ITEM 1. BUSINESS.
GENERAL
Pacific Greystone Corporation (the "Company" or "Pacific Greystone") is a leading regional builder of high quality, single family homes primarily targeted to first time and move-up homebuyers in infill and emerging markets located throughout Northern and Southern California, as well as Las Vegas and Phoenix. All of the operations of the Company are conducted through the Company's wholly-owned subsidiary, Greystone Homes, Inc. ("Greystone"), with the exception of the Company's mortgage brokerage business which is conducted by a separate subsidiary of the Company.
The Company's primary business objective is to become one of the leading regional single-family homebuilders while managing the risks inherent in the homebuilding industry. To achieve this objective, the Company has adopted the following business strategies:
EXPANSION THROUGH ACQUISITIONS AND START-UP OPERATIONS. The Company has successfully expanded its operations through selective acquisitions and by commencing start-up projects in new and existing markets. Within its existing markets, management believes there are opportunities to increase the number of residential projects with its current management information systems. As part of its overall strategy to enter new geographic markets, the Company continually evaluates acquisition opportunities which combine attractive residential projects and management with local market expertise.
MARKET SEGMENT DIVERSITY THROUGH INFILL AND EMERGING MARKET STRATEGY. Pacific Greystone focuses on two distinct market segments.
- Infill markets generally include sites zoned for non-residential use within previously developed communities that will typically yield 50 to 100 residential lots. The Company has a particular expertise in identifying and redeveloping non-residential sites suitable for single family homes. Management views its infill expertise as an important competitive advantage over larger tract builders due to its belief that the housing market in infill areas is less volatile than in emerging markets. The supply of buildable lots in an infill market is often constrained; therefore, competition is typically limited to resale housing.
- Emerging markets tend to include raw land and improved residential lots in areas of active new home construction. As compared to infill markets, emerging markets provide greater growth potential during periods of strong housing demand since they typically have fewer entitlement issues and generate more buildable lots than an infill market.
GEOGRAPHIC DIVERSITY WITHIN CALIFORNIA. Northern California and Southern California are distinct markets with unique economic and demographic trends. The number of homes closed by Pacific Greystone in California were divided almost equally between Northern and Southern California during 1996. By having diverse operations within California, management believes that it minimizes the risks associated with any one particular locality, yet the Company is able to participate in two large markets with significant demand for housing.
CONSERVATIVE LAND POLICIES. The Company maintains a conservative land acquisition policy designed to optimize profitability and return on capital while minimizing the risks associated with investments in land. It generally limits the number of lots acquired to less than 150 in any one project. By not having a significant investment in any one project, management believes it is better able to adjust to changing buyer needs and reduce the risks associated with changing market conditions. The Company only purchases lots after entitlements are received. The Company's inventory strategy is to own a two to four year supply of residential lots. Pacific Greystone's owned residential lot inventory has been obtained since its formation in 1991, with approximately 84% acquired since January 1995. As of December 31, 1996, the Company owned and controlled 7,219 residential lots.
EXPERIENCED MANAGEMENT WITH DECENTRALIZED OPERATING STRUCTURE. Pacific Greystone balances its local operating structure with centralized corporate-level management. The Company's local managers, who have significant experience in both the homebuilding industry and their respective markets, are responsible for operating decisions regarding project identification, house design, construction and marketing. Decisions related to overall Company strategy, project acquisition, financing and disbursements are centralized at the corporate level. The Company's senior operating and financial management is very experienced with the 14 most senior managers averaging 22 years of experience in the homebuilding industry.
On June 20, 1996, the Company completed its initial public offering (the "Offering") and sold 5,000,000 shares of common stock including 4,562,900 shares sold by the Company. The Offering was priced at $13.00 per share and the net proceeds were used to redeem the Series A cumulative senior preferred stock and the remainder to temporarily reduce amounts outstanding under the revolving credit facility.
The Company is a Delaware corporation and maintains its principal executive offices at 6767 Forest Lawn Drive, Los Angeles, California 90068. Its telephone number is (213) 436-6300.
MARKETS AND PRODUCTS
The Company's homebuilding operations are presently conducted in three regions: Northern California, Southern California and outside of California. Within each region, the Company operates through separate divisions managed by Division Presidents. Each Division President is responsible for the Company's operations within a prescribed geographic area including project identification, product design, construction, marketing and customer service. The boundaries of these geographic areas change from time to time as market conditions and internal conditions dictate. Division Presidents are experienced in the "for sale" housing business and possess in-depth knowledge of the geographic areas within which their divisions operate. The ability to balance corporate control over significant decisions and policies with the need to respond on a timely basis to local market opportunities is an important factor in the Company's operations. The Company conducts its homebuilding operations through eight divisional offices.
The Company's operations are focused on two distinct market segments, infill and emerging. The Company's infill projects are generally located in developed residential areas with ready access to jobs, shopping, schools and other amenities. Infill projects typically have higher densities than emerging markets and the Company's projects in infill markets generally contain a smaller number of units and attract move-up buyers. The Company believes that approximately half of the purchasers of homes in the Company's infill projects previously lived within a five mile radius of the infill projects. Homes in infill markets typically compete primarily against sales of existing homes in the market area.
The Company's emerging projects tend to be located in areas of active new construction but still within reasonable commuting distance of major employment centers. These projects generally focus on first time and move-up buyers desiring lower priced homes. In these locations, cost effectiveness is an important competitive advantage and the price at which the Company can acquire lots and construct homes is a key factor in achieving home sales. Typically, these markets have lower densities and compete primarily against new homes offered by other homebuilders.
The Northern California region operations are currently conducted in Alameda, Santa Clara, Contra Costa, San Mateo, Sacramento and San Joaquin counties. The Southern California region concentrates its operations in the counties of Los Angeles, Orange, San Bernardino, Riverside, San Diego and Ventura. Currently, the Company's operations outside of California are conducted in Las Vegas, Nevada and Phoenix, Arizona.
The following table sets forth information regarding the Company's projects and backlog at December 31, 1996:
_______________
(1) Actively selling projects are projects owned by the Company at which five or more homes were for sale at December 31, 1996. (2) Backlog is the number of units subject to pending sales contracts, some of which are subject to contingencies. Therefore, no assurances can be given that this backlog will result in actual sales. See "Sales and Marketing" below.
Homes in each residential project are specifically designed to meet local buyer preferences and geographic conditions and to be competitive within the marketplace. Typically the Company offers three to four product types in each project generally ranging in size from 1,000 to 3,000 square feet with various configurations for each product type. Homes are arranged within the project to ensure a varied street scene. In designing homes, the Company also takes into account new homes being offered by other homebuilders and homes available in the resale market. See "Cautionary Statements" "- Dependence on California Economy and Housing Markets" and "- Expansion into New Markets."
