-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BSbb5FZFD4xkl7hFzlNYHzOBl3lZj0nLvWBoxxP7zbZoJXmCDcdW8zGo5e7Mo7c2 5WTt7fhovmMyKCPkd94OLQ== 0000912057-96-010506.txt : 19960522 0000912057-96-010506.hdr.sgml : 19960522 ACCESSION NUMBER: 0000912057-96-010506 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960521 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC GREYSTONE CORP /DE/ CENTRAL INDEX KEY: 0000920760 STANDARD INDUSTRIAL CLASSIFICATION: GEN BUILDING CONTRACTORS - RESIDENTIAL BUILDINGS [1520] IRS NUMBER: 954337490 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-01388 FILM NUMBER: 96570608 BUSINESS ADDRESS: STREET 1: 6767 FOREST LAWN DR STREET 2: STE 300 CITY: LOS ANGELES STATE: CA ZIP: 90068-1027 BUSINESS PHONE: 2134366300 MAIL ADDRESS: STREET 1: 6767 FOREST LAWN DR STREET 2: STE 300 CITY: LOS ANGELES STATE: CA ZIP: 90068-1027 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1996 REGISTRATION NO. 333-1388 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- PACIFIC GREYSTONE CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 1521 95-4337490 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) 6767 FOREST LAWN DRIVE SUITE 300 LOS ANGELES, CALIFORNIA 90068 (213) 436-6300 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ROBERT W. GARCIN, ESQ. PACIFIC GREYSTONE CORPORATION 6767 FOREST LAWN DRIVE, SUITE 300 LOS ANGELES, CALIFORNIA 90068 (213) 436-6300 (Name and address, including zip code, and telephone number, including area code, of agent for service) ---------------- COPIES TO: RICHARD A. BOEHMER, ESQ. KENNETH M. DORAN, ESQ. O'MELVENY & MYERS GIBSON, DUNN & CRUTCHER LLP 400 SOUTH HOPE STREET 333 SOUTH GRAND AVENUE, SUITE 4900 LOS ANGELES, CALIFORNIA 90071-2899 LOS ANGELES, CALIFORNIA 90071-3197 (213) 669-6000 (213) 229-7000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / /
TITLE OF EACH CLASS OF SECURITIES TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF REGISTRATION FEE(1)(3) REGISTERED(1) OFFERING PRICE(1)(2) Common Stock, $.01 par value............ $90,800,000 $31,311
(1) Calculated pursuant to Rule 457(o). (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a). (3) $29,742 previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PACIFIC GREYSTONE CORPORATION CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page.................................... Facing Page; Cross Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors 4. Use of Proceeds...................................... Use of Proceeds 5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting 6. Dilution............................................. Dilution 7. Selling Security Holders............................. Principal and Selling Stockholders 8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered........... Description of Capital Stock 10. Interests of Named Experts and Counsel............... Not Applicable 11. Information with Respect to the Registrant........... Outside and Inside Front Cover Pages of Prospectus; Prospectus Summary; Risk Factors; Company Formation and Organization; Use of Proceeds; Dividends; Capitalization; Dilution; Selected Consolidated Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal and Selling Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Legal Matters; Experts; Index to Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 21, 1996 PROSPECTUS 5,000,000 SHARES [LOGO] PACIFIC GREYSTONE CORPORATION COMMON STOCK --------- Of the 5,000,000 shares of Common Stock (the "Common Stock") offered hereby, 4,562,900 shares are being sold by Pacific Greystone Corporation (the "Company" or "Pacific Greystone") and 437,100 shares are being sold by stockholders of the Company (the "Selling Stockholders"), in each case through the Underwriters named herein (the "Offering"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholders. Prior to this Offering, there has not been a public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $14.00 and $16.00. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Common Stock of the Company has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "GRY." SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS Per Share..................... $ $ $ $ Total(3)...................... $ $ $ $
(1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $525,000. (3) The Company and the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 675,000 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. -------------- The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by the Underwriters and subject to certain conditions. It is expected that certificates for the shares of Common Stock will be available for delivery on or about June , 1996 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York, 10001. -------------- SMITH BARNEY INC. MORGAN STANLEY & CO. INCORPORATED ROBERTSON, STEPHENS & COMPANY , 1996 [PHOTO OF HOUSE] CROWN POINTE ALAMEDA, CALIFORNIA [PHOTO OF HOUSE] [PHOTO OF HOUSE] TASSAJARA DANVILLE, CALIFORNIA [PHOTO OF HOUSE] REUNION CHANDLER, ARIZONA THE COLLECTION SIMI VALLEY, CALIFORNIA
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION (INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS, OTHER THAN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS, ASSUMES (I) A 1.4282 FOR 1.00 STOCK SPLIT OF THE COMMON STOCK TO BE EFFECTIVE IMMEDIATELY PRIOR TO THE OFFERING AND (II) THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. INVESTORS SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY 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. The Company's operations are geographically diverse within California, with 53 residential projects in 12 counties. In December 1995, the Company further expanded its operations through the acquisition of four residential projects in Las Vegas, Nevada and three residential projects in Phoenix, Arizona. Since commencing its homebuilding operations in 1992, revenues have grown rapidly from $26.2 million to $293.9 million in 1995, with pretax income increasing from a loss of $5.7 million to a profit of $17.5 million over the same period. The number of homes closed during that period increased from 135 in 1992 to 1,374 in 1995. In the first quarter of 1996, revenues increased by 83% to $63.5 million as compared to $34.7 million for the same quarter of 1995, with pretax income increasing to $3.2 million in the first quarter of 1996 from $0.5 million in the first quarter of 1995. California is the third largest housing market (measured by permits issued) in the United States and the Company believes it is well-positioned to benefit from the recovery in the California housing market. In 1994, employment growth in California showed a positive trend for the first time in three years and during the twelve months ended March 1996, nonfarm employment growth was 2.4%, significantly outpacing the 1.5% gain nationwide. As a result, the unemployment rate in California has declined from 10.1% in January 1994 to 7.7% in March 1996, although it is still above the national average. Since May 1989, the percentage of California households able to afford a median-priced single family home has increased from 15% to 41% in March 1996. Single family building permits issued in California totaled 162,600 at the last cyclical peak in 1989 and declined to 68,673 in 1995, a decline of 57.7%. In the first three months of 1996, 15,541 single family permits were issued in California, a 15.0% increase above the 13,510 permits issued during the first three months of 1995. Pacific Greystone was founded in late 1991 by senior management and Warburg, Pincus Investors, L.P. ("Warburg") with the objective of becoming a major homebuilder with diverse geographic operations. The Company's initial efforts were focused in both Northern and Southern California due to management's belief that attractive opportunities were available in those regions as a result of the distressed conditions in the California homebuilding industry at that time. In September 1992, Pacific Greystone acquired the California homebuilding operations of A-M Homes (the "AM Operations") which had been active in homebuilding in California since 1979. Since inception, the Company has continued to expand its presence in Northern and Southern California through start-up operations in new markets, and entered the Las Vegas and Phoenix markets through acquisitions in December 1995. BUSINESS STRATEGY Pacific Greystone believes its rapid growth and success since its inception in 1991 is attributable, in part, to the following elements of its business strategy: 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 and information systems. As part of its 3 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. In 1995 and the first three months of 1996, the number of homes closed by Pacific Greystone were divided almost equally between Northern and Southern California. 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. Pacific Greystone generally limits the number of lots acquired to less than 150 in any one project. By limiting the size of its 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 1994. As of March 31, 1996, the Company owned and controlled 7,001 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 12 most senior managers averaging 21 years of experience in the homebuilding industry. The Company was incorporated in Delaware in September 1991. The principal executive offices of the Company are located at 6767 Forest Lawn Drive, Suite 300, Los Angeles, California 90068, and its telephone number is (213) 436-6300. 4 THE OFFERING Common Stock being offered by: The Company............................................... 4,562,900 Shares The Selling Stockholders.................................. 437,100 Shares Common Stock to be outstanding immediately after the Offering (1)............................................... 14,350,703 Shares Use of proceeds............................................. The redemption of outstanding Series A Preferred and general corporate purposes Proposed NYSE symbol........................................ GRY
- ------------ (1) Includes 1,472,981 shares of Common Stock to be issued as payment of a portion of the accrued dividends on the Series A Cumulative Senior Preferred Stock of the Company (the "Series A Preferred") as described under "Dividends" (assuming an initial offering price to the public in the Offering, less underwriting discounts and commissions, of $13.95 per share), and 2,485,754 shares of Common Stock to be issued upon conversion of the Series C Cumulative Convertible Preferred Stock of the Company (the "Series C Preferred") and a portion of the accrued dividends thereon into Common Stock upon the consummation of the Offering, as described under "Dividends" (assuming an initial offering price to the public in the Offering of $15.00 per share). Excludes 14,282 shares of Common Stock subject to outstanding stock options, 574,000 shares subject to options to be granted upon consummation of the Offering and 326,718 additional shares of Common Stock reserved for issuance under the Company's Amended and Restated 1995 Eligible Directors' Stock Option Plan, 1996 Employee Stock Option and Award Plan and 1996 Employee Stock Purchase Plan. See "Management-- Directors' Compensation" and "--Executive Compensation." 5 SUMMARY CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except share amounts)
OCTOBER 10, THREE MONTHS 1991 ENDED (INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------------------------ -------------------- 1991(1) 1992(2) 1993 1994 1995 1995 1996 --------------- --------- --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenues................... $ -- $ 26,209 $ 172,830 $ 260,185 $ 293,921 $ 34,733 $ 63,535 Cost of sales.............. -- (25,816) (144,395) (215,437) (247,827) (29,269) (51,840) ------ --------- --------- --------- --------- --------- --------- Gross margin............... -- 393 28,435 44,748 46,094 5,464 11,695 Equity in pretax income (loss) of unconsolidated joint ventures............ -- 608 1,096 2,581 1,742 659 (148) Selling, general and administrative expenses... (938) (7,133) (19,521) (29,059) (31,468) (5,970) (8,502) Interest and other, net.... 92 435 32 388 1,162 371 159 ------ --------- --------- --------- --------- --------- --------- Pretax income (loss)....... (846) (5,697) 10,042 18,658 17,530 524 3,204 Provision for income taxes..................... -- -- (3,966) -- (2,512) -- (1,307) ------ --------- --------- --------- --------- --------- --------- Net income (loss).......... $ (846) $ (5,697) $ 6,076 $ 18,658 $ 15,018 $ 524 $ 1,897 ------ --------- --------- --------- --------- --------- --------- ------ --------- --------- --------- --------- --------- --------- Gross margin as a percent of revenues............... -- 1.5% 16.5% 17.2% 15.7% 15.7% 18.4% Selling, general and administrative expenses as a percent of revenues..... -- 27.2% 11.3% 11.2% 10.7% 17.2% 13.4% PRO FORMA DATA:(3) Pro forma earnings per share..................... $ 0.72 $ 0.02 $ 0.13 --------- --------- --------- --------- --------- --------- Pro forma weighted average number of shares outstanding (in thousands)................ 14,343 14,351 14,351 --------- --------- --------- --------- --------- --------- OPERATING DATA:(4) Homes closed (units)....... -- 135 717 1,331 1,374 227 306 Average price of homes closed.................... -- $ 317 $ 264 $ 261 $ 235 $ 238 $ 209 Number of projects owned (at period end)........... -- 27 30 43 46 41 53 Net new orders (units)(5)................ -- 67 807 1,331 1,497 311 492 Backlog (units)(at period end)(6)................... -- 112 202 202 325 286 511 Sales value of backlog (at period end)(6)............ -- $ 33,811 $ 53,677 $ 50,388 $ 60,219 $ 67,611 $ 101,011
AT MARCH 31, 1996 ------------------------ PRO FORMA AS ACTUAL ADJUSTED(7) --------- ------------- BALANCE SHEET DATA: Housing inventories.................................................................... $ 246,780 $ 246,780 Total assets........................................................................... 296,064 304,444 Total liabilities...................................................................... 168,272 158,272 Total shareholders' equity............................................................. 127,792 146,172
- ------------ (1) See "Company Formation and Organization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Does not include the results of operations of the AM Operations acquired in 1992. (2) Includes the results of operations of the AM Operations only from October 1, 1992. (FOOTNOTES CONTINUE ON NEXT PAGE) 6 (3) Pro forma data were calculated as if the Offering was consummated on January 1, 1995 at an assumed initial offering price to the public in the Offering of $15.00 per share and giving effect to (a) the redemption of the Series A Preferred with approximately $44.7 million of the net proceeds of the Offering, (b) the declaration and payment of the accrued dividends on the Series A Preferred as described under "Dividends," (c) the conversion of all the outstanding shares of the Series C Preferred and a portion of the accrued dividends thereon into Common Stock as described under "Dividends," and (d) the adjustment to the weighted average number of shares of Common Stock outstanding to reflect a 1.4282 for 1.00 stock split. Since the number of shares issuable as payment for the accrued dividends on the Series A Preferred and upon conversion of the Series C Preferred and accrued dividends thereon is dependent upon the initial offering price to the public in the Offering, an increase or decrease of the initial offering price from $15.00 per share will affect the pro forma weighted average number of shares outstanding and could affect pro forma earnings per share. The pro forma earnings available to holders of Common Stock for purposes of this calculation is historical pretax income less an assumed provision for income tax at an effective rate of 40.8% for each period. (4) Includes consolidated and unconsolidated projects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to Consolidated Financial Statements. (5) Net new orders are net of cancellations received during the applicable period. (6) At December 31, 1995 and March 31, 1996, included 78 and 77 homes, respectively, with a sales value of $7.8 million and $7.5 million, respectively, in Las Vegas, and 67 and 92 homes with a sales value of $6.3 million and $9.1 million, respectively, in Phoenix. Backlog is the number of units subject to pending sales contracts, some of which are subject to contingencies. No assurance can be given that such backlog will result in closings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Backlog." (7) Adjusted to reflect (i) the payment of accrued dividends on the Series A Preferred and the conversion of the Series C Preferred and accrued dividends thereon into Common Stock, each as described under "Dividends," and (ii) the sale of the shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 7 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE THE SHARES OF COMMON STOCK OFFERED HEREBY. EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. 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 March 31, 1996, the Company had 106 completed and unsold homes, excluding 97 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 and cement. 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 MARKET 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 over the past three years and there can be no assurance that home sale prices will not decline in the future. A continued prolonged economic downturn in California would have a material adverse effect on the Company. 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 8 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 the Northern and Southern California 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 local 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 9 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. At March 31, 1996, total consolidated indebtedness was $147.4 million. Although the Company believes that internally generated funds, cash on hand, the Company's revolving credit facility and the net proceeds from the Offering will be sufficient to fund the Company's anticipated operations for at least the next 18 months, there can be no assurance that the amounts available from such sources will be sufficient. 