14,883 510,961
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
No reports on Form 8-K were filed during the quarter ended September 30,1997.
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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
October 31, 1997 /s/ JACK R. HARTER
------------------
Jack R. Harter
Chairman, President and Chief Executive Officer
October 31, 1997 /s/ ANTONIO B. MON
------------------
Antonio B. Mon
Vice Chairman and Chief Financial Officer
17