LAND ACQUISITION AND DEVELOPMENT
The Company acquires land for its residential home projects with a view toward the development of finished lots capable of supporting housing units. The Company views land as a component of a home's cost structure, rather than for its speculative value. Due to the cyclical character of the industry and the critical role of effective risk-management in land development, the Company seeks to limit building sites owned and controlled to a number adequate to support approximately two to four years of new home sales. Also, because of the illiquid nature of land holdings and the related financing requirements, the Company has implemented policies and programs to manage and minimize these risks. The Company requires the completion of due diligence prior to committing to acquire land, acquires only residential entitled land to mitigate zoning risk and typically limits land acquisition size to less than 150 units to minimize investment levels in any one project. The Company also uses options and other non-capital intensive structures to control land, and funds land acquisitions whenever possible with non-recourse seller financing. "Entitled" land refers to land subject to development agreements, tentative maps or recorded maps, depending on the jurisdiction within which the land is located. Developers generally have the right to obtain building permits with respect to entitled land upon compliance with conditions that are usually within the developer's control.
Prior to committing to the acquisition of land, the Company conducts extensive feasibility studies covering all pertinent aspects of the proposed commitment. These studies include such technical aspects as title, zoning, soil and seismic characteristics, marketing studies that review population and employment trends, schools, transportation access, buyer profiles, sales forecasts, projected profitability, cash requirements and assessment of political risk and other factors. Prior to acquiring each land parcel, market studies are completed to determine the needs of the targeted customers and to determine whether the underlying land price enables the Company to meet those needs at an affordable price. The Company purchases land only when it can project the commencement of construction and sales within a reasonable time period. The Company's policy is that land can be purchased or sold only with the prior approval of the Company's Executive Management Committee. The Company utilizes outside architects and consultants, under close supervision, to help review its acquisitions and design its products.
The Company generally purchases lots or obtains an option to purchase lots which, in either case, requires certain site improvements prior to construction. The Company then undertakes, where required, development activities (through contractual arrangements with local developers) that include site planning and engineering, as well as constructing road, sewer, water, utilities, drainage and recreational facilities and other amenities. When available in certain markets, the Company also buys finished lots that are ready for construction.
The following table sets forth the number of lots owned and controlled by the Company at December 31, 1996:
________________ (1) Lots controlled include properties for which the Company has entered into contractual relationships including non-binding letters of intent, binding purchase agreements with customary conditions precedent, non-binding verbal agreements, as well as option agreements and other arrangements. There can be no assurance the Company will acquire all of these properties.
The Company views joint ventures as a means to both expand its market opportunities and manage its risk profile. It enters into joint ventures with land owners, intermediaries and other homebuilders in the ordinary course of its business. Typically, the Company acts as the general partner and the day-to-day manager, while the other partner contributes the land or additional equity to the partnership. The joint ventures generally obtain development or construction financing from banks and other sources. Guarantees of such financing, if required, are generally provided by the partners on a negotiated basis. See "Cautionary Statements - Real Estate, Economic and Certain Other Conditions" and Note 5 to the Consolidated Financial Statements included in Item 8.
SALES AND MARKETING
The Company sells its homes through its own sales representatives, although sales by independent real estate brokers are encouraged in some markets. The Company's in-house sales force typically works from sales offices located in the model homes at each subdivision. Sales representatives assist potential buyers by providing them with basic floorplans, price information, development and construction timetables, tours of model homes and the selection of options. Sales personnel are licensed by the applicable real estate agencies in their respective markets, are provided training by the Company and generally have had prior experience selling new homes in the local market.
The Company advertises in newspapers and magazines and on billboards. The Company also utilizes home shows, video tapes, direct mailings, special promotional events, illustrated brochures and model homes in a comprehensive marketing program. Generally, two to four different model homes are built and decorated at each subdivision to display design features. Model homes play a key role in helping buyers understand the efficiencies and value provided by each plan type. Company personnel, along with subcontracted marketing and design consultants, carefully design exteriors and interiors of each home to coincide with the lifestyles of targeted buyers. Various plan types and elevations are utilized to provide a more varied street scene and sense of "customization" for the buyers.
Homes are typically sold during construction using sales contracts which are usually accompanied by cash deposits. Before entering into sales contracts, the Company generally prequalifies its customers. Purchasers are permitted to cancel sales contracts if they are unable to sell their existing homes or fail to qualify for financing and under certain other circumstances. For the years ended December 31, 1994, 1995 and 1996, the Company experienced a cancellation rate of approximately 24%, 21% and 25%, respectively. Although cancellations can delay the sale of the Company's homes, they have not had a material impact on sales, operations or liquidity since the Company closely monitors the progress of prospective buyers in obtaining financing and monitors and adjusts its start plans to better match the level of demand for its homes. The Company does not recognize revenue on homes covered by pending sales contracts until the sales are closed and the risk of ownership has been transferred to the buyer. See "Cautionary Statements - Interest Rates; Mortgage Financing."
CONSTRUCTION
The Company strives to match construction starts to its sales rates. The Company generally will not start construction of a phase of homes until sales have met predetermined targets. The Company controls its construction starts by releasing homes for construction and for sale in phases. The size of these phases depends on such factors as current sales and cancellation rates, the type of buyer targeted for a particular residential project, the time of the year and the Company's assessment of prevailing and anticipated economic conditions. Normally, the Company does not release homes for sale until a significant portion of the homes' construction cost has been established through firm subcontractor bids.
The Company functions as a general contractor, subcontracting its construction activities. The Company manages these activities with on-site supervisory employees and informational and management control systems. The services of independent architectural, design, engineering and other consulting firms are engaged to assist in project planning. The Company does not have long- term contractual commitments with its subcontractors, consultants or suppliers of materials, who are generally selected on a competitive bid basis. However, the Company has generally been able to obtain sufficient materials and subcontractors during times of market shortages. Depending on the design, time of year, local labor situation, governmental approvals, availability of materials and supplies, and other factors, the Company generally completes a home in four to six months.