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Notes 5 and 6 to Consolidated Financial Statements. CONCENTRATION OF OWNERSHIP Immediately after consummation of this Offering, Warburg will own approximately 54.4% (53.5% if the Underwriters' over-allotment option is exercised in full) of the Company's outstanding Common Stock. Accordingly, Warburg may elect the entire Board of Directors of the Company and control its management, operations and affairs. See "Principal and Selling Stockholders." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. There has been no public market for the Common Stock prior to this Offering, and there can be no assurance that an active trading market will develop or be sustained after this Offering. The initial public offering price will be determined through negotiations among the Company and the representatives of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The negotiated public offering price may not be indicative of the market price for the Common Stock following this Offering. In recent years, the stock market in general and the stock prices of new public companies in particular have experienced extreme price fluctuations, sometimes without regard to the operating performance of particular companies. Factors such as quarterly variations in actual or anticipated operating results, changes in or failure to meet earnings estimates by analysts, market conditions in the industry, regulatory actions and general economic conditions may have a significant effect on the market price of the Common Stock. Following periods of volatility in the market price of a corporation's securities, securities class action litigation has often resulted. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse impact on the Company's business, financial condition and results of operations. DILUTION The initial public offering price is substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock in the Offering will therefore incur immediate, substantial dilution. See "Dilution." EFFECT ON MARKET PRICE OF COMMON STOCK OF SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 14,350,703 shares of Common Stock (assuming the payment of the accrued dividends on the Series A Preferred and the conversion of the Series C Preferred and a portion of the accrued dividends thereon as set forth under "Dividends"). On the date of this Prospectus, only shares offered hereby will be immediately eligible for sale in the public market. Subject to volume limitations on sales pursuant to Rule 144 under the Securities Act, and taking into account 10 the effect of lock-up agreements binding the Company's stockholders, 9,350,703 additional shares of Common Stock will be eligible for sale beginning 180 days after the date of this Prospectus, unless earlier released by Smith Barney Inc., and will have certain registration rights. The Securities and Exchange Commission has recently proposed to reduce the Rule 144 holding periods. If enacted, such modifications will have a material effect on the timing of when shares of Common Stock become eligible for resale. Sales of substantial amounts of such shares in the public market or the prospect of such sales could adversely affect the market price of the Common Stock. See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." 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. See "Management." BLANK CHECK PREFERRED STOCK The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The Company has no present plans to issue any new shares of Preferred Stock. See "Description of Capital Stock--Preferred Stock." POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS Effective upon the closing of this Offering, the Board of Directors of the Company will be divided into three classes. Generally, each director (other than those directors elected to fill vacancies on the Board of Directors) will serve until the date of the third annual meeting following the annual meeting at which the director is elected and until his or her successor is elected and qualified. Amendments to the Company's Certificate of Incorporation will be approved, effective upon the closing of the Offering, which, among other things, will require that stockholders give advance notice to the Company's Secretary of any nominations of directors made or other business to be brought by stockholders at any stockholders' meeting. The Certificate of Incorporation also will require the approval of 75% of the Company's voting stock to amend certain provisions of the Certificate. The staggered Board provision and other charter provisions may discourage certain types of transactions involving an actual or potential change in control of the Company, including transactions in which the stockholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of the stockholders to approve transactions that they may deem to be in their best interests. See "Management--Directors and Executive Officers--Terms of Office of Directors and Officers" and "Description of Capital Stock--Certain Charter Provisions." COMPANY FORMATION AND ORGANIZATION Pacific Greystone was formed in late 1991 by Warburg and senior management of the Company with the objective of becoming a major homebuilder with diverse geographic operations. The Company initially focused on Northern and Southern California due to management's belief that attractive opportunities were available in those regions as a result of the distressed conditions in the California homebuilding industry at that time. Warburg invested $85 million in the Company through the purchase of a combination of Common Stock and preferred stock. On September 30, 1992, Pacific Greystone completed the purchase of the AM Operations. This purchase offered Pacific Greystone an opportunity to (i) obtain quickly a critical mass of inventory by acquiring a significant number of entitled lots in most of the major housing markets of California, (ii) establish two operating divisions in new markets and (iii) acquire experienced divisional management in 11 the new markets. Between September 1992 and March 1996, the Company developed 27 start-up residential projects in its existing markets and expanded into the counties of Los Angeles, Sacramento, San Diego, San Joaquin, San Mateo and Ventura, California with the development of 17 additional residential projects. In December 1995, the Company further expanded into the Las Vegas, Nevada and Phoenix, Arizona markets through the acquisition of seven residential projects from another homebuilder and employed substantially all local management. Management believes that this acquisition expanded its operations into two of the Southwest's fast growing markets. 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 service business which is conducted by a separate subsidiary of the Company. USE OF PROCEEDS The net proceeds to the Company from the sale of the 4,562,900 shares of Common Stock offered hereby are estimated to be $63.1 million ($66.4 million if the Underwriters' over-allotment option is exercised in full) after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use approximately $44.7 million of the net proceeds from the Offering to redeem the Series A Preferred. See "Dividends." The remainder of the net proceeds of the Offering will be used to reduce temporarily amounts then outstanding under the Company's revolving credit facility (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources") and for general corporate purposes, including capital expenditures and working capital. A portion of the net proceeds may be used to acquire lots and land through the acquisition of other companies or divisions of other companies. From time to time, the Company evaluates such potential acquisitions; however, the Company has no present understandings, commitments or agreements with respect to any material acquisitions. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term and medium-term, interest-bearing, investment-grade obligations. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. DIVIDENDS In connection with the consummation of the Offering, the Company will declare 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 the holders of the Series A Preferred have agreed that the accrued dividends on the Series A Preferred through March 31, 1996, once declared, will be paid by the issuance of Common Stock valued at a per share price equal to the initial per share offering price to the public in the Offering less underwriting discounts and commissions. Dividends on the Series A Preferred from April 1, 1996 to the closing of the Offering will be paid in cash. At March 31, 1996, accrued dividends on the Series A Preferred were approximately $20.5 million. The principal amount of the Series A Preferred will be redeemed at the closing of the Offering at its liquidation preference of $10.00 per share. See "Use of Proceeds." In addition, the Company will declare a dividend on the Series C Preferred equal to the accrued dividends thereon to the date of the closing of the Offering. At March 31, 1996, accrued dividends on the Series C Preferred were approximately $9.8 million. At the closing of the Offering, all outstanding shares of Series C Preferred (based upon a liquidation preference of $10.00 per share) plus accrued dividends thereon through March 31, 1996 will be converted into Common Stock at a price equal to 80% of the initial per share offering price to the public in the Offering. Dividends on the Series C Preferred from April 1, 1996 to the closing of the Offering will be paid in cash. The Company has never declared a dividend and, except as noted above, will not declare a dividend on its capital stock prior to the consummation of the Offering. 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 Pacific Greystone 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." 12 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of March 31, 1996, and as adjusted to reflect (i) the redemption of the Series A Preferred with a portion of the net proceeds of the Offering, (ii) the declaration of accrued dividends on the Series A Preferred and the payment of those dividends as described under "Dividends" (assuming an initial offering price to the public, less underwriting discounts and commissions, in the Offering of $13.95 per share), (iii) the conversion of all the outstanding shares of the Series C Preferred and a portion of the accrued dividends thereon into Common Stock as described under "Dividends" (assuming a conversion price of $12.00 per share which is based upon an assumed initial offering price to the public in the Offering of $15.00 per share), (iv) the change in the number of authorized shares of Common Stock and Preferred Stock to be effective upon consummation of the Offering and (v) the sale by the Company of the shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom.
MARCH 31, 1996 ----------------------- PRO FORMA AS ACTUAL ADJUSTED ---------- ----------- (DOLLARS IN THOUSANDS) Long-term debt............................................................................ $ 147,401 $ 137,401 ---------- ----------- Shareholders' equity: Preferred Stock, 7,100,000 shares authorized Actual, 5,000,000 shares authorized As Adjusted; Series A Cumulative Senior Preferred Stock, 5,100,000 shares authorized, 4,474,706 shares outstanding Actual, none authorized or outstanding As Adjusted................ 44,747 -- Series C Cumulative Convertible Preferred Stock, 2,000,000 shares authorized, 2,000,000 shares outstanding Actual, none authorized or outstanding As Adjusted...... 20,000 -- Common Stock, 5,000,000 shares authorized Actual, 20,000,000 shares authorized As Adjusted; 4,081,413 shares outstanding Actual, 14,350,703 shares outstanding As Adjusted(1)............................................................................ 41 144 Additional paid-in capital.............................................................. 27,898 141,299 Retained earnings....................................................................... 35,106 4,729 ---------- ----------- Total shareholders' equity.............................................................. 127,792 146,172 ---------- ----------- Total capitalization.................................................................. $ 275,193 $ 283,573 ---------- ----------- ---------- -----------
- ------------ (1) Excludes 14,282 shares issuable upon the exercise of outstanding stock options at a weighted average exercise price of $1.83 per share, 574,000 shares subject to options to be granted upon consummation of the Offering and 326,718 additional shares reserved for issuance under the Company's Amended and Restated 1995 Eligible Directors' Stock Option Plan, 1996 Employee Stock Option and Award Plan and 1996 Employee Stock Purchase Plan. See "Management--Directors' Compensation" and "--Executive Compensation." 13 DILUTION The net tangible book value (total tangible assets less total liabilities) of the Company at March 31, 1996 was approximately $83.1 million, or $8.49 per share of Common Stock, after giving effect to the declaration and payment of accrued dividends on the Series A Preferred as described under "Dividends" (assuming an initial offering price to the public, less underwriting discounts and commissions, in the Offering of $13.95 per share) and the conversion of the Series C Preferred and a portion of the accrued dividends thereon as described under "Dividends" (assuming an initial offering price to the public in the Offering of $15.00 per share). After giving effect to the sale by the Company of the 4,562,900 shares of Common Stock offered hereby (resulting in estimated net proceeds of $63.1 million based upon an assumed initial offering price to the public in the Offering of $15.00 per share), the Company's pro forma net tangible book value at March 31, 1996 would have been $146.2 million, or $10.19 per share. This represents an immediate increase in net tangible book value of $1.70 per share to existing stockholders and an immediate dilution in net tangible book value of $4.81 per share to new investors purchasing shares in the Offering. The following table illustrates this per share dilution. Assumed initial public offering price per share.............................. $ 15.00 Net tangible book value per share before the Offering.................... $ 8.49 Increase per share attributable to new investors......................... 1.70 --------- Pro forma net tangible book value per share after the Offering............... 10.19 --------- Dilution per share to new investors.......................................... $ 4.81 --------- ---------
The following table summarizes, on a pro forma basis, as of March 31, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by (i) existing stockholders and (ii) new investors (before deducting underwriting discounts and commissions and estimated expenses payable by the Company):
SHARES PURCHASED (1) TOTAL CONSIDERATION ------------------------- --------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ----------- -------------- ----------- ------------- Existing stockholders............................. 9,787,803 68.2% $ 78,316,000 53.4% $ 8.00 New investors..................................... 4,562,900 31.8 68,443,500 46.6 $ 15.00 ------------ ----- -------------- ----- Total........................................... 14,350,703 100.0% $ 146,759,500 100.0% ------------ ----- -------------- ----- ------------ ----- -------------- -----
- ------------ (1) Sales by the Selling Stockholders in the Offering will cause the number of shares of Common Stock held by existing stockholders to be reduced to 9,350,703, or 65.2% of the total number of shares to be outstanding after the Offering (8,913,445 shares, or 61.1%, if the Underwriters' over-allotment is exercised in full), and will increase the number of shares of Common Stock held by new investors to 5,000,000, or 34.8% of the total number of shares to be outstanding after the Offering (5,675,000 shares, or 38.9%, if the Underwriters' option is exercised in full). See "Principal and Selling Stockholders." The foregoing computations assume no exercise of outstanding stock options. There are options outstanding to purchase 14,282 shares of Common Stock at a weighted average exercise price of $1.83 per share. To the extent these options are exercised, there will be further dilution to new investors. 574,000 shares will be subject to options to be granted upon consummation of the Offering at the initial offering price to the public in the Offering and 326,718 additional shares are reserved for issuance under the Company's Amended and Restated 1995 Eligible Directors' Stock Option Plan, 1996 Employee Stock Option and Award Plan and 1996 Employee Stock Purchase Plan. See "Management--Directors' Compensation" and "Executive Compensation." 14 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) The following tables include consolidated financial data of the Company as of December 31, 1991, 1992, 1993, 1994 and 1995 and for the period October 10, 1991 (the date of inception of the Company) to December 31, 1991, and for the years ended December 31, 1992, 1993, 1994 and 1995 which are derived from the Company's Consolidated Financial Statements which have been audited by Ernst & Young LLP, independent auditors. The consolidated financial data of the Company as of and for the three months ended March 31, 1995 and 1996 are derived from unaudited consolidated financial statements of the Company, which, in the opinion of the Company's management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited periods. These tables should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results of operations for the full fiscal year.