By limiting the size of each construction phase and closely monitoring sales activity, the Company attempts to limit the number of unsold units under construction. However, unlike homebuyers in other parts of the country, homebuyers in the Company's markets generally are not accustomed to long delays in the delivery of homes. Accordingly, the Company and other homebuilders in the Company's markets typically commence construction prior to obtaining sales contracts for all homes within a given phase. Building homes of the same product type in phases also allows the Company to utilize production techniques that reduce its construction costs. The number of unsold homes fluctuates depending upon the timing of completion of construction and absorption of home phases. At December 31, 1996, the Company had 135 completed and unsold homes, excluding 132 model homes. See "Cautionary Statements - Real Estate, Economic and Certain Other Conditions" and "-Dependence on California Economy and Housing Markets."
CUSTOMER SERVICE AND QUALITY MANAGEMENT
The Company believes it provides high quality homes by employing a quality process which is intended to provide a positive atmosphere for each customer throughout the pre-sale, sale, building, closing and post-closing periods. The participation of the sales representatives, on-site construction supervisor and the post-closing customer service personnel, working in a team effort, is intended to foster the Company's reputation for quality service and ultimately lead to enhanced customer retention and referrals.
Homebuyers are provided with a warranty program which, in general, provides for a limited one-year warranty on building materials and, in California, a ten- year statutory warranty with respect to construction defects. The Company establishes reserves for future warranty costs which are periodically reviewed and adjusted as necessary.
In 1995, the Company initiated Total Quality Management ("TQM") as a process to improve customer satisfaction and reduce costs in all aspects of the Company's operations. TQM is a continual process in which all employees are involved in improving productivity and product quality. The Company believes its TQM process will increase long-term profitability.
MORTGAGE BROKERAGE OPERATIONS
The Company, through its wholly-owned subsidiary, PGC/Pacific Mortgage, Inc., offers mortgage brokerage services exclusively to its customers in most of its markets. The Company, acting as a broker, has agreements with various lenders to receive a fee on loans made by the lenders to customers introduced to the lenders by the Company. The Company does not originate, fund or service the loans. No credit or interest rate risk is assumed by the Company with respect to the loans.
INFORMATION SYSTEMS
From its inception, the Company has assigned a high priority to the development and implementation of systems and procedures. It has implemented a highly automated accounting and operational system using a proven software package widely used by other publicly owned homebuilders. This system is integrated and functions from a common data base to maintain the integrity of the data. All of the Company's offices are electronically connected via dedicated phone lines and a wide area network. This system facilitates the use of common accounting, financial and operational databases.
The Company has invested significantly in the development and implementation of its systems and procedures and has, by design, created capacity to manage larger volumes of activity than the Company is presently experiencing. In addition to its accounting and operational systems, the Company utilizes specialized software packages for specific applications that range from project feasibility analysis to construction scheduling. The Company has also designed its budgeting and planning system to accommodate expanded public reporting requirements. The Company has organized its operating divisions with a full complement of experienced financial personnel to manage divisional accounting functions and support division personnel.
COMPETITION
The residential homebuilding industry is highly competitive, with homebuilders competing for customers, desirable properties, financing, raw materials and skilled labor. The Company competes on the basis of location, design, quality and price with numerous other residential homebuilders, ranging from regional and national firms to small local companies. In addition, the Company competes with resales of existing residential housing by individuals, financial institutions and others. Competition is particularly intense when the Company enters a new market area. Many of the Company's competitors are larger than the Company and have greater financial resources.
REGULATORY AND ENVIRONMENTAL MATTERS
The residential homebuilding industry is subject to various local, state and other statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of particular areas. The Company may also be subject to periodic delays in its homebuilding projects due to building moratoria. In addition, certain new development projects, particularly in Southern California, are subject to various assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial. By raising the cost of the Company's homes to its customers, an increase in such assessments could have a negative impact on the Company's sales.
The residential homebuilding industry is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The environmental laws that apply to a given homebuilding site depend on the site's location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. Additionally, the climate and geology of the markets in California present risks of natural disasters that could adversely affect the homebuilding industry in general, and the Company's business in particular.
See "Cautionary Statements" "- Dependence on California Economy and Housing Markets" and "- Regulatory and Environmental Matters."
EMPLOYEES
At December 31, 1996, the Company had 396 employees. The Company considers its relations with its employees to be good. The Company's homebuilding operations are conducted primarily through independent subcontractors, thereby limiting the number of its employees. None of the Company's employees is represented by a union.
CAUTIONARY STATEMENTS
The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual results to differ materially from those expressed or implied in any forward-looking statements made in this Report. The words "likely," "expected," "anticipated," "estimate" or similar expressions identify forward-looking statements. The Company intends to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.
REAL ESTATE, ECONOMIC AND CERTAIN OTHER CONDITIONS. The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing for acquisition, construction and permanent mortgages, interest rate levels and demand for housing. Sales of new houses are also affected by the condition of the resale market for used homes, including foreclosed homes.
The risks associated with holding an inventory of lots are substantial for homebuilders due to the high carrying costs of lots. The market value of housing inventories can change significantly over the life of a project, reflecting dynamic market conditions. This may result in losses when trying to exit a poorly performing project or market. Also, cash flow management is crucial due to high leverage and the seasonal cycle of home sales. The need to stage raw materials such as land and finished lots ahead of the start of home construction requires homebuilders to commit working capital for longer periods than is true for manufacturing companies. The Company attempts to reduce these risks through (i) constraining project size and (ii) acquiring lots and land through the use of options and joint ventures where possible, thereby enabling the Company to control lots with a smaller capital investment. However, there can be no assurance that such efforts will be successful. At December 31, 1996, the Company had 135 completed and unsold homes, excluding 132 model homes.
The residential homebuilding industry has, from time to time, experienced fluctuating lumber prices and supply, as well as serious shortages of labor and other materials, including insulation, drywall, carpenters, electricians, plumbers and concrete. Delays in construction of homes due to these factors or to inclement weather conditions could have an adverse effect upon the Company's operations.
DEPENDENCE ON CALIFORNIA ECONOMY AND HOUSING MARKETS. The Company presently conducts most of its business in California. Economic growth in California has slowed considerably in the 1990s compared to the late 1980s. The average sale price of homes in most of the areas in California in which the Company does business has decreased overall during the 1990s and there can be no assurance that home sale prices will not decline more in the future. A continued prolonged economic downturn in California would have a material adverse effect on the Company's operations.
Periodically, the State of California has experienced drought conditions, resulting in water conservation measures and, in some cases, rationing by local municipalities in which the Company does business. Restrictions by governmental agencies on future construction activity could have an adverse effect upon the Company's operations.
The climate and geology of the markets in which the Company operates present risks of natural disasters. To the extent that earthquakes, droughts, floods, wildfires or other natural disasters or similar events occur, the homebuilding industry in general, and the Company's business in particular, may be adversely affected.