OCTOBER 10, 1991 (INCEPTION) THREE MONTHS ENDED TO YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------------------------ -------------------- 1991(1) 1992(2) 1993 1994 1995 1995 1996 ------------- --------- --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenues........................ $ -- $ 26,209 $ 172,830 $ 260,185 $ 293,921 $ 34,733 $ 63,535 Cost of sales................... -- (25,816) (144,395) (215,437) (247,827) (29,269) (51,840) ------------- --------- --------- --------- --------- --------- --------- Gross margin.................... -- 393 28,435 44,748 46,094 5,464 11,695 Equity in pretax income (loss) of unconsolidated joint ventures....................... -- 608 1,096 2,581 1,742 659 (148) Selling, general and administrative expenses........ (938) (7,133) (19,521) (29,059) (31,468) (5,970) (8,502) Interest and other, net......... 92 435 32 388 1,162 371 159 ------------- --------- --------- --------- --------- --------- --------- Pretax income (loss)............ (846) (5,697) 10,042 18,658 17,530 524 3,204 Provision for income taxes...... -- -- (3,966) -- (2,512) -- (1,307) ------------- --------- --------- --------- --------- --------- --------- Net income (loss)............... $ (846) $ (5,697) $ 6,076 $ 18,658 $ 15,018 $ 524 $ 1,897 ------------- --------- --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- --------- PRO FORMA DATA:(3) Pro forma earnings per share.... $ 0.72 $ 0.02 $ 0.13 --------- --------- --------- --------- --------- --------- Pro forma weighted average number of shares outstanding (in thousands)................. 14,343 14,351 14,351 --------- --------- --------- --------- --------- --------- AT DECEMBER 31, AT MARCH 31, --------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ------------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA: Housing inventories............. $ 22,488 $ 142,794 $ 136,178 $ 207,900 $ 215,043 $ 218,266 $ 246,780 Total assets.................... 28,121 204,896 191,994 275,179 289,970 284,108 296,064 Long-term debt.................. 15,984 102,710 81,487 139,899 137,337 156,224 147,401 Total liabilities............... 16,686 119,193 100,085 164,340 164,075 172,745 168,272 Total shareholders' equity...... 11,434 85,702 91,909 110,839 125,895 111,363 127,792
(FOOTNOTES APPEAR ON NEXT PAGE) 15
OCTOBER 10, 1991 (INCEPTION) THREE MONTHS ENDED TO YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, -------------------------------------------- -------------------- 1991 1992(2) 1993 1994 1995 1995 1996 ------------- ----------- --------- --------- --------- --------- --------- OPERATING DATA: UNITS: Homes closed: Consolidated......................... -- 83 604 1,012 1,220 157 303 Unconsolidated(4).................... -- 52 113 319 154 70 3 ------------- ----------- --------- --------- --------- --------- --------- Total.............................. -- 135 717 1,331 1,374 227 306 ------------- ----------- --------- --------- --------- --------- --------- ------------- ----------- --------- --------- --------- --------- --------- Net new orders:(5) Consolidated......................... -- 57 696 996 1,393 256 491 Unconsolidated(4).................... -- 10 111 335 104 55 1 ------------- ----------- --------- --------- --------- --------- --------- Total.............................. -- 67 807 1,331 1,497 311 492 ------------- ----------- --------- --------- --------- --------- --------- ------------- ----------- --------- --------- --------- --------- --------- Backlog (at period end):(6) Consolidated......................... -- 73 165 149 322 248 510 Unconsolidated(4).................... -- 39 37 53 3 38 1 ------------- ----------- --------- --------- --------- --------- --------- Total.............................. -- 112 202 202 325 286 511 ------------- ----------- --------- --------- --------- --------- --------- ------------- ----------- --------- --------- --------- --------- --------- DOLLARS: Average price of homes closed: Consolidated......................... -- $ 311 $ 258 $ 252 $ 231 $ 217 $ 209 Unconsolidated(4).................... -- $ 327 $ 296 $ 288 $ 265 $ 286 $ 216 Sales value of backlog (at period end):(6).............................. Consolidated......................... -- $ 21,157 $ 43,681 $ 34,563 $ 59,550 $ 56,800 $ 100,847 Unconsolidated(4).................... -- 12,654 9,996 15,825 669 10,811 164 ------------- ----------- --------- --------- --------- --------- --------- Total.............................. -- $ 33,811 $ 53,677 $ 50,388 $ 60,219 $ 67,611 $ 101,011 ------------- ----------- --------- --------- --------- --------- --------- ------------- ----------- --------- --------- --------- --------- ---------
- ------------ (1) See "Company Formation and Organization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Does not include the results of operations of the AM Operations acquired in 1992. (2) Includes the results of operations of the AM Operations only from October 1, 1992. (3) Pro forma data were calculated as if the Offering was consummated on January 1, 1995 at an assumed initial offering price to the public in the Offering of $15.00 per share and giving effect to (a) the redemption of the Series A Preferred with approximately $44.7 million of the net proceeds of the Offering, (b) the declaration and payment of the accrued dividends on the Series A Preferred as described under "Dividends," (c) the conversion of all the outstanding shares of the Series C Preferred and a portion of the accrued dividends thereon into Common Stock as described under "Dividends," and (d) the adjustment to the weighted average number of shares of Common Stock outstanding to reflect a 1.4282 for 1.00 stock split. Since the number of shares issuable as payment for the accrued dividends on the Series A Preferred and upon conversion of the Series C Preferred and accrued dividends thereon is dependent upon the initial offering price to the public in the Offering, an increase or decrease of the initial offering price from $15.00 per share will affect the pro forma weighted average number of shares outstanding and could affect pro forma earnings per share. The pro forma earnings available to holders of Common Stock for purposes of this calculation is historical pretax income less an assumed provision for income taxes at an effective rate of 40.8% for each period. (4) See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to Consolidated Financial Statements. (5) Net new orders are net of cancellations received during the applicable period. (6) At December 31, 1995 and March 31, 1996, included 78 and 77 homes, respectively, with a sales value of $7.8 million and $7.5 million, respectively, in Las Vegas and 67 and 92 homes with a sales value of $6.3 million and $9.1 million, respectively, in Phoenix. Backlog is the number of units subject to pending sales contracts, some of which are subject to contingencies. No assurance can be given that such backlog will result in closings. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company was formed in late 1991 by Warburg and senior management of the Company with the objective of becoming a major homebuilder with diverse geographic operations. The Company's initial efforts were focused in Northern and Southern California due to management's belief that attractive opportunities were available in those regions as a result of recessionary economic conditions prevailing in California at that time. From inception in October 1991, the Company has grown rapidly through start-up operations and the acquisition of the AM Operations in September 1992. For the year ended December 31, 1994, the Company closed 1,331 homes and reported revenues and pretax income of $260.2 million and $18.7 million, respectively. In early 1995, as a result of the soft housing market, particularly in Southern California, and the impact of construction and processing delays from the unusually heavy rains in the first quarter of 1995, the Company implemented a strategy designed to strengthen its financial position and to maintain liquidity. This strategy was executed primarily by slowing the timing of new lot purchases and restructuring existing lot acquisition arrangements. As a result, the Company's housing inventory increased only 3.4% from $207.9 million at December 31, 1994 to $215.0 million at December 31, 1995 and the Company had no debt outstanding under its unsecured revolving line of credit at December 31, 1995. The soft housing market, coupled with management's conservative view toward new home construction, resulted in a small increase in the number of homes closed from 1,331 homes in 1994 to 1,374 homes in 1995. For the year ended December 31, 1995, total revenues increased 13.0% from $260.2 million to $293.9 million, while pretax income decreased 6.4% from $18.7 million to $17.5 million. This decrease in pretax income was due in part to higher sales incentives, particularly in Southern California, and the increased costs associated with construction and processing delays. Entering 1996, management's outlook for California's housing markets turned more positive and, as a result, the Company intends to increase the number of active selling projects in California. During the first quarter of 1996, the Company raised its housing inventory level through the acquisition of four residential projects in California. Additionally, the Company expanded its presence in the Phoenix and Las Vegas housing markets through the purchase of five residential projects. As a result, the Company's housing inventory increased 15% to $246.8 million at March 31, 1996 from $215.0 million at December 31, 1995. At March 31, 1996, the Company had 53 owned projects and 27 active selling projects. In the first quarter of 1996, revenues increased by 83% to $63.5 million as compared to $34.7 million for the same quarter in 1995. The total number of homes closed for the first three months of 1996 increased to 306 from 227 in the first three months of 1995. Pretax income for the first quarter of 1996 was $3.2 million compared to $0.5 million for the comparable prior year quarter. The gross margin percent for the first quarter of 1996 was 18.4% compared to 15.7% in the year-earlier period. The Company believes that the gross margin percent for the first quarter of 1996 is not sustainable throughout 1996, as the Company is scheduled to deliver a more balanced product mix for the remainder of 1996, although the Company currently believes that the gross margin percent for 1996 will exceed the gross margin percent for 1995. Total net new orders increased by 58% during the three months ended March 31, 1996 over the comparable quarter in the prior year, while the Company's backlog of homes under contract at March 31, 1996 was 511 units, a 79% increase compared to March 31, 1995. The recent adoption of Statement of Financial Accounting Standard ("SFAS") No. 121 has caused several publicly traded homebuilders to write-off significant portions of the carrying value of their land inventories. From inception, the Company has implemented conservative land acquisition policies designed to reduce the risks associated with changing market conditions. Such policies generally include limiting the number of lots acquired to less than 150 in any one project and purchasing lots after entitlements are received. Additionally, the Company's owned lot inventory, all of which is intended for single family residential development, has been obtained in arm's length transactions since its formation in 1991, with approximately 84% acquired since January 1994. Prior to the adoption of SFAS No. 121, the Company 17 reviewed its housing inventory, on a periodic basis, and recorded net realizable value adjustments to specific projects as considered necessary. As a result, the Company's implementation of SFAS No. 121 effective January 1, 1996 had no impact on the Company's consolidated financial position and results of operations. See also "Risk Factors--Real Estate, Economic and Certain Other Conditions," "--Dependence on California Economy and Housing Markets," "--Interest Rates; Mortgage Financing," " Competition," "--Expansion into New Markets, "--Regulatory and Environmental Matters," "--Variability of Results," "--Access to Financing," and " Dependence on Key Personnel." The following table sets forth, for the periods indicated, certain income statement data as a percentage of total revenues.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Revenues.................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................................... (83.5) (82.8) (84.3) (84.3) (81.6) --------- --------- --------- --------- --------- Gross margin................................................ 16.5 17.2 15.7 15.7 18.4 Equity in pretax income (loss) of unconsolidated joint ventures................................................... 0.6 1.0 0.6 1.9 (0.2) Selling, general and administrative expenses................ (11.3) (11.2) (10.7) (17.2) (13.4) Interest and other, net..................................... -- 0.2 0.4 1.1 0.2 --------- --------- --------- --------- --------- Pretax income............................................... 5.8 7.2 6.0 1.5 5.0 Provision for income tax.................................... (2.3) -- (0.9) -- (2.0) --------- --------- --------- --------- --------- Net income.................................................. 3.5% 7.2% 5.1% 1.5% 3.