INTEREST RATES; MORTGAGE FINANCING. Virtually all purchasers of the Company's homes finance their acquisitions through third-party lenders providing mortgage financing. In general, housing demand is adversely affected by increases in interest rates, housing costs and unemployment and by decreases in the availability of mortgage financing. In addition, various proposals for a flat rate federal income tax have been discussed, some of which would remove or limit the deduction for home mortgage interest. If effective mortgage interest rates increase and the ability or willingness of prospective buyers to finance home purchases is adversely affected, the Company's operating results may be negatively affected. The Company's homebuilding activities also are dependent upon the availability and cost of mortgage financing for buyers of homes owned by potential customers permitting those customers to sell their existing homes and purchase homes from the Company. Any limitations or restrictions on the availability of such financing could adversely affect the Company's sales.
COMPETITION. The homebuilding industry is highly competitive and fragmented. Homebuilders compete not only for homebuyers, but also for desirable properties, financing, raw materials and skilled labor. The Company competes with other local, regional and national homebuilders, often within larger subdivisions designed, planned and developed by the other homebuilders. Some of the Company's competitors have longer operating histories and greater financial, marketing and sales resources than the Company.
EXPANSION INTO NEW MARKETS. The Company's operations to date have generally been limited to Northern and Southern California, as well as the Las Vegas and Phoenix markets. To the extent the Company expands into new markets, it will need to employ personnel with knowledge of the new markets as it has done in Las Vegas and Phoenix. There can be no assurances that the Company will be able to employ the necessary personnel or that the Company's operations will be successful in any new markets. When evaluating acquisitions in new markets, an important factor to the Company is whether managers with local knowledge can be employed.
REGULATORY AND ENVIRONMENTAL MATTERS. The Company and its competitors are subject to various local and state statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters which impose restrictive zoning and density requirements limiting the number of homes that may be built within the boundaries of a particular area. The Company may also be subject to periodic delays in its homebuilding projects due to building moratoria. In addition, certain new development projects, particularly in Southern California, are subject to various assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial. By raising the cost of the Company's homes to its customers, an increase in such assessments could have a negative impact on the Company's sales.
The Company and its competitors are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws which apply to any given homebuilding site vary according to the site's location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and may prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas.
In recent years, several cities and counties in which the Company has projects have approved the inclusion of "slow growth" initiatives and other ballot measures which could impact the affordability and availability of homes and land within those localities. Although many of these initiatives have been defeated, the Company believes that if similar initiatives are introduced and approved, future residential construction by the Company within certain cities or counties could be negatively impacted.
VARIABILITY OF RESULTS. The Company historically has experienced, and in the future expects to continue to experience, variability in sales and revenues on a quarterly basis. Factors expected to contribute to this variability include, among others (i) the timing of home closings; (ii) the Company's ability to continue to acquire land and options thereon on acceptable terms; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and general economic conditions in California, especially in the Company's markets; (v) the cyclical nature of the homebuilding industry; (vi) the prevailing interest rates and the availability of mortgage financing; (vii) pricing policies of the Company's competitors; (viii) the timing of the opening of new residential projects; (ix) weather; and (x) the cost and availability of materials and labor. The Company's historical financial performance is not necessarily a meaningful indicator of future results and, in particular, the Company expects its financial results to vary from project to project and from quarter to quarter.
ACCESS TO FINANCING. The homebuilding industry is capital intensive and requires expenditures for land purchases, land development and housing construction. Accordingly, the Company incurs substantial indebtedness to finance its homebuilding activities. The Company may be required to seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financing and securities offerings. The amount and types of indebtedness which the Company may incur is limited by the terms of the indentures under which the senior unsecured notes of a subsidiary of the Company were issued and by the terms of the Company's existing revolving credit agreement. If the Company is not successful in obtaining sufficient capital to fund its planned expansion and other expenditures, new projects may be constrained. Any such delay or abandonment could result in a reduction in sales and may adversely affect the Company's future results of operations. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Notes 6 and 7 to the Consolidated Financial Statements included in Item 8.
DEPENDENCE ON KEY PERSONNEL. The success of the Company depends to a significant degree on the efforts of the Company's senior management, especially its Chief Executive Officer, Chief Financial Officer and other officers. The Company's operations may be adversely affected if one or more members of senior management cease to be active in the Company. The Company has employment agreements only with its Chief Executive Officer and Chief Financial Officer. The Company has designed its compensation structure and employee benefit programs to encourage long-term employment of all executive officers.
ITEM 2.

ITEM 2. PROPERTIES.
In addition to real estate held for development and sale, which is either owned or under option to be purchased by the Company, the Company leases office space for its corporate headquarters, located in Los Angeles, California, through 1997, with extensions at the Company's option for an additional six years. In addition, the Company leases each of its other offices and those leases have initial terms expiring from 1997 through 1999 and renewal options. The Company believes that its office space is suitable and adequate for its needs for the foreseeable future. See Note 11 to the Consolidated Financial Statements included in Item 8.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in routine litigation arising in the ordinary course of its business. In the opinion of the Company's management, none of the pending litigation will have a material adverse effect on the Company's consolidated financial condition or results of operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 1996 to a vote of security holders, through the solicitation of proxies or otherwise.
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EXECUTIVE OFFICERS OF THE REGISTRANT [PURSUANT TO INSTRUCTION 3 TO REGULATION S-K, ITEM 401(b)]
__________________ (1) All positions described were with the Company, unless otherwise indicated. (2) Member of the Executive Management Committee.
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PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of common stock are listed on the New York Stock Exchange under the symbol "GRY." The following table sets forth, for the quarters indicated, the reported high and low sales prices of the common shares. The last reported closing price of the Company's common stock on the New York Stock Exchange was $14-1/8 on February 10, 1997. Prior to June 20, 1996, the Company's common stock was closely held and there was no established public trading market. As of January 31, 1997, there were 28 holders of record of the Company's common stock.
QUARTER ENDED HIGH LOW ------------- --------- -------- June 30, 1996* $ 12 5/8 $ 11 September 30, 1996 $ 12 3/8 $ 9 3/4 December 31, 1996 $ 12 1/2 $ 9 3/4
*From June 21, 1996 to June 30, 1996
No cash dividends have ever been declared or paid on the Company's common stock. The Company anticipates that all future earnings will be retained to finance the continuing development of its business and does not anticipate paying cash dividends on the common stock in the foreseeable future. The payment of any future cash dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future cash earnings, capital requirements, the general financial condition of the Company and general business conditions. Payment of dividends by Greystone to the Company is limited by certain financing arrangements of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" included in Item 7.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The following tables include selected consolidated financial data of the Company as of and for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 which are derived from the Company's Consolidated Financial Statements. These tables should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Report and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." These historical results are not necessarily indicative of the results to be expected in the future.
__________________________ (1) Includes the operating results of the California Homebuilding Operations of A-M Homes only from October 1, 1992. (2) Pro forma earnings for purposes of this calculation is historical pretax income less an assumed provision for income taxes at an effective tax rate of 40.8% and excludes the effect of the preferred dividend requirements. (3) Pro forma weighted average number of shares outstanding were calculated as if the Offering was consummated on January 1, 1995 and the changes in the capital structure as discussed in Note 1 and 9 to the Consolidated Financial Statements occurred on such date.
ITEM 7.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders Pacific Greystone Corporation
We have audited the accompanying consolidated balance sheets of Pacific Greystone Corporation as of December 31, 1995 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Greystone Corporation at December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Los Angeles, California January 24, 1997
PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, ------------------------------- 1994 1995 1996 -------- --------- ---------- Revenues. . . . . . . . . . . . . . . . . . . . $260,185 $ 293,921 $ 420,021 Cost of sales . . . . . . . . . . . . . . . . . (215,437) (247,827) (345,666) -------- --------- ---------- Gross margin. . . . . . . . . . . . . . . . . . 44,748 46,094 74,355 Equity in pretax income (loss) of unconsolidatedjoint ventures. . . . . . . . . 2,581 1,742 (227) Selling, general and administrative expenses. . (29,059) (31,468) (42,726) Interest and other, net . . . . . . . . . . . . 388 1,162 1,858 -------- --------- ---------- Pretax income . . . . . . . . . . . . . . . . . 18,658 17,530 33,260 Provision for income taxes. . . . . . . . . . . -- (2,512) (13,570) -------- --------- ---------- Net income. . . . . . . . . . . . . . . . . . . $ 18,658 $ 15,018 $ 19,690 -------- --------- ---------- -------- --------- ---------- Pro forma earnings. . . . . . . . . . . . . . . $ 10,378 $ 19,690 --------- ---------- --------- ---------- Pro forma earnings per share. . . . . . . . . . $ 0.69 $ 1.32 --------- ---------- --------- ---------- Pro forma weighted average number of shares outstanding . . . . . . . . . . . . . . . . . . 14,955 14,960 --------- ---------- --------- ----------
See accompanying notes.
PACIFIC GREYSTONE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
December 31, ----------------------------- 1995 1996 ------------ ------------ Cash and cash equivalents. . . . . . . . . . $ 49,294 $ 31,142 Housing inventories. . . . . . . . . . . . . 215,043 301,934 Deferred tax asset . . . . . . . . . . . . . 15,498 4,480 Other assets . . . . . . . . . . . . . . . . 10,135 12,913 ------------ ------------ Total assets . . . . . . . . . . . . . . . $ 289,970 $ 350,469 ------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities: Accounts payable and other liabilities. . . $ 26,738 $ 32,532 Notes payable . . . . . . . . . . . . . . . 12,337 40,254 Senior unsecured notes payable. . . . . . . 125,000 125,000 ------------ ------------ Total liabilities . . . . . . . . . . . . 164,075 197,786
Shareholders' equity: Series A cumulative senior preferred stock . . . . . . . . . . . . . . . . . . 44,747 -- Series C cumulative convertible preferred stock . . . . . . . . . . . . . 20,000 -- Common stock, $.01 par value; 35,000,000 shares authorized, 14,959,741 shares issued and outstanding in 1996 . . . . . . . . . . . 41 150 Additional paid-in capital. . . . . . . . . 27,898 132,482 Retained earnings . . . . . . . . . . . . . 33,209 20,051 ------------ ------------ Total shareholders' equity. . . . . . . . 125,895 152,683 ------------ ------------ Total liabilities and shareholders' equity . . . . . . . . . . . . . . . $ 289,970 $ 350,469 ------------ ------------ ------------ ------------
See accompanying notes.
PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes.
PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
1. FORMATION OF COMPANY
Pacific Greystone Corporation (the "Company") is a leading regional builder of high quality, single family homes primarily targeted to first time and move- up homebuyers in infill and emerging markets located throughout Northern and Southern California, as well as Las Vegas and Phoenix. The Company also provides mortgage brokerage services to its customers.
The Company was founded on October 10, 1991 by senior management and Warburg, Pincus Investors, L.P. Since inception, the Company has expanded its presence in Northern and Southern California through start-up operations in new markets. In December 1995, the Company expanded into the Las Vegas, Nevada and Phoenix, Arizona markets through the acquisition of seven residential projects from another homebuilder.
On June 20, 1996, the Company completed its initial public offering (the "Offering") and sold 5,000,000 shares of common stock, including 4,562,900 and 437,100 shares sold by the Company and certain stockholders of the Company, respectively. The Offering was priced at $13.00 per share and the net proceeds were used to redeem the Series A cumulative senior preferred stock ("Series A Preferred") and the remainder to temporarily reduce amounts outstanding under the revolving credit facility.
In connection with the Offering, the Company declared a dividend on the Series A Preferred equal to the accrued dividends thereon to the date of the closing of the Offering. The Company and holders of the Series A Preferred agreed that accrued dividends through March 31, 1996, aggregating approximately $20,548,000, would be paid through the issuance of common stock valued at a per share price equal to the initial offering price per share in the Offering less underwriting discounts and commissions. Dividends on the Series A Preferred from April 1, 1996 to the closing of the Offering, aggregating approximately $1,650,000, were paid in cash. In addition, all outstanding shares of the Series C cumulative convertible preferred stock ("Series C Preferred") plus accrued dividends thereon through March 31, 1996 were converted into common stock at a price equal to 80% of the initial offering price per share in the Offering. Dividends on the Series C Preferred from April 1, 1996 to the closing of the Offering aggregating approximately $821,000, were paid in cash.
2. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Investments in joint ventures which are not effectively controlled by the Company are accounted for using the equity method. The accounting policies of the joint ventures are substantially the same as those of the Company.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased and amounts in-transit from escrow accounts to be cash equivalents. The Company estimates that the market value of these investments approximates their book value.
2. ACCOUNTING POLICIES (CONTINUED)
HOUSING INVENTORIES The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" effective January 1, 1996. In accordance with this pronouncement, the Company records impairment losses on long-lived assets held and used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. The adoption of SFAS No. 121 had no impact on the Company's consolidated financial position and results of operations in the current year.