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 Total revenues for the three months ended March 31,1996 increased to $63.5 million from $34.7 million for the three months ended March 31, 1995, an increase of 83%, while homes closed increased to 303 from 157, an increase of 93%. Housing revenues and homes closed increased in both the Company's Northern and Southern California regions. The Company's expansion into the Phoenix and Las Vegas housing markets contributed a combined 81 homes and resulted in total revenues of $7.7 million in its first full quarter of operations. The overall average sales price on homes closed decreased to $209,000 for the three months ended March 31, 1996 from $217,000 for the three months ended March 31, 1995, largely reflecting lower-priced homes in the Company's Phoenix and Las Vegas operations. There were no land sales in the first quarter of 1996 and 1995, respectively. The gross margin increased to $11.7 million or 18.4% of housing revenues in the first quarter of 1996 from $5.5 million or 15.7% in the year-earlier quarter. The improvement in the gross margin percent was largely impacted by changes in the product mix which produced an increased share of homes closed from higher margin projects in California. In the first quarter of 1996, the gross margin percent in California was 18.6% as compared to 15.7% in the prior year's period while the combined gross margin percent for Phoenix and Las Vegas was 17.0% in the first quarter of 1996. Historically, those markets generate a lower gross margin than California. Joint ventures reported combined housing revenues of $0.7 million on three homes closed during the first quarter of 1996 compared to $20.0 million on 70 homes closed for the same period in 1995. The Company's interest in income of individual unconsolidated joint ventures ranges from 25% to 50%, however its share of income may vary from period to period depending on the preferred returns earned and recognized. In the first quarter of 1996, the Company had a $0.1 million equity loss on its unconsolidated joint ventures compared to a $0.7 million pretax profit in the prior year's period. This decrease can largely be attributed to the lower number of joint venture closings. Although the Company expects existing joint ventures to close their final units in the second quarter of 1996, the Company will consider entering into joint venture arrangements in the future in areas of land scarcity or to diversify risk with capital intensive projects. Selling, general and administrative expenses as a percentage of revenues decreased to 13.4% for the first quarter of 1996 from 17.2% for the same period in 1995. Selling expenses as a percentage of revenues 18 for the three months ended March 31, 1996 and 1995 were 6.4% and 7.4%, respectively. The selling percentage in the first quarter of 1996 declined from the previous quarter due primarily to the increased revenue. General and administrative expenses as a percentage of revenues for the three months ended March 31, 1996 and 1995 were 7.0% and 9.8%, respectively. The reduction in general and administrative expenses as a percentage of revenues is largely attributable to the increased revenues in 1996. In addition, the Company incurred general and administrative expenses in the prior period to manage the 70 joint venture closings which were not included in revenues. In the first three months of 1996, interest and other, net decreased to $0.2 million from $0.4 million in the comparable period of 1995. Included in interest and other, net is interest incurred, less amounts capitalized to housing inventories; interest income; and minority interest in pretax income of a consolidated joint venture. For the three months ended March 31, 1996 and 1995, the Company incurred interest of $3.9 million and $4.0 million and capitalized interest to housing inventories of $3.8 million and $3.9 million, respectively. The Company's effective tax rate was 40.8% and 0% for the quarters ended March 31, 1996 and 1995, respectively. In the first quarter of 1995, the deferred tax asset valuation allowance was reduced by $0.2 million reducing the effective tax rate to zero. See "Fiscal 1995 Compared to Fiscal 1994" below. FISCAL 1995 COMPARED TO FISCAL 1994 Record revenues of $293.9 million were achieved for 1995 representing a 13% increase over the preceding year. This was accomplished despite difficult market conditions experienced in Southern California and construction delays as a result of the unusually heavy rainfall experienced during the first quarter of 1995. Housing revenues for 1995 increased to $284.4 million on 1,220 homes closed compared to $258.1 million on 1,012 homes closed in 1994. Housing revenues for 1995 increased due principally to a 21% increase in the number of homes closed partially offset by an 8% decline in the average sales price of homes closed from $252,000 in 1994 to $231,000 in 1995. The decline in the average sales price was largely a result of changes in the product mix and geographic location of homes closed. In the fourth quarter of 1995, housing revenues increased to $119.3 million which represented a quarterly record for the Company and were 48% above 1994's fourth quarter housing revenues. The record housing revenues in the fourth quarter of 1995 resulted primarily from a 47% increase in the number of homes closed to 487 from 332 in 1994 and a slight increase in the average sales price to $243,000 from $240,000. Revenues from land sales were $9.5 million for 1995 compared to $2.1 million in 1994. The results of operations include the Phoenix and Las Vegas operations beginning in December 1995, which were not significant to the 1995 consolidated operating results. The gross margin, excluding land sales, was $45.1 million or 15.9% of housing revenues for 1995 compared to $44.6 million or 17.3% of housing revenues in 1994. The decline in the gross margin percent reflected higher sales incentives, particularly in Southern California, and the impact of construction and processing delays from the first quarter 1995 rains. Nevertheless, the gross margin percent increased to 16.7% in the fourth quarter of 1995 and marked the second consecutive quarter for 1995 in which the Company has gradually improved its gross margin percent. This improvement was due largely to the increased number of homes closed from new, higher margin projects that were delayed primarily as a result of the first quarter 1995 rains. In fiscal year 1995, the gross margin in the Northern California region exceeded the Southern California region as a result of stronger economic conditions and this trend is expected to continue into early 1996. The gross margin on land sales was $1.0 million for 1995 compared to $0.1 million in 1994. Gross margin is net of reductions in housing inventory to net realizable value of $1.9 million in 1995 and $2.0 million in 1994. Joint ventures reported combined housing revenues of $40.8 million on 154 homes closed for 1995, compared to $92.6 million on 319 homes closed in 1994. Equity in pretax income of unconsolidated joint ventures was $1.7 million for 1995 compared to $2.6 million in 1994. This decrease can be largely attributable to a lower number of joint venture closings and a $0.8 million loss recognized principally on a joint venture 19 land sale to an outside party. Partially offsetting this decrease was a $0.9 million increase from the completion of a joint venture project, however, this increase is a non-recurring event and is not indicative of future profits upon the completion of joint venture projects. The Company's management expects joint venture closings to continue to decline significantly in 1996. Selling, general and administrative expenses as a percentage of revenues decreased to 10.7% for 1995 from 11.2% in 1994. Selling expenses as a percentage of revenues for 1995 and 1994 were 5.7% and 4.8%, respectively. The increase in selling expense as a percent of revenues is principally attributable to increased sales commissions and advertising costs required to stimulate housing sales. General and administrative expenses as a percentage of revenues for 1995 and 1994 were 5.0% and 6.4%, respectively. General and administrative expenses as a percent of revenues decreased primarily due to a decrease in incentive compensation expense which is based on operating results. Interest and other, net increased to $1.1 million for 1995 compared to $0.4 million in 1994. For the years ended December 31, 1995 and 1994, the Company incurred interest of $15.9 million and $14.7 million and capitalized $15.8 million and $14.2 million, respectively. At December 31, 1995, the Company had a net deferred tax asset of $15.5 million after a valuation allowance of $1.5 million determined in accordance with SFAS No. 109. The Company recorded a provision for income taxes of $2.5 million in 1995 which consisted of a $7.0 million tax provision offset by a $4.5 million reduction in the deferred tax asset valuation allowance. The Company reduced its valuation allowance as a result of the increased visibility of anticipated future income. The net deferred tax asset at December 31, 1995 included net operating loss carryforwards ("NOLs") for federal and California tax purposes of $21.3 million and $9.6 million, respectively (expiring in the years 2006 through 2010 for federal and 1997 through 1999 for California tax purposes). No assurance can be given that all of the NOLs can be utilized in the future. SFAS No. 109 requires that all available evidence, both positive and negative, be considered in evaluating whether the deferred tax asset is fully realizable. In order to fully realize the $15.5 million deferred tax asset, which is net of a $1.5 million valuation allowance applicable to capital loss carryforwards, the Company must generate a minimum amount of future pretax income of approximately $38.0 million. In evaluating the Company's ability to generate sufficient cumulative pretax income in the future to fully realize the benefit of the net deferred tax asset recorded at December 31, 1995, the Company's management reviewed project forecasts for 1996 and 1997. The capital to complete the projects in the forecasts is expected to be available and a significant number of the projects necessary to generate such earnings are owned or controlled by the Company. Because of the Company's earnings history, the Company's management believes that the forecasts are no longer required to be discounted to the extent previously considered necessary. Based upon this analysis, the Company's management believes the valuation allowance at December 31, 1995 is adequate and that it is more likely than not that the Company will generate sufficient pretax income in the future to fully realize the benefit of the net deferred tax asset recorded at December 31, 1995. As a result of the reduction in the valuation allowance for the year ended December 31, 1995, the Company's effective tax rate was reduced to 14.3%. The Company's effective tax rate was 0% in 1994 due to the reduction in the deferred tax asset valuation allowance. See Note 7 to Consolidated Financial Statements. FISCAL 1994 COMPARED TO FISCAL 1993 Total revenues for the year ended December 31, 1994 were $260.2 million compared to $172.8 million in 1993. Housing revenues increased 64.3% to $258.1 million from $157.1 million in 1993 as a result of a 67.5% increase in homes closed from 604 in 1993 to 1,012 in 1994. The increase in housing revenues was partially offset by a decrease in the average sales price of homes closed to $252,000 in 1994 from $258,000 in 1993, as the Company continued to focus its efforts in the first time and move-up market segments. Revenues from land sales were $2.1 million in 1994 and $15.7 million in 1993, including revenues of $9.6 million on a sale to a related joint venture. Gross margin, excluding land sales, as a percent of housing revenues remained relatively constant in 1994 and 1993 at 17.3% and 17.7%, respectively. Total gross margin was $44.7 million or 17.2% of revenues 20 in 1994 compared to $28.4 million or 16.5% of revenues in 1993. The lower gross margin as a percent of revenues in 1993 is attributable to the $9.6 million land sale to a related joint venture at approximately a break-even margin. Gross margin is net of reductions in housing inventory to net realizable value of $2.0 million in 1994 and $0.9 million in 1993. For the years ended December 31, 1994 and 1993, joint ventures reported combined revenues of $92.6 million on 319 homes closed and $33.4 million on 113 homes closed, respectively. In 1993, activity at two unconsolidated joint ventures, which were purchased as part of the AM Operations, slowed significantly and increased marketing costs and sales incentives reduced their contribution to equity in pretax income of unconsolidated joint ventures. The Company recorded equity in pretax income of unconsolidated joint ventures of $2.6 million in 1994 compared to $1.1 million in 1993. Selling, general and administrative expenses were $29.1 million, or 11.2% of revenues, in 1994, and $19.5 million, or 11.3% of revenues, in 1993. As a result of the increase in the number of homes closed, selling expenses increased to $12.4 million in 1994 from $7.0 million in 1993. As a percent of housing revenues, to which selling expenses are directly associated, selling expenses increased from 4.5% in 1993 to 4.8% in 1994. General and administrative expenses were $16.7 million, or 6.4% of revenues, in 1994 and $12.5 million, or 7.2% of revenues, in 1993. The increase in general and administrative expenses is attributable to the Company's growth in new and existing markets in California. The Company employed full-time employees of 277 and 194 at December 31, 1994 and 1993, respectively. As a percent of revenues, general and administrative expense decreased due to increased housing revenues associated with the increased volume of homes closed. For the years ended December 31, 1994 and 1993, the Company incurred interest of $14.7 million and $7.2 million and capitalized $14.2 million and $6.8 million, respectively. The increase in interest incurred in 1994 is due to the issuance by the Company of $125 million aggregate principal amount of 10 3/4% Notes due 2004 (the "Notes"). See "Liquidity and Capital Resources" below. As a result of increased cash balances, also related to the issuance of the Notes, interest income increased to $2.0 million in 1994 from $0.5 million in 1993. For the year ended December 31, 1994, interest and other, net, included minority interest in pretax income of a consolidated joint venture of $0.8 million related to a single joint venture that commenced operations in December 1993. At December 31, 1994, the Company had a net deferred tax asset of $18.0 million after a valuation allowance of $6.0 million determined in accordance with SFAS No. 109. For the year ended December 31, 1994, the valuation allowance was reduced by $7.5 million due to the increased expectation of realization of the deferred tax asset primarily attributable to anticipated future income. As a result of the reduction in the valuation allowance, the Company's effective tax rate was reduced to 0% for the year ended December 31, 1994, compared to a 40% effective tax rate for the year ended December 31, 1993. LIQUIDITY AND CAPITAL RESOURCES As a result of the soft housing market, particularly in Southern California, and the impact of construction and processing delays from the unusually heavy rains in the first quarter of 1995, the Company implemented a strategy to strengthen its financial position and to maintain liquidity. This strategy was implemented early in 1995 and was executed by slowing the timing of new lot purchases and restructuring existing lot acquisition arrangements. At December 31, 1995, the Company's debt to equity ratio was 1.09 to 1.00, with no outstanding borrowings under its unsecured revolving credit facility (the "Facility"). The Company's cash balance at year-end increased to $41.3 million. The strong financial position that has been established should enable the Company to react quickly to a changing homebuilding market. At March 31, 1996, the Company's debt to equity ratio increased slightly to 1.15 to 1.00 from 1.09 to 1.00 at the beginning of 1996. The increase was largely a result of the increased level of borrowings associated with the nine new projects acquired in the first quarter of 1996. The Company improved its inventory turnover ratio for the 12 months ended March 31, 1996 to 1.20 from 1.09 for the 12 months ended March 31, 1995 by closely monitoring its housing inventory level. 21 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 the issuance of the Company's common and preferred stock, purchase money notes provided by sellers of residential projects, use of the Facility, issuance of the Notes in 1994 and cash from operations. The Company used net cash in operating activities of $30.0 million for the first quarter of 1996 and $40.6 million for the full year 1994 and generated net cash of $12.4 million for the full year 1995. In the first quarter of 1996 and the full year 1994, cash was used primarily to fund the increase in housing inventories associated with the Company's growth and expansion. In the full year 1995, the Company's use of cash decreased when compared to first quarter of 1996 and the full year 1994 as a result of the soft housing market and the impact of construction and processing delays from the unusually heavy rains experienced in the first quarter of 1995. The Company slowed the timing of new lot purchases and implemented a strategy designed to strengthen its financial position and maintain liquidity. The Company's sources of operating cash in fiscal 1995 were primarily earnings from operations. For fiscal years ended 1994 and 1995 and for the first quarter of 1996, net cash provided by investing activities was $4.2 million, $4.5 million and $0.4 million, respectively. Cash was generated primarily from cash distributions received from the Company's investments in unconsolidated joint ventures. Net cash flow received from financing activities was $8.6 million and $45.4 million in the first quarter of 1996 and the full year 1994, respectively, while financing activities in the full year 1995 used net cash flows of $11.7 million. In the first quarter of 1996, cash was provided primarily from the Company's Facility. In fiscal 1994, sources of financing activities were primarily the issuance of the Notes of which the net proceeds were used to repay certain existing indebtedness and general corporate purposes. In fiscal 1995, the Company's strategy was to maintain liquidity; therefore, cash was used principally to reduce the Facility's outstanding borrowings to zero and to repay existing indebtedness. As the Company continues to expand in its existing markets and evaluates opportunities to enter new markets, it may be required to seek additional capital in the form of equity or debt financing. See "Risk Factors -- Access to Financing." At March 31, 1996, a total of $50 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 to pay cash dividends or make loans and advances to the Company. At March 31, 1996, under the terms of the indentures, Greystone could pay cash dividends or make loans or advances to the Company in an amount of $32.5 million. The Notes are fully and unconditionally guaranteed by the Company. On April 10, 1996 the Company increased its Facility commitment to $100 million from $60 million. The amended Facility also provides for lower borrowing and administrative costs. Participants in the amended Facility include: Bank of America NT&SA; Guaranty Federal Bank, F.S.B.; and Bank of Boston. The amended Facility extends the maturity date to July 31, 1999 and includes a provision for a 12-month amortization of outstanding principal starting July 31, 1998. In the normal conduct of the Company's business, it guarantees on an unsecured basis obligations of certain unconsolidated joint ventures of which it is the general partner. Generally these obligations are pro rata with the other partners and the underlying obligations are secured by the assets of the joint venture. At March 31, 1996, the Company had no liability for such obligations. The indentures with respect to the Notes and the Facility impose restrictions on the amount of such guarantees and obligations. The Company has utilized, and will continue to utilize, options as a method of controlling and subsequently acquiring land. By controlling land, through options on the future discretionary purchase of land, the Company attempts to minimize its cash outlays and reduce its risk from changing market conditions. While the Company attempts to prudently manage its acquisition and development of residential lots, the development of such projects can have a negative impact on liquidity due to the timing of acquisition and development activities. The Company believes that cash on hand, cash generated from operations and funds 22 available under the Facility will be sufficient to meet the Company's working capital and capital expenditure requirements for at least the next 18 months. Currently, the Company does not have any material commitments for capital expenditures. BACKLOG Backlog is the number of units subject to pending sales contracts. 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. If the sale of an existing home is a condition to a customer's purchase of a new home, the Company generally requires that a listing agreement exist with respect to the customer's existing home before the Company will count the sales contract as a new order. 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. The Company experienced a cancellation rate of 21% in the first quarter of 1996, 21% in 1995 and 24% in 1994. Although cancellations can delay the sales of the Company's homes, they have not had a material impact on sales, operations or liquidity because 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. At December 31, 1995, the Company had a backlog of 325 homes with an aggregate sales value of $60.2 million, representing an increase of 61% and 19%, respectively, since December 31, 1994. The increase in backlog in fiscal year 1995 resulted from the inclusion of sales of 67 homes and 78 homes in the Phoenix and Las Vegas housing markets, respectively. The Company's backlog, including units from unconsolidated joint ventures, as of December 31, 1994 consisted of 202 units with an aggregate sales value of approximately $50.4 million compared to 202 units with an aggregate sales value of $53.7 million a year earlier. Backlog at March 31, 1996 consisted of 511 units with an aggregate sales value of $101.0 million, representing 79% and 49% increases, respectively, over comparable figures at March 31, 1995. The Company's California operations provided strong growth in backlog levels with the sales value increasing to $84.5 million on 342 units at March 31, 1996 from $67.6 million on 286 units at March 31, 1995. This growth reflected a 24% increase in net new orders for the first three months of 1996 compared to the first three months of 1995. The Company's Phoenix and Las Vegas operations contributed a combined 169 sales in backlog with an aggregate sales value of $16.5 million in its first full quarter of operations. SELECTED UNAUDITED QUARTERLY OPERATING DATA The homebuilding industry is seasonal. Generally, new orders are higher in the spring and summer with closings, and therefore revenues, being higher in the fall. The following table presents selected quarterly operating data of the Company for each of the nine quarters in the period ended March 31, 1996. In the opinion of management, all necessary adjustments (consisting of normal recurring adjustments) have been included to present fairly the unaudited selected quarterly operating data. This data is not necessarily indicative of the results of operations of the Company for any future period. 23
QUARTER ENDED ---------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1994 1994 1994 1994 1995 1995 1995 1995 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues................ $ 46,186 $ 59,696 $ 73,869 $ 80,434 $ 34,733 $ 62,283 $ 77,595 $ 119,310 Cost of sales........... (38,932) (49,786) (59,919) (66,800) (29,269) (54,087) (65,060) (99,411) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross margin............ 7,254 9,910 13,950 13,634 5,464 8,196 12,535 19,899 Equity in pretax income (loss) of unconsolidated joint ventures............... 174 556 1,194 657 659 1,349 (189) (77) Selling, general and administrative expenses............... (5,801) (6,551) (7,644) (9,063) (5,970) (7,164) (8,438) (9,896) Interest and other, net.................... 243 235 (152) 62 371 334 292 165 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pretax income........... 1,870 4,150 7,348 5,290 524 2,715 4,200 10,091 Income tax benefit (provision)............ (767) (1,340) 2,107 -- -- 3,204 (1,680) (4,036) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income.............. $ 1,103 $ 2,810 $ 9,455 $ 5,290 $ 524 $ 5,919 $ 2,520 $ 6,055 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross margin as a percent of revenues.... 15.7% 16.6% 18.9% 17.0% 15.7% 13.2% 16.2% 16.7% Selling, general and administrative expenses as a percent of revenues............... 12.6% 11.0% 10.3% 11.3% 17.2% 11.5% 10.9% 8.3% OPERATING DATA:(1) Homes closed (units).... 211 295 400 425 227 323 322 502 Average price of homes closed................. $ 256 $ 265 $ 269 $ 251 $ 238 $ 220 $ 234 $ 243 Net new orders (units)................ 351 437 309 234 311 380 383 423 Backlog (at period end) (units)................ 342 484 393 202 286 343 404 325 Sales value of backlog (at period end)........ $ 91,425 $ 130,322 $ 100,849 $ 50,388 $ 67,611 $ 84,997 $ 105,918 $ 60,219 MARCH 31, 1996 ---------- STATEMENT OF OPERATIONS DATA: Revenues................ $ 63,535 Cost of sales........... (51,840) ---------- Gross margin............ 11,695 Equity in pretax income (loss) of unconsolidated joint ventures............... (148) Selling, general and administrative expenses............... (8,502) Interest and other, net.................... 159 ---------- Pretax income........... 3,204 Income tax benefit (provision)............ (1,307) ---------- Net income.............. $ 1,897 ---------- ---------- Gross margin as a percent of revenues.... 18.4% Selling, general and administrative expenses as a percent of revenues............... 13.4% OPERATING DATA:(1) Homes closed (units).... 306 Average price of homes closed................. $ 209 Net new orders (units)................ 492 Backlog (at period end) (units)................ 511 Sales value of backlog (at period end)........ $ 101,011
- ------------ (1) Includes consolidated and unconsolidated projects. 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. 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 permanent mortgage financing available to prospective customers. Increased construction costs, rising interest rates, as well as increased material 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. 24 BUSINESS 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, Nevada and Phoenix, Arizona. The Company also provides mortgage brokerage services to its customers. BUSINESS STRATEGY 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 and 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. In 1995 and the first three months of 1996, the number of homes closed by Pacific Greystone were divided almost equally between Northern and Southern California. 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. Pacific Greystone 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 1994. As of March 31, 1996, the Company owned and controlled 7,001 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 25 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 12 most senior managers averaging 21 years of experience in the homebuilding industry. THE CALIFORNIA ECONOMY AND HOUSING MARKETS California is the most populous state and the third largest housing market (measured by permits issued in 1995) in the United States. According to the U.S. Census Bureau, the population of California increased from 23.7 million in 1980 to an estimated 31.4 million in 1994, an annual compound growth rate of 2.0% compared to a nationwide compound annual growth rate of 1.0% over this same period. HOUSING TRENDS Single family building permits issued in California totaled 162,600 at the last cyclical peak in 1989 and declined to 68,673 in 1995, a decline of 57.7%. In the first three months of 1996, 15,541 permits were issued, a 15.0% increase from the 13,510 permits issued during the first three months of 1995. The steep decline in single family building permits during California's recession led to a parallel decline in single family housing starts. As illustrated in the following chart, annual single family housing starts in California during the December 1990 to September 1995 period declined to one of the lowest levels since 1969. CALIFORNIA SINGLE FAMILY vs. U.S. SINGLE FAMILY HOUSING STARTS (1969-1995) A line graph plotting the California single family starts, in thousands, on the left axis and the U.S. single family starts, in millions, on the right axis for the years 1969 through 1995. The indicated source is DRI/ McGraw Hill. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALIFORNIA SINGLE FAMILY VS. U.S. SINGLE FAMILY HOUSING STARTS (1969-1995) California Single U.S. Single Family Starts Family Starts Mar-69 87.50 0.84 Jun-69 89.09 0.81 Sep-69 74.76 0.82 Dec-69 83.80 0.72 Mar-70 65.36 0.73 Jun-70 63.17 0.81 Sep-70 70.71 0.87 Dec-70 85.77 1.11 Mar-71 114.65 1.08 Jun-71 118.29 1.16 Sep-71 114.98 1.16 Dec-71 122.32 1.30 Mar-72 147.75 1.32 Jun-72 111.89 1.27 Sep-72 131.34 1.40 Dec-72 131.23 1.26 Mar-73 104.22 1.24 Jun-73 116.42 1.11 Sep-73 105.43 1.02 Dec-73 84.40 0.82 Mar-74 81.20 0.97 Jun-74 82.53 0.98 Sep-74 75.63 0.86 Dec-74 64.33 0.76 Mar-75 65.91 0.77 Jun-75 80.21 0.87 Sep-75 89.98 0.96 Dec-75 108.02 1.03 Mar-76 131.48 1.11 Jun-76 119.94 1.13 Sep-76 131.57 1.23 Dec-76 175.94 1.31 Mar-77 218.15 1.49 Jun-77 164.66 1.39 Sep-77 163.34 1.48 Dec-77 169.69 1.53 Mar-78 154.31 1.43 Jun-78 138.94 1.43 Sep-78 145.38 1.39 Dec-78 141.04 1.46 Mar-79 131.95 1.32 Jun-79 131.75 1.32 Sep-79 134.98 1.19 Dec-79 119.87 1.02 Mar-80 97.17 0.63 Jun-80 63.13 0.77 Sep-80 98.45 1.02 Dec-80 101.88 0.94 Mar-81 77.37 0.85 Jun-81 68.84 0.70 Sep-81 55.22 0.64 Dec-81 41.58 0.56 Mar-82 43.49 0.61 Jun-82 37.56 0.61 Sep-82 51.25 0.69 Dec-82 65.24 0.86 Mar-83 76.98 1.00 Jun-83 102.91 1.12 Sep-83 112.73 1.06 Dec-83 118.74 1.02 Mar-84 124.78 1.05 Jun-84 116.76 1.09 Sep-84 107.52 1.04 Dec-84 108.45 1.10 Mar-85 113.42 1.13 Jun-85 113.06 1.03 Sep-85 124.63 1.02 Dec-85 119.51 1.12 Mar-86 117.62 1.18 Jun-86 144.29 1.22 Sep-86 144.37 1.14 Dec-86 157.98 1.23 Mar-87 161.01 1.21 Jun-87 145.62 1.09 Sep-87 138.77 1.23 Dec-87 127.21 1.03 Mar-88 152.76 1.18 Jun-88 148.20 1.11 Sep-88 167.32 1.04 Dec-88 181.43 1.13 Mar-89 160.67 0.98 Jun-89 168.40 0.97 Sep-89 162.78 0.97 Dec-89 164.75 0.91 Mar-90 155.07 0.97 Jun-90 117.04 0.89 Sep-90 103.70 0.86 Dec-90 77.90 0.75 Mar-91 69.50 0.75 Jun-91 83.89 0.87 Sep-91 81.68 0.87 Dec-91 75.88 0.95 Mar-92 84.07 1.04 Jun-92 81.19 1.00 Sep-92 79.15 1.02 Dec-92 80.49 1.08 Mar-93 71.92 0.94 Jun-93 75.83 1.07 Sep-93 73.07 1.15 Dec-93 81.25 1.38 Mar-94 85.32 1.26 Jun-94 75.83 1.17 Sep-94 84.76 1.24 Dec-94 81.09 1.25 Mar-95 66.47 0.99 Jun-95 64.20 1.03 Sep-95 80.39 1.14 Source: DRI/McGraw Hill
Since peaking in early 1991, median single family home sales prices have fallen dramatically. The price of a median single family home declined to $176,150 in March 1996. As home sales prices and mortgage rates declined, the percentage of California households able to afford a median-priced single family home has increased from a low of 15% in May of 1989 to 41% in March 1996. 26 CALIFORNIA AFFORDABILITY INDEX BASED ON MEDIAN HOME PRICE A line graph plotting the median home price in dollars on the left axis and the affordability index as a percentage on the right axis for the years 1989 to March 1996. The indicated source is California Association of Realtors. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALIFORNIA AFFORDABILITY INDEX BASED ON MEDIAN HOME PRICE Affordability Index (%) Median Home Price ($) 1/89 19 182,859 2/89 17 190,197 3/89 16 194,697 4/89 15 201,034 5/89 14 201,021 6/89 14 199,441 7/89 14 201,653 8/89 16 199,385 9/89 16 198,743 10/89 17 193,734 11/89 17 193,581 12/89 19 188,477 1/90 22 194,952 2/90 21 196,273 3/90 22 194,856 4/90 22 196,111 5/90 22 195,281 6/90 22 194,410 7/90 23 193,088 8/90 23 192,180 9/90 24 189,979 10/90 25 187,630 11/90 24 192,020 12/90 25 190,375 1/91 25 192,054 2/91 24 194,805 3/91 23 202,686 4/91 23 207,718 5/91 22 211,001 6/91 24 206,722 7/91 24 206,069 8/91 25 200,340 9/91 26 197,801 10/91 27 196,021 11/91 29 194,192 12/91 29 199,452 1/92 31 196,410 2/92 30 198,220 3/92 29 200,500 4/92 29 198,700 5/92 29 203,420 6/92 30 199,460 7/92 32 199,150 8/92 34 194,670 9/92 34 195,840 10/92 35 194,000 11/92 35 189,670 12/92 35 193,330 1/93 36 191,670 2/93 38 187,440 3/93 37 189,130 4/93 38 192,600 5/93 39 188,850 6/93 39 188,650 7/93 39 190,540 8/93 40 189,010 9/93 41 186,740 10/93 43 185,920 11/93 43 184,700 12/93 42 184,980 1/94 42 183,046 2/94 43 183,010 3/94 41 185,472 4/94 40 187,620 5/94 39 185,950 6/94 37 189,234 7/94 37 188,051 8/94 37 185,788 9/94 37 185,158 10/94 38 181,862 11/94 38 180,907 12/94 38 179,057 1/95 38 177,200 2/95 39 172,327 3/95 38 175,000 4/95 37 176,816 5/95 38 176,179 6/95 39 180,876 7/95 38 180,381 8/95 37 182,619 9/95 37 180,529 10/95 39 176,040 11/95 39 176,200 12/95 40 175,370 1/96 41 174,480 2/96 42 170,420 3/96 41 171,151 Source: California Association of Realtors