Prior to January 1, 1996, housing inventories were stated at the lower of cost or estimated net realizable value for each project. Estimated net realizable value was based upon management's evaluation of the net sales proceeds anticipated in the normal course of business, less estimated costs to complete or improve the property to the condition used in determining the estimated selling price given current economic conditions and those expected throughout the development and selling period. Management's assessment of net realizable value incorporated a thorough assessment of the Company's liquidity and capital resources. For the years ended December 31, 1994 and 1995, cost of sales included approximately $2,000,000 and $1,900,000, respectively, for reductions in housing inventories to net realizable value.
Housing revenues are recognized when homes are completed and ownership has transferred to the customer. Cost of sales is comprised of direct and allocated costs including estimated future costs for warranty. Land, land improvements and other common costs are generally allocated to units within a project. Development costs include interest and other carrying costs incurred until development is substantially complete.
INCOME TAXES The Company accounts for income taxes using SFAS No. 109, "Accounting for Income Taxes." Among other things, SFAS No. 109 requires the liability method and that current and deferred tax balances be determined based on tax rates and laws enacted as of the balance sheet date rather than the historical tax rates.
HISTORICAL PER SHARE DATA Historical per share data calculated in accordance with APB No. 15, "Earnings Per Share," was not presented on the statements of income since such data was not considered relevant to the new common shareholders. In calculating historical per share data under APB No. 15, the preferred dividend requirements were deducted from net income and the weighted average number of shares outstanding were adjusted to give effect to the Offering and the stock split as discussed in Note 9. Historical per share data was $1.36 for the year ended December 31, 1996. The computation of historical per share is based on the weighted average number of common shares and common share equivalents outstanding of 10,701,000 in 1996.
STOCK-BASED COMPENSATION PLANS The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock options since the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing non-traded stock options. Under APB No. 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES 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 estimates.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation.
3. PRO FORMA DATA
PRO FORMA EARNINGS Pro forma earnings for purposes of this calculation is historical pretax income less an assumed provision for income taxes at an effective tax rate of 40.8% and excludes the effect of the preferred dividend requirements.
PRO FORMA WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Pro forma weighted average number of shares outstanding was calculated as if (a) the Offering was consummated on January 1, 1995 and (b) the changes in the capital structure discussed in Note 1 and Note 9 occurred on such date.
4. HOUSING INVENTORIES
As of December 31, 1995 and 1996, the finished homes and completed model portion of housing inventories was approximately $52,519,000 and $75,189,000, respectively. An analysis of interest incurred is as follows:
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
Summarized combined financial information of the Company's investments in unconsolidated joint ventures accounted for using the equity method is as follows:
SUMMARY COMBINED BALANCE SHEETS
DECEMBER 31, ------------------------------- 1995 1996 ------------- ------------- (In thousands) ASSETS Cash and cash equivalents............. $ 4,001 $ 940 Housing inventories................... 119 -- Other assets.......................... 338 -- ------------- ------------- Total assets........................ $ 4,458 $ 940 ------------- ------------- ------------- -------------
LIABILITIES AND EQUITY Liabilities........................... $ 1,920 $ 720 Equity: The Company......................... 280 170 Others.............................. 2,258 50 ------------- ------------- Total liabilities and equity.... $ 4,458 $ 940 ------------- ------------- ------------- -------------
SUMMARY COMBINED STATEMENTS OF INCOME
The Company's interest in earnings of its joint venture investments ranges from 25% to 50%. The joint venture agreements generally provide that the first cash distributions from operations are to be distributed to repay capital contributions, loans or advances and thereafter all cash is to be distributed in accordance with the earnings and loss sharing ratios.
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
The Company receives a fee for management services it renders to its joint ventures. The fees are intended to compensate the Company for its efforts on behalf of the joint ventures and are included in the Company's revenues. The amount of management fees recognized for the years ended December 31, 1994 and 1995 is approximately $2,139,000 and $1,005,000, respectively. No management fee was recognized for the year ended December 31, 1996.
The Company guarantees, on an unsecured basis, certain debt of its joint ventures which is secured by land and improvements. At December 31, 1995, approximately $325,000 was guaranteed by the Company. At December 31, 1996, the Company had no liability for such obligations.
6. NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31, ------------------------------- 1995 1996 ------------- ------------- (In thousands) Unsecured revolving credit facility.. $ -- $ 30,000 Notes secured by trust deeds; interest payable at 8% to 10%..... 10,287 10,254 Assessment bond liabilities; interest payable at 6.0% to 7.9%.. 2,050 -- ------------- ------------- Total notes payable.................. $ 12,337 $ 40,254 ------------- ------------- ------------- -------------
Terms under the unsecured revolving credit facility (the "Facility") dated June 28, 1994 and as amended on July 24, 1995 and April 10, 1996 provide for a total commitment not to exceed $100,000,000. The Facility matures July 31, 1999 and includes a provision for a 12-month amortization of outstanding principal starting July 31, 1998. The 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 Company's senior long-term debt rating. A quarterly commitment fee of .125% on the unused portion is payable quarterly in arrears.
The Facility provides for various covenants and restrictions, including minimum liquidity and net worth requirements and limitations on the amount of debt to equity. The Company is able to draw against the Facility based on housing inventory borrowing base levels. The Company is not required to pay down the line from each home closing. The Company had $57,691,000 available under the Facility for future use at December 31, 1996.
Housing inventories having a carrying value of $25,478,000 and $32,308,000 at December 31, 1995 and 1996, respectively, are pledged to collateralize secured loans. The Company estimates that the market value of its notes payable approximates their stated book value.
Principal payments on the above notes are due as follows: 1997, $9,210,000; 1998, $15,033,000; 1999, $15,036,000; 2000, $39,000; and $936,000 thereafter. The Company's weighted average interest rate on short-term borrowings was 8.0% and 8.5% as of December 31, 1995 and 1996, respectively.
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. SENIOR UNSECURED NOTES PAYABLE
On March 10, 1994, the Company, through its wholly-owned subsidiary, Greystone Homes, Inc. ("Greystone"), sold in a private placement $125,000,000 aggregate principal amount of 10 3/4% Senior Notes (the "Notes"). The Notes were subsequently registered with the Securities and Exchange Commission.
The Notes are due March 1, 2004 with interest payable semi-annually. The Company may, at its option, redeem the Notes, in whole or in part, at any time on or after March 1, 1999, initially at 105.375% of the principal amount thereof, declining to 100% of the principal amount thereof on or after March 1, 2001. The Notes are general unsecured senior obligations of Greystone, ranking pari passu in right of payment with all existing and future unsecured indebtedness that is not, by its terms, expressly subordinated in right of payment to the Notes. The Notes contain certain restrictive covenants including limitations on additional indebtedness. The indentures with respect to the Notes limit the ability of Greystone to pay cash dividends or make loans and advances to the Company. Under the terms of the indentures, Greystone could pay cash dividends or make loans or advances to the Company in an amount of $51,075,000 at December 31, 1996. The Notes are fully and unconditionally guaranteed by the Company. The market value of the Notes approximates their book value.
8. INCOME TAXES
Included in the table below is the provision for income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax asset are as follows:
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (CONTINUED)
SFAS No. 109 requires the reduction of the deferred tax asset by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred tax asset will not be realized. For the years ended December 31, 1994 and 1995, the Company reduced its valuation allowance by $7,496,000 and $4,500,000, respectively, due to the increased visibility of anticipated future income. The Company has established a $1,500,000 valuation allowance for capital loss carryforwards which currently are not expected to be utilized. Based on the weight of available evidence, in the opinion of the Company's management, the Company will more likely than not generate sufficient taxable income to fully utilize the net deferred tax asset.
The reconciliation of income tax attributable to continuing operations computed at the applicable statutory tax rates to income tax expense is as follows:
9. STOCKHOLDERS' EQUITY
The Board of Directors authorized a 1.4282 to 1.00 stock split of the Company's common stock immediately prior to the Offering. The Company's par value of $.01 remained unchanged and an amount equal to the par value of the shares outstanding prior to the Offering has been transferred from additional paid-in capital to common stock. In addition, the authorized number of common shares were increased from 5,000,000 to 35,000,000 while the preferred shares were decreased from 7,100,000 to 5,000,000. All references in the financial statements to number of shares and per share amounts have been restated to reflect the stock split. At December 31, 1995 and 1996, the Company had 5,829,074, after adjusting for a 1.4282 to 1.00 stock split, and 14,959,741 common shares outstanding, respectively.
In conjunction with the issuance of the Notes, the holders of the Series B cumulative convertible preferred stock ("Series B Preferred") converted the 2,559,260 shares of Series B Preferred then outstanding into common shares on a share-for-share basis. There were no dividends declared or paid on the Series B Preferred.
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK OPTIONS
The Company has a 1996 stock option and award plan (the "Plan") to grant options and other awards to employees. The Plan provides for the granting of a maximum of 825,000 shares subject to options or other awards. On June 20, 1996, 299,195 stock options were awarded to certain executive officers of the Company pursuant to the Plan. These options were first exercisable on December 20, 1996 and expire on June 20, 2006. On June 24, 1996, additional options to purchase an aggregate of 295,000 shares were granted to other management of the Company. These options have a term of ten years and will vest in equal annual installments over three years. All stock options were granted at the initial offering price to the public in the Offering. During 1996, 16,000 stock options were canceled.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method under SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black- Scholes option pricing model with the following weighted-average assumptions for 1996: risk-free interest rates of 6.11%; dividend yields of 0%, volatility factors of the expected market price of the Company's common stock of .384; and a weighted-average expected life of the options of 3 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that require the input of highly subjective assumptions including the expected stock price volatility. Since the Company's stock options have characteristics significantly different from those of traded options, and since changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
For purposes of SFAS No. 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's 1996 pro forma information is as follows: pro forma net income under SFAS No. 123: $13,744,000; weighted average number of common shares and common shares equivalents outstanding: 10,701,000 and pro forma earnings per share under SFAS No. 123: $1.28. The effects of applying SFAS No. 123 to the Company's stock-based awards for 1995 results in net income and earnings per share that are not materially different from the reported amount.
A summary of the Company's stock option activity, and related information for the year ended December 31, 1996 is as follows:
Options Weighted-Average (in 000s) Exercise Price ----------- ----------------- Outstanding-beginning of year.... 14 $ 1.83 Granted.......................... 594 13.00 Exercised........................ - - Forfeited........................ (16) 13.00 --------- Outstanding-end of year.......... 592 $ 12.73 --------- --------- Exercisable-end of year.......... 304 $ 12.82 --------- --------- Weighted-average fair value of options granted under SFAS No. 123 during the year.. -- $ 3.93
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to lease certain office facilities under operating leases which expire at various dates through 1998. Future minimum payments under the noncancelable leases having an initial or remaining term in excess of one year are as follows: 1997, $1,141,000; 1998, $260,000; and 1999, $105,000. Total rent expense for the years ended December 31, 1994, 1995 and 1996, was $969,000, $877,000 and $1,097,000, respectively.
At December 31, 1995 and 1996, the Company had outstanding performance bonds with an estimated potential obligation of $20,117,000 and $37,334,000, respectively, related principally to its obligations for site improvements at various projects. The Company does not believe that any such bonds are likely to be drawn upon.
David Kaplan, a director of the Company, was a principal with Victor Capital Group, L.P. in 1995. The Company engaged Victor Capital Group, L.P. to assist in the development of the Company's long-term strategic plan. The Company made payments in 1995 totaling $160,000 for consulting services rendered. The Company paid $85,000 to the Autumn Hill Group for similar consulting services rendered in 1996. David Kaplan is a principal at the Autumn Hill Group.
Commitments and contingencies include the usual obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business. The Company is also involved in routine litigation arising in the ordinary course of its business. In the opinion of the Company's management, none of the pending litigation will have a material adverse effect on the Company's consolidated financial condition or results of operations.
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC.
Summarized consolidated financial information for Greystone 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's selling, general and administrative expenses presented below.
SUMMARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ 1995 1996 --------- --------- (In thousands) ASSETS Cash and cash equivalents $ 40,013 $ 22,594 Housing inventories 215,043 301,934 Deferred tax asset 15,498 4,480 Other assets 9,668 12,554 --------- --------- Total assets $ 280,222 $ 341,562 --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable and other liabilities $ 21,200 $ 24,011 Intercompany payable to the Company 2,314 3,675 Notes payable 12,337 40,254 Senior unsecured notes payable 125,000 125,000 --------- --------- Total liabilities 160,851 192,940 Shareholder's equity 119,371 148,622 --------- --------- Total liabilities and shareholder's equity $ 280,222 $ 341,562 --------- --------- --------- ---------
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC.
Greystone 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 are not presented, as the Company's management does not consider the information material to investors.
In September 1995, all the subsidiaries of Greystone were merged into Greystone's operations. Accordingly, the requirements of Rule 1-02 (aa) of Regulation S-X for certain information and summarized combined financial statements no longer apply.
13. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the years ended December 31, 1995 and 1996 is summarized as follows:
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 401 of Regulation S-K is set forth in the Company's 1997 Annual Meeting Proxy Statement which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996 except for the information regarding the executive officers of the Company, which is included in Part I on page 17 herein. The Company's 1997 Annual Meeting Proxy Statement, exclusive of the information set forth under the captions "Report of the Compensation Committee" and "Company Performance," are incorporated herein by this reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 402 of Regulation S-K is set forth in the Company's 1997 Annual Meeting Proxy Statement which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996. The Company's 1997 Annual Meeting Proxy Statement, exclusive of the information set forth under the captions "Report of the Compensation Committee" and "Company Performance," are incorporated herein by this reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 403 of Regulation S-K is set forth in the Company's 1997 Annual Meeting Proxy Statement which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996. The Company's 1997 Annual Meeting Proxy Statement, exclusive of the information set forth under the captions "Report of the Compensation Committee" and "Company Performance," are incorporated herein by this reference.
ITEMS 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 404 of Regulation S-K is set forth in the Company's 1997 Annual Meeting Proxy Statement which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996. The Company's 1997 Annual Meeting Proxy Statement, exclusive of the information set forth under the captions "Report of the Compensation Committee" and "Company Performance," are incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The following required information is included herein on pages 31 - 46 of this Report:
Report of Independent Auditors
Consolidated Statements of Income for each of the three years in the period ended December 31, 1996
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1996
Consolidated statements of Cash Flows for each of the three years in the period ended December 31, 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules have been omitted. The information required is presented herein in the "Notes to Consolidated Financial Statements" on pages 36 - 46 of this Report.
3. EXHIBITS.
Exhibit Number Description - ------- -----------
3.1(f) Restated Certificate of Incorporation of the Company. 3.2(f) Bylaws of the Company. 3.3(f) Amendments to the Bylaws of the Company. 4.1(b) Indenture, dated as of March 1, 1994, among Greystone Homes, Inc., Pacific Greystone Corporation, HLDC Acquisition Corp., Stonegrey Corporation, PGC Holdings, Inc., A-M Homes, a California Limited Partnership and U.S. Trust Company of California, N.A., as Trustee, relating to the 10 3/4% Senior Notes due March 1, 2004 of Greystone Homes, Inc. 4.2 The Registrant agrees to furnish to the Securities and Exchange Commission upon request copies of all instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries. 10.1(a) First Amended and Restated Shareholders' Agreement and Irrevocable Proxy, dated as of September 28, 1992, by and among the Company and certain shareholders. 10.2(a) Office Space Lease, dated December 12, 1988, between Downey Savings and Loan Association and A-M Homes, a California Limited Partnership, with respect to the property located at 3501 Jamboree Road, Newport Beach. 10.3(a) Office Lease, dated December 21, 1992, between Toluca Plaza Company and the Company, with respect to the Company's corporate executive offices located at 6767 Forest Lawn Drive, Los Angeles, California. 10.4(d) Employment Agreement, dated as of January 1, 1996, between the Company and Jack R. Harter.(1) 10.5(d) Employment Agreement, dated as of January 1, 1996, between the Company and Antonio B. Mon.(1) 10.6(b) Revolving Credit Agreement, dated as of June 28, 1994, between Bank of America National Trust and Savings Association, as lender, and Greystone Homes, Inc. and A-M Homes, a California Limited Partnership, as borrower.
Exhibit Number Description - ------- -----------
10.7(c) Modification Agreement dated July 24, 1995 to the Revolving Credit Agreement between Bank of America National Trust and Savings Association, as lender, and Greystone Homes, Inc. and A-M Homes, a California Limited Partnership, as borrower. 10.8(e) Second Modification Agreement dated April 4, 1996 to the Revolving Credit Agreement between Bank of America National Trust and Savings Association, as lender, and Greystone Homes, Inc., as borrower. 10.9(e) Co-Lending Agreement dated April 4, 1996 to the Revolving Credit Agreement between Bank of America National Trust and Savings Association, as the agent for certain lenders, and Greystone Homes, Inc., as borrower. 10.8(c) Amendment No. 1 to the First Amended and Restated Shareholders' Agreement and Irrevocable Proxy. 10.9(c) 1995 Eligible Directors' Stock Option Plan.(1) 10.10(f) Agreement between the Company and Warburg, Pincus Investors, L.P. 10.11(g) Amended and Restated 1995 Eligible Directors' Stock Option Plan.(1) 10.12(h) 1996 Employee Stock Option and Award Plan.(1) 10.13(i) 1996 Employee Stock Purchase Plan.(1) 21 List of Subsidiaries. 23 Consent of Independent Auditors. 27 Financial Data Schedule.
- ------------------------- (a) Filed as an exhibit to the Company's Registration Statement No. 33-76628 on Form S-4 and incorporated herein by reference.
(b) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994 and incorporated herein by reference.
(c) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1995 and incorporated herein by reference.
(d) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference.
(e) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1996 and incorporated herein by reference.
(f) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996 and incorporated herein by reference.
(g) Filed as an exhibit to the Company's Registration Statement No. 333-07117 on Form S-8 dated June 28, 1996, and incorporated by reference herein.
(h) Filed as an exhibit to the Company's Registration Statement No. 333-07115 on Form S-8 dated June 28, 1996, and incorporated by reference herein.
(i) Filed as an exhibit to the Company's Registration Statement No. 333-06985 on Form S-8 dated June 27, 1996, and incorporated by reference herein.
(1) Management contract, compensation plan or arrangement required to be identified pursuant to Item 14(a) (3) of this Report.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC GREYSTONE CORPORATION
February 11, 1997 /s/ Jack R. Harter ----------------------------------------------- Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
February 11, 1997 /s/ Jack R. Harter ----------------------------------------------- Jack R. Harter Chairman, President and Chief Executive Officer
February 11, 1997 /s/ Antonio B. Mon ----------------------------------------------- Antonio B. Mon Vice Chairman and Chief Financial Officer
February 11, 1997 /s/ Bruce E. Gross ----------------------------------------------- Bruce E. Gross Senior Vice President, Controller and Treasurer (Chief Accounting Officer)
February 11, 1997 /s/ Sidney Lapidus ----------------------------------------------- Sidney Lapidus Director
February 11, 1997 /s/ Reuben S. Leibowitz ----------------------------------------------- Reuben S. Leibowitz Director
February 11, 1997 ----------------------------------------------- John D. Santoleri Director
February 11, 1997 /s/ David Kaplan ----------------------------------------------- David Kaplan Director