EMPLOYMENT TRENDS The rate of nonfarm employment growth in California turned negative in December 1990 and showed a negative trend through 1993. In 1994, nonfarm employment growth turned positive for the first time in over three years. Since 1991, Northern California only experienced one year of negative employment growth, 1992. In contrast, Southern California's rate of nonfarm employment growth was negative for the years 1991 through 1993 and only mildly positive in 1994. Over the twelve months ended March 1996, the California Employment Development Department estimated that California nonfarm employment increased by 2.4%, or 296,000 jobs, significantly outpacing the 1.5% gain nationwide. During that period, all of California's metropolitan statistical areas posted job gains. Additionally, the California Department of Finance recently projected a 2.5% increase in nonfarm employment in 1996 and a 2.3% increase in 1997. 27 YEAR-0VER-YEAR NONFARM EMPLOYMENT GROWTH (1920-1995) A line graph plotting the unit change on the left axis and the percentage of change of the nonfarm equipment growth for the years 1970 through 1995. The indicated source is DRI/McGraw Hill. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
YEAR-OVER-YEAR NONFARM EMPLOYMENT GROWTH (1970-1995) Unit Change Percentage of Change Mar-70 189 2.77% Jun-70 61 0.89% Sep-70 (52) -0.75% Dec-70 (136) -1.94% Mar-71 (149) -2.13% Jun-71 (97) -1.39% Sep-71 9 0.13% Dec-71 116 1.69% Mar-72 261 3.81% Jun-72 296 4.30% Sep-72 318 4.58% Dec-72 295 4.22% Mar-73 369 5.17% Jun-73 419 5.84% Sep-73 438 6.05% Dec-73 420 5.76% Mar-74 271 3.61% Jun-74 252 3.32% Sep-74 183 2.38% Dec-74 147 1.91% Mar-75 (6) -0.08% Jun-75 (66) -0.84% Sep-75 (6) -0.08% Dec-75 128 1.63% Mar-76 277 3.57% Jun-76 328 4.22% Sep-76 344 4.37% Dec-76 280 3.51% Mar-77 346 4.31% Jun-77 413 5.10% Sep-77 448 5.46% Dec-77 574 6.95% Mar-78 621 7.41% Jun-78 656 7.70% Sep-78 587 6.78% Dec-78 531 6.00% Mar-79 518 5.76% Jun-79 421 4.59% Sep-79 482 5.21% Dec-79 444 4.74% Mar-80 343 3.61% Jun-80 233 2.43% Sep-80 74 0.76% Dec-80 89 0.91% Mar-81 87 0.88% Jun-81 178 1.81% Sep-81 213 2.18% Dec-81 67 0.67% Mar-82 (53) -0.53% Jun-82 (179) -1.79% Sep-82 (245) -2.44% Dec-82 (223) -2.23% Mar-83 (118) -1.19% Jun-83 41 0.42% Sep-83 183 1.88% Dec-83 319 3.27% Mar-84 436 4.46% Jun-84 464 4.70% Sep-84 517 5.20% Dec-84 473 4.69% Mar-85 433 4.24% Jun-85 397 3.84% Sep-85 349 3.33% Dec-85 340 3.23% Mar-86 315 2.95% Jun-86 301 2.80% Sep-86 300 2.77% Dec-86 346 3.18% Mar-87 364 3.32% Jun-87 338 3.51% Sep-87 379 3.41% Dec-87 416 3.71% Mar-88 451 3.98% Jun-88 454 3.98% Sep-88 439 3.82% Dec-88 410 3.52% Mar-89 396 3.36% Jun-89 340 2.86% Sep-89 287 2.41% Dec-89 285 2.37% Mar-90 277 2.28% Jun-90 301 2.47% Sep-90 302 2.47% Dec-90 168 1.36% Mar-91 (28) -0.22% Jun-91 (134) -1.07% Sep-91 (182) -1.45% Dec-91 (219) -1.75% Mar-92 (231) -1.86% Jun-92 (184) -1.49% Sep-92 (208) -1.69% Dec-92 (198) -1.61% Mar-93 (132) -1.08% Jun-93 (163) -1.34% Sep-93 (89) -0.73% Dec-93 (51) -0.42% Mar-94 17 0.14% Jun-94 95 0.79% Sep-94 156 1.30% Dec-94 195 1.62% Mar-95 199 1.65% Jun-95 261 2.15% Sep-95 262 2.15% Dec-95 293 2.40% Source: DRI/McGraw Hill
The California unemployment rate increased from 4.8% in June 1990 to 10.1% in January 1994, compared to the national unemployment rate which increased more modestly from 5.3% to 6.7% during the same period. Since reaching 10.1%, California's unemployment rate has declined markedly to 7.7% as of March 1996 while the national rate has declined to 5.6%. MARKETS AND PRODUCTS The Company's homebuilding operations are presently conducted in four regions: Northern California, Southern California, Las Vegas, Nevada and Phoenix, Arizona. 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'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. These 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 over 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. 28 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. Northern California operations are currently conducted in Alameda, Santa Clara, Contra Costa, San Mateo, Sacramento and San Joaquin counties. Southern California operations are concentrated in the counties of Los Angeles, Orange, San Bernardino, Riverside, San Diego and Ventura. In December 1995, the Company acquired seven residential projects in Las Vegas, Nevada and Phoenix, Arizona. The following table sets forth information regarding the Company's projects and backlog at March 31, 1996 (includes unconsolidated joint venture):
SALES VALUE OF BACKLOG NUMBER OF ACTIVE (DOLLARS) (2) NUMBER OF SELLING BACKLOG ------------- PROJECTS OWNED PROJECTS (1) (UNITS) (2) --------------- ----------------- ------------- (IN THOUSANDS) Northern California.................... 20 10 143 $ 37,477 Southern California.................... 21 11 199 46,988 Nevada................................. 5 3 77 7,453 Arizona................................ 7 3 92 9,093 -- -- --- ------------- Total................................ 53 27 511 $ 101,011 -- -- -- -- --- ------------- --- -------------
- ------------ (1) Active selling projects are projects owned by the Company at which five or more homes were for sale at March 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. 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 attempt to manage 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. 29 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 March 31, 1996:
LOTS LOTS OWNED CONTROLLED (1) TOTAL ----------- --------------- --------- Northern California................................ 1,086 1,545 2,631 Southern California................................ 1,138 2,019 3,157 Nevada............................................. 389 127 516 Arizona............................................ 220 477 697 ----- ----- --------- Total............................................ 2,833 4,168 7,001 ----- ----- --------- ----- ----- ---------
- ------------ (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. The Company has an ongoing program to identify and cultivate a wide source of potential joint venture partners. 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 4 to the Consolidated Financial Statements. 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. At March 31, 1996, the Company owned 97 model homes which were not generally available for sale until the end of the project. 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. 30 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. If the sale of an existing home is a condition to a customer's purchase of a new home, the Company generally requires a listing agreement with respect to the customer's existing home before the Company will count the sales contract as a new order. 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. During 1993, 1994 and 1995 and the first three months of 1996, the Company experienced a cancellation rate of approximately 32%, 24%, 21% and 21%, respectively. Although cancellations can delay the sale of the Company's homes, they have not had a material impact on sales, operations or liquidity because 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. 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 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 March 31, 1996, the Company had 106 completed and unsold homes, excluding 97 model homes. 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- 31 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. Although the Company believes its TQM process will increase long-term profitability, the Company incurred approximately $175,000 of training and consultant costs in connection with initiating this process in 1995. MORTGAGE BROKERAGE OPERATIONS The Company 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 much 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 anticipated 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 32 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 "Risk Factors--Dependence on California Economy and Housing Markets" and "--Regulatory and Environmental Matters." EMPLOYEES At March 31, 1996, the Company had 321 employees. The Company considers its relations with its employees to be good. The Company's construction 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. 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 1996 through 1998 and renewal options. The Company believes that its office space is suitable and adequate for its needs for the foreseeable future. See Note 9 to the Consolidated Financial Statements. 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. 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information concerning the directors and executive officers of the Company. All these persons have served in their capacities since the Company was formed in 1991, except as otherwise indicated.
NUMBER OF YEARS OF EXPERIENCE IN HOME-BUILDING NAME AGE (*) PRINCIPAL POSITIONS WITH THE COMPANY INDUSTRY - -------------------------- ----------- ----------------------------------------------------------- --------------------- Jack R. Harter(1) 64 Chairman, President and Chief Executive Officer 40 Antonio B. Mon(1) 50 Vice Chairman and Chief Financial Officer 18 Robert W. Garcin(1) 67 Vice President, General Counsel and Secretary 33 Peter J. Kiesecker(1) 35 Vice President and Treasurer 13 Bruce E. Gross(1) 37 Vice President and Controller 16 Richard D. Baker 52 Division President, North Bay 19 Denis G. Cullumber 49 Division President, South Coast 24 Steven G. Delva 47 Division President, South Bay 21 Charles J. Dragicevich 46 Division President, Ventura 22 Timothy F. Kent 44 Division President, Las Vegas 19 David M. Kitnick 34 Division President, Phoenix 10 Todd J. Palmaer 37 Division President, Coastal Valley 15 Jack N. Grigsby 62 Division President, PGC Financial Services 38 Sidney Lapidus(2) 58 Director Reuben S. Leibowitz(3) 48 Director John D. Santoleri(2) 32 Director David Kaplan(2)(3) 51 Director
- ------------ (*) As of January 31, 1996. (1) Member of the Executive Management Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. JACK R. HARTER, a co-founder of the Company, has been its Chairman, President and Chief Executive Officer since the Company's inception in 1991. For the 34 years prior to that, Mr. Harter held increasingly more responsible positions at M.J. Brock and Sons, Inc., a major California homebuilder, where, from 1985 through 1991, he was President. For the period 1986 through 1991, Mr. Harter was also an officer of The Ryland Group, Inc. ANTONIO B. MON, a co-founder of the Company, has been its Vice Chairman and Chief Financial Officer since the Company's inception in 1991. Prior to that, Mr. Mon was an officer of The Ryland Group, Inc. from 1986 to 1989 and from 1989 through 1991 was President of Ryland Ventures, Inc. During 1985, Mr. Mon was Executive Vice President and Chief Financial Officer of M.J. Brock and Sons, Inc. During the period 1978 through 1984, he held various positions at CIGNA Corporation where, among other activities, he was responsible for CIGNA's investment in M.J. Brock and Sons, Inc. ROBERT W. GARCIN has been the Company's Vice President, General Counsel and Secretary since 1991. From 1986 to 1991, Mr. Garcin was Vice President and General Counsel of M.J. Brock and Sons, Inc. Prior 34 to joining M.J. Brock and Sons, Inc., Mr. Garcin was outside legal counsel to that company for over 20 years. Mr. Garcin is the former Mayor of the City of Glendale, California, and, from 1984 to 1994, served as President of the Burbank-Glendale-Pasadena Airport Authority where he currently serves as a member of that Authority. PETER J. KIESECKER has been the Company's Vice President and Treasurer since 1991. Mr. Kiesecker was Vice President of Ryland Ventures, Inc. and Director of Financial Planning for The Ryland Group, Inc. from 1989 to 1991. From 1984 to 1989, Mr. Kiesecker was a Financial Analyst for M.J. Brock Corporation. Prior to 1984, Mr. Kiesecker was associated with Wilshire and Associates. BRUCE E. GROSS has been the Company's Vice President and Controller since 1991. Mr. Gross was Corporate Controller for Shea Homes from 1990 to 1991. From 1984 to 1990, Mr. Gross was Vice President of Finance and Corporate Controller for Calmark Development Corporation. Prior to 1984, Mr. Gross was associated with Seidman and Seidman, Certified Public Accountants. RICHARD D. BAKER has been President of the North Bay Division since 1991. From 1983 to 1991, Mr. Baker worked as President and Vice President of Sales and Marketing for the Northern California Division of Pulte Home Corporation. Prior to that, Mr. Baker was Director of Marketing at Robertson Homes and General Sales Manager at Broadmoor Homes. Mr. Baker is the Chairman of the Board of the Northern California Building Industry Association. DENIS G. CULLUMBER has been President of the South Coast Division since June 1995. He previously served as President of the Coastal Valley Division from 1991 to June 1995. From 1985 to 1991 he was a Senior Vice President for UDC Homes, Inc., with responsibility for its Southern California operations from 1987. From 1980 to 1984, Mr. Cullumber was a Partner of Penstar, Inc., a homebuilding company in Fresno, California. STEVEN G. DELVA has been President of the South Bay Division since 1992. From 1988 to 1992, he was Vice President of Forward Planning and Land Acquisition for the Northern California division of the AM Operations. From 1977 to 1988, Mr. Delva was associated with the Writer Corporation, a Denver, Colorado homebuilder. Mr. Delva currently serves as the South Bay Region President of the Building Industry Association. CHARLES J. DRAGICEVICH has been President of the Ventura Division since its inception in 1995. Mr. Dragicevich joined the Company in 1993 where he served as Senior Project Manager for the Coastal Valley Division. From 1988 to 1993, he was a Division President for Griffin Homes with responsibility for its Los Angeles and Ventura County Regions. Mr. Dragicevich is a board member and past president of the Ventura County Building Industry Association. TIMOTHY F. KENT has been President of the Las Vegas Division since December 1995. From February 1994 to December 1995, he was a Division President for the Las Vegas Division of Inco Homes Corporation. From April 1993 to January 1994, Mr. Kent was President of the Las Vegas Division of Beazer Homes. From September 1989 to April 1993, he was a President of Watt Nevada (which was acquired by Beazer Homes). DAVID M. KITNICK has been President of the Phoenix Division since December 1995. From November 1993 to December 1995, he was a Division President for the Phoenix Division of Inco Homes Corporation. From 1986 to 1993, Mr. Kitnick held several management positions at Ryland Homes, a subsidiary of The Ryland Group, Inc. His most recent position there was as a manager of land resources for the Phoenix Division. TODD J. PALMAER has been President of the Coastal Valley Division since June 1995. Mr. Palmaer joined the Company in 1992 and he served first as Vice President/Controller for the North Bay Division where he was also responsible for land acquisitions. From 1985 to 1992, Mr. Palmaer served as Financial Officer and Director of Joint Venture Operations for Pulte Homes. JACK N. GRIGSBY has been Division President of PGC Financial Services since its inception in 1993. From 1990 to 1993, he was a Director and Senior Consultant to Prudential Real Estate Affiliates facilitating their 35 establishment of nationwide mortgage loan origination capabilities. From 1983 to 1990, Mr. Grigsby was President and Chief Executive Officer of Coldwell Banker Mortgage, a nationwide company that originated mortgage loans. SIDNEY LAPIDUS is a Managing Director of E.M. Warburg, Pincus & Co., Inc. ("Warburg Pincus"), an affiliate of Warburg. Mr. Lapidus has been with Warburg Pincus since 1967. Mr. Lapidus currently serves on the board of directors of Renaissance Communications Corp. and Caribiner International, Inc., as well as a number of private companies. REUBEN S. LEIBOWITZ has been a Managing Director of Warburg Pincus since 1984. Prior to 1984, Mr. Leibowitz was a partner at Spicer and Oppenheim, Certified Public Accountants. Mr. Leibowitz currently serves on the board of directors of Chelsea GCA Realty, Inc. and Grubb & Ellis Company. JOHN D. SANTOLERI has been a Managing Director of Warburg Pincus since January 1996 and has been with Warburg Pincus since 1989. From 1985 to 1989, he was associated with The Harlan Company. Mr. Santoleri currently serves on the board of directors of Chelsea GCA Realty, Inc., Grubb & Ellis Company and several private companies. DAVID KAPLAN is a principal with the Autumn Hill Group, an investment banking and advisory firm specializing in homebuilder services since January 1996. From 1991 to 1995, Mr. Kaplan was a principal with Victor Capital Group, L.P. From 1976 to 1991, he was associated with The Harlan Company, Inc. Mr. Kaplan currently serves on the board of directors of F.P.A., a New Jersey based public homebuilder. The Company will seek the appointment or election of at least one new member of the Board of Directors of the Company who is not an officer or an employee of the Company or any of its affiliates as soon as practicable. TERM OF OFFICE OF DIRECTORS AND OFFICERS Members of the Board of Directors currently hold office and serve until their successors are elected and qualified. Certain directors are currently nominated by various stockholder groups. Pursuant to the Shareholders' Agreement (as defined below), Jack Harter and Antonio B. Mon are required to be elected directors, Warburg can nominate three directors (currently Sidney Lapidus, Reuben S. Leibowitz and John D. Santoleri), Jennings (as defined below) can nominate one director (currently vacant) and Mr. Harter, Mr. Mon and Warburg may jointly designate up to three other directors (currently only David Kaplan has been designated). See "Description of Capital Stock--Shareholders' Agreement and Registration Rights." Upon the consummation of this Offering, the Shareholders' Agreement, as it relates to the election of directors, will be terminated. In addition, upon consummation of the Offering, the Board of Directors will be divided into three classes: Class I, Class II and Class III. Generally, each director (other than those directors elected to fill vacancies on the Board) will serve until the third annual meeting following the annual meeting at which such director is elected and until his successor is elected and qualified. Initially, the Class I directors will be Reuben S. Leibowitz and David Kaplan, whose terms will expire at the annual meeting in 1997, the Class II directors will be Sidney Lapidus and John D. Santoleri, whose terms will expire at the annual meeting in 1998, and the Class III directors will be Jack R. Harter and Antonio B. Mon, whose terms will expire at the annual meeting in 1999. Executive officers are appointed by and serve at the discretion of the Board of Directors, but subject to their employment agreements, if applicable. "See Employment Contracts and Termination of Employment and Change-in-Control Arrangements" below. DIRECTORS COMPENSATION The Company's outside board member is paid a $3,000 quarterly retainer plus $850 for each meeting attended. All other directors serve without compensation. Prior to the closing of the Offering, the Board of Directors and stockholders of the Company will approve the Company's Amended and Restated 1995 Eligible Directors' Stock Option Plan to be effective upon consummation of the Offering (the "Director Plan"). The purpose of the Director Plan is to promote the success of the Company by providing an additional means through the grant of stock options to attract, motivate and retain experienced and knowledgeable Eligible Directors (as defined below). The Director 36 Plan provides that upon becoming an Eligible Director, the director will receive an option to purchase 5,000 shares of Common Stock and that annually thereafter the Eligible Director will receive an option to purchase an additional 1,000 shares of Common Stock, in each case at an exercise price equal to the market price of the Common Stock on the date of grant. The Board of Directors has authorized 75,000 shares of Common Stock for issuance under the Director Plan. Stock options granted under the Director Plan will expire five years after the date of grant. If a person's service as a member of the Board of Directors terminates, any unexercisable portion of the option shall terminate and the option will terminate six months after the date of termination or the earlier expiration of the option by its terms. Options generally vest over a three-year period. Upon a Change in Control Event (as defined in the Director Plan), the options will become fully exercisable. "Eligible Director" means a member of the Board of Directors of the Company who as of the applicable date of grant is not (i) an officer or employee of the Company or any subsidiary, or (ii) a person to whom equity securities of the Company or an affiliate have been granted or awarded within the prior year under or pursuant to any other plan of the Company or an affiliate that provides for the grant or award of equity securities, or (iii) an affiliate, associate or employee of either Warburg or Jennings Holdings (USA). On August 3, 1995, stock options with respect to 14,282 shares were granted to David Kaplan pursuant to the Director Plan. These stock options are first exercisable on August 3, 1996 and expire August 2, 2000. COMMITTEES OF THE BOARD OF DIRECTORS The Bylaws of the Company provide that the Board of Directors may establish committees from time to time. An Audit Committee and a Compensation Committee have been established. The Audit Committee reviews the Company's annual audit and meets with the Company's independent auditors to review the Company's internal controls and financial management practices. The Board's Audit Committee currently consists of Sidney Lapidus, John D. Santoleri and David Kaplan. Upon the election or appointment of a new director who is not an officer or employee of the Company or any of its affiliates, that person will be appointed to the Audit Committee and Mr. Lapidus, Mr. Santoleri or both will resign from the Audit Committee. The Compensation Committee recommends compensation for certain of the Company's personnel to the Board. The Compensation Committee currently consists of Reuben S. Leibowitz and David Kaplan. 37 EXECUTIVE COMPENSATION The following table sets forth a summary of annual and long-term compensation awarded to, earned by, or paid to the Chief Executive Officer of the Company and each of the four most highly compensated executive officers of the Company (other than the Chief Executive Officer) whose total annual salary and bonus for the year ended December 31, 1995 was in excess of $100,000: SUMMARY COMPENSATION TABLE (1)
LONG-TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------------- --------------- OTHER ANNUAL RESTRICTED ALL OTHER COMPENSATION STOCK AWARDS COMPEN- NAME AND PRINCIPAL POSITION SALARY BONUS (2)(3)(4) (5) SATION (6) - ----------------------------------- ---------- ------------- ------------- --------------- ---------- Jack R. Harter (7) 1995 $ 425,000 $ 482,000 $ 23,964 -- $ 77,064 Chairman, President and 1994 400,000 536,000 44,816 -- 52,310 Chief Executive Officer 1993 300,000 175,000(8) 11,714 -- 308,435 Antonio B. Mon (7) 1995 375,000 425,000 22,818 -- 77,076 Vice Chairman and 1994 350,000 469,000 27,314 -- 52,310 Chief Financial Officer 1993 250,000 150,000(8) 5,686 -- 139,382 Steven G. Delva 1995 184,198 109,058(9) 1,716 1,144 2,145 President, South Bay Division 1994 167,785 214,486(9) 5,674 8,510 2,310 1993 155,317 122,242(9) -- -- 1,179 Richard D. Baker 1995 186,996 97,022(9) 957 -- 2,032 President, North Bay Division 1994 175,192 120,579(9) 2,638 660 2,310 1993 170,192 10,000 -- -- 2,249 Denis G. Cullumber 1995 186,996 -- 1,669 -- 2,110 President, South Coast Division 1994 182,092 199,383(9) 2,844 698 2,310 1993 177,285 177,706(9) -- -- 2,056
- ------------ (1) Amounts presented include cash compensation earned and received by executive officers as well as amounts earned but deferred at the election of those officers. (2) The amounts included in this column do not include the value of certain perquisites which for each named individual do not exceed the lower of $50,000 or 10% of their respective aggregate salary and bonus compensation for either of the years reported. (3) The amounts presented for certain officers include that portion of interest earned on deferred compensation accounts above 120% of the applicable federal rate. Mr. Harter and Mr. Mon also received payments to reimburse for their taxes relating to certain employee benefits provided by the Company as follows: Mr. Harter, $14,347 in 1995, $13,077 in 1994 and $11,714 in 1993; and Mr. Mon $7,342 in 1995, $5,706 in 1994 and $5,686 in 1993. (4) During 1994 and 1995, stock awards were issued to the named executives. The dollar value of the vested portion of these awards was based on the number of shares granted multiplied by the stock price. The stock price was determined by an outside appraisal as of the grant date in 1994 and based upon a recent stock transaction in 1995. For 1994, the number and dollar value of shares are as follows: Mr. Harter - 20,974 shares ($31,428); Mr. Mon - 13,743 shares ($20,593); Mr. Delva - 3,786 shares ($5,674); Mr. Baker - 1,759 shares ($2,638); and Mr. Cullumber - 1,863 shares ($2,792). For 1995, Mr. Delva received 942 shares with a dollar value of $1,716. (5) The number and dollar value of shares of restricted stock held on December 31, 1995 for Mr. Delva were 12,575 shares with a corresponding dollar value of $91,396. During 1995, after giving effect to the non-restricted portion of the stock award included in (4) above, Mr. Delva was issued 628 shares of restricted stock vesting equally over two years. There is no dividend component to any of these restricted shares. The dollar value per share of restricted stock held on December 31, 1995 was based on a $7.27 book value per share of common stock. Book value was used since no established market existed (FOOTNOTES CONTINUE ON NEXT PAGE) 38 for the restricted stock. At December 31, 1995, the book value was calculated by deducting the cumulative undeclared dividends on the Series A Preferred before any assumed conversion on the Series C Preferred and the cumulative undeclared dividends on Series C Preferred. Book value may not be indicative of the market value of the Company's common stock that would be achieved in an initial public offering. (6) Includes contributions to a defined contribution plan on behalf of each named officer. Additionally, in 1994 and 1995, the Company contributed $50,000 and $75,000, respectively, to a non-qualified deferred compensation plan in each of Mr. Harter's and Mr. Mon's name in accordance with their employment contracts. (7) In 1996, the Company terminated its existing employment agreements with Messrs. Harter and Mon and entered into new employment agreements with them which are applicable for 1996 and a specified number of years thereafter. See "Employment Contracts and Termination of Employment and Change- In-Control Arrangements" below. (8) Under Mr. Harter's and Mr. Mon's employment agreements as in effect through 1993, Mr. Harter and Mr. Mon were entitled to receive guaranteed bonuses of $350,000 and $300,000, respectively, relating to services performed in 1992 and 1993, payable on January 1, 1994 if they remained employed by the Company on that date. The amounts included in the table constitute the portion of the guaranteed bonuses attributable to 1993. (9) A portion of the bonus included in the table is payable over three years and is forfeited if the employee leaves the Company prior to the scheduled payment date. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS Messrs. Harter and Mon have employment agreements with the Company, effective January 1, 1996, which have terms of three years, subject to the right of the employee to extend the term for one additional year, in each case unless earlier terminated. The agreements provide for various benefits including a base salary of $450,000 for 1996, $475,000 for 1997, $500,000 for 1998 and, if applicable, $525,000 for 1999 for Mr. Harter and $400,000 for 1996, $425,000 for 1997, $450,000 for 1998 and, if applicable, $475,000 for 1999 for Mr. Mon. Messrs. Harter and Mon will also each receive annual deferred compensation of $75,000. The agreements provide that Messrs. Harter and Mon are entitled to bonuses ranging from 50% to over 150% of their respective base salaries if certain targeted levels of consolidated pretax income of the Company established by the Compensation Committee are met. Messrs. Harter and Mon will also be entitled to such other or additional bonuses as the Company's Board of Directors deems appropriate. At the end of Mr. Mon's employment agreement, if the Company and Mr. Mon do not enter into a new employment agreement, the Company will employ Mr. Mon as a consultant for a three-year period at an annual compensation of $150,000. Under each employment agreement, in the event of a termination of the employee's employment without cause, his Total Disability (as defined in the agreements) or the employee resigns for "good reason" (as defined in the agreements, which includes a resignation by the employee within nine months of, among other events, a "change in control" (as defined below)), the employee is entitled to receive, in addition to salary and bonuses accrued to the date of termination, all amounts payable under the agreement as though such termination, Total Disability or resignation for good reason had not occurred, in equal monthly installments through December, 1999. A "change in control" occurs under the agreements upon (i) approval by the stockholders of the Company of the dissolution or liquidation of the Company; (ii) approval by the stockholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities not a subsidiary of the Company, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned, directly or indirectly, by stockholders of the Company immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Company's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization, but including in such determination any securities of the other parties to such reorganization held by affiliates of the Company); (iii) approval by the stockholders of the Company of the sale, lease, conveyance or other disposition of all or substantially all of 39 the Company's business and/or assets to a person or entity which is not a wholly owned subsidiary of the Company; (iv) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a person who is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding shares of Common Stock of the Company at the time of the execution of the employment agreements (or an affiliate, successor, heir, descendent or related party of or to any such person), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 25% of the combined voting power of the Company's then outstanding securities entitled to then vote generally in the election of directors of the Company; or (v) a majority of the Board of Directors of the Company not being comprised of Continuing Directors. For purposes of this definition, "Continuing Directors" are persons who were (A) members of the Board of Directors of the Company on the date of the employment agreements or (B) nominated for election or elected to the Board of Directors of the Company with the affirmative vote of at least a majority of the directors who were Continuing Directors at the time of such nomination or election. INCENTIVE COMPENSATION PLAN The Company has established an incentive compensation plan for its corporate and divisional management personnel (the "Incentive Compensation Plan"). This plan generally provides for payments expressed as a percentage of a participant's base compensation upon achievement of pre-agreed financial and qualitative objectives. The bonus percentages are established annually by the Compensation Committee of the Board of Directors. Bonuses can be tiered depending upon individual, profit center and Company performance. Generally, performance criteria are based on achievements of annual budgets, return on equity and assets and, to a lesser degree, on subjective evaluations of performance and individual relative contribution to the Company's goals and objectives. A portion of any bonus over a specific amount will be paid out by the Company over a three-year period and is subject to forfeiture if the employee leaves the Company prior to the scheduled payment date. STOCK OPTION PLAN Prior to the closing of the Offering, the Company and its stockholders will adopt the Company's 1996 Stock Option and Award Plan (the "Plan"). The Plan provides a means to attract, motivate, retain and reward key employees of the Company and its subsidiaries and promote the success of the Company. A maximum of 790,000 shares of Common Stock (subject to certain anti-dilutive adjustments) may be issued pursuant to grants and awards under the Plan. The maximum number of shares that may be subject to all qualifying share-based awards, either individually or in the aggregate, that during any calendar year are granted under the Plan to any participant will not exceed 179,000 (subject to certain anti-dilutive adjustments). ADMINISTRATION AND ELIGIBILITY. The Plan will be administered by the Compensation Committee, each member of which must be a Disinterested Director, defined in the Plan as a member of the Board of Directors who was not, during the year prior to appointment to the Compensation Committee or during the period of service, granted or awarded equity securities pursuant to the Plan or any other plan, except as permitted by Rule 16b-3 under the Securities Exchange Act of 1934. The Plan empowers the Compensation Committee, among other things, to interpret the Plan, to make all determinations deemed necessary or advisable for the administration of the Plan and to award to officers and other key employees of Company and its subsidiaries ("Eligible Employees"), as selected by the Compensation Committee, options, including incentive stock options ("ISOs") as defined in the Internal Revenue Code (the "Code"), stock appreciation rights ("SARs"), shares of restricted stock, performance shares and other awards valued by reference to Common Stock, based on the performance of the participant, the performance of the Company or its Common Stock and/or such other factors as the Compensation Committee deems appropriate. The various types of awards under the Plan are collectively referred to as "Awards." It is expected that after the consummation of the Offering there will be approximately 50 officers and other employees eligible to participate in the Plan. 40 TRANSFERABILITY. Generally speaking, Awards under the Plan are not transferable other than by will or the laws of descent and distribution, are exercisable only by the participant, and may be paid only to the participant or the participant's beneficiary or representatives. However, the Compensation Committee may establish conditions and procedures under which exercise by and transfers and payments to certain third parties are permitted, to the extent permitted by law. OPTIONS. An option is the right to purchase shares of Common Stock at a future date at a specified price. The option price is generally the closing price for a share of Common Stock as reported on the New York Stock Exchange ("fair market value") on the date of grant, but may be a lesser amount if authorized by the Compensation Committee. The Plan authorizes the Compensation Committee to award options to purchase Common Stock at an exercise price which may be less than 100% of the fair market value of such stock at the time the option is granted, except in the case of ISOs. An option may be granted as an incentive stock option, as defined in the Code, or a nonqualified stock option. An ISO may not be granted to a person who, at the time the ISO is granted, owns more than 10% of the total combined voting power of all classes of stock of the Company and its subsidiaries unless the option price is at least 110% of the fair market value of shares of Common Stock subject to the option and such option by its terms is not exercisable after expiration of five years from the date such option is granted. The aggregate fair market value of shares of Common Stock (determined at the time the option is granted) for which ISOs may be first exercisable by an option holder during any calendar year under the Plan or any other plan of the Company or its subsidiaries may not exceed $100,000. A nonqualified stock option is not subject to any of these limitations. The Plan permits optionees, with certain exceptions, to pay the exercise price of options in cash, Common Stock (valued at its fair market value on the date of exercise), a combination thereof or, if an option award so provides, by delivering irrevocable instructions to a stockbroker to promptly deliver the exercise price to the Company upon exercise (i.e., a so-called "cashless exercise"). Cash received by the Company upon exercise will constitute general funds of the Company and shares of Common Stock received by the Company upon exercise will return to the status of authorized but unissued shares. CONSIDERATION FOR AWARDS. Typically, the only consideration received by the Company for the grant of an Award under the Plan will be the future services by the optionee (as contemplated by the vesting schedule or required by agreement), past services, or a combination thereof. SARS. The Plan authorizes the Compensation Committee to grant SARs independent of any other Award or concurrently (and in tandem) with the grant of options. An SAR granted in tandem with an option is only exercisable when and to the extent that the related option is exercisable. An SAR entitles the holder to receive upon exercise the excess of the fair market value of a specified number of shares of Common Stock at the time of exercise over the option price. This amount may be paid in Common Stock (valued at its fair market value on the date of exercise), cash or a combination thereof, as the Compensation Committee may determine. The option granted concurrently with the SAR must be cancelled to the extent that the appreciation right is exercised and the SAR must be cancelled to the extent the option is exercised. SARs limited to certain periods of time around a major event, such as a reorganization or change in control, may also be granted under the Plan. RESTRICTED STOCK. The Plan authorizes the Compensation Committee to grant restricted stock to Eligible Employees on such conditions and with such restricted periods as the Compensation Committee may designate. During the restricted period, stock certificates evidencing the restricted shares will be held by the Company or a third party designated by the Compensation Committee and the restricted shares may not be sold, assigned, transferred, pledged or otherwise encumbered. PERFORMANCE SHARE AWARDS. The Compensation Committee may, in its discretion, grant Performance Share Awards to Eligible Employees based upon such factors, which includes but is not limited to the contribution, responsibility and other compensation of the person, as the Compensation Committee deems relevant in light of the specific type and terms of the Award. The amount of cash or shares or other property that may be deliverable pursuant to these Awards will be based upon the degree of attainment over a 41 specified period of not more than ten years (a "performance cycle") as may be established by the Compensation Committee of such measures of the performance of the Company (or any part thereof) or the participant as may be established by the Compensation Committee. The Compensation Committee may provide for full or partial credit, prior to completion of a performance cycle or the attainment of the performance achievement specified in the Award, in the event of the participant's death, retirement, or disability, a Change in Control Event (as defined in the Plan) or in such other circumstances as the Compensation Committee may determine. SPECIAL PERFORMANCE-BASED SHARE AWARDS. In addition to awards granted under other provisions of the Plan, performance-based awards within the meaning of Section 162(m) of the Code (in addition to Options and SARs granted at option prices at above fair market value) and based on net earnings, cash flow, return on equity or on assets, or other business criteria ("Other Performance-Based Awards") relative to preestablished performance goals, may be granted under the Plan. The specific performance goals relative to these business criteria must be approved by the Compensation Committee in advance of applicable deadlines under the Code and while the performance relating to the goals remains substantially uncertain. The applicable performance measurement period may not be less than one nor more than ten years. Performance goals may be adjusted to mitigate the unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time the goals were set. The eligible class of persons for Other Performance-Based Awards is executive officers of the Company. In no event may grants of this type of Award in any fiscal year to any participant relate to more than 143,500 shares or $3.5 million if payable only in cash. Before any Other Performance-Based Award is paid, the Committee must certify that the material terms of the Other Performance-Based Award were satisfied. The Committee will have discretion to determine the restrictions or other limitations of the individual Awards. STOCK BONUSES. The Compensation Committee may grant a stock bonus to any Eligible Employee to reward exceptional or special services, contributions or achievements in the manner and on such terms and conditions (including any restrictions on such shares) as determined from time to time by the Compensation Committee. The number of shares so awarded shall be determined by the Compensation Committee and may be granted independently or in lieu of a cash bonus. OTHER AWARDS. The Plan provides that other awards, including units payable in cash or shares and measured by the value of shares, the performance of the participant or the performance of the Company, may be granted. Certain share based awards payable only in cash are not now considered derivative securities and will not reduce the number of shares available under the Plan. Some cash only awards, however, such as SARs, will reduce the numbers of shares available under the Plan. Subject to the provisions of the Plan, the Compensation Committee has the sole and complete authority to determine the employees to whom and the time or times at which such awards will be made, the number of shares awarded and other conditions of the awards. TERM AND EXERCISE PERIOD OF AWARDS. The Plan provides that awards may be granted for such terms as the Compensation Committee may determine but not greater than ten years after the date of the Award. The Plan does not impose any minimum vesting period, post-termination exercise period or pricing requirement, although in the ordinary course, customary restrictions will likely be imposed. Options and SARs will generally be exercisable during the holder's employment by the Company or by a related company and unearned restricted stock and other Awards will generally be forfeited upon the termination of the holder's employment prior to the end of the restricted or performance period. Generally speaking, options which have become exercisable prior to termination of employment will remain exercisable for three months thereafter (12 months in the case of retirement, disability or death). Such periods, however, cannot exceed the expiration dates of the Options. SARs have the same post-termination provisions as the Options to which they relate. The Committee has the authority to accelerate the exercisability of Options or (within the maximum ten-year term) extend the exercisability periods. TERMINATION, AMENDMENT AND ADJUSTMENT. The Plan may be terminated by the Compensation Committee or by the Board of Directors at any time. In addition, the Compensation Committee or the Board may amend the Plan from time to time, without the authorization or approval of the Company's stockholders, 42 unless that approval is required by law, agreement or the rules of any exchange upon which the stock of the Company is listed. No Award may be granted under the Plan after January 31, 2006, although Awards previously granted may thereafter be amended consistent with the terms of the Plan. Upon the occurrence of a Change in Control Event (as defined in the Plan), in addition to acceleration of vesting, an appropriate adjustment to the number and type of shares or other securities or property subject to an Award and the price thereof may be made in order to prevent dilution or enlargement of rights under Awards. Individual awards may be amended by the Compensation Committee in any manner consistent with the Plan, including amendments that effectively reprice options without changes to other terms. Amendments that adversely affect the holder of an Award, however, are subject to his or her consent. The Plan is not exclusive and does not limit the authority of the Board of Directors or the Compensation Committee to grant other awards, in stock or cash, or to authorize other compensation, under any other plan or authority. INITIAL GRANTS OF OPTIONS. The Company will grant certain options under the Plan at the consummation of the Offering. The options will include options to purchase 173,350 shares and 113,650 shares of Common Stock to be granted to Jack R. Harter, Chairman, President and Chief Executive Officer, and Antonio B. Mon, Vice Chairman and Chief Financial Officer, respectively. These options will have a term of ten years, will vest in full six months after issuance and will remain exercisable for the entire ten-year term, except in the case of termination for cause, in which event the options will terminate immediately, or upon the employee's resignation prior to June 30, 1996 for reasons other than "good reason" (as defined), in which event one-half of the options will terminate one year after such resignation. Options to purchase an aggregate of 287,000 additional shares are anticipated to be granted to other executive officers of the Company, including Messrs. Delva, Baker and Cullumber. These options are anticipated to have a term of ten years and to vest in equal annual installments over three years. All these options will have an exercise price equal to the initial price to the public in the Offering. 1996 EMPLOYEE STOCK PURCHASE PLAN Prior to the closing of the Offering, the Company and its stockholders will adopt the Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 50,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Code will be implemented by two six-month offering periods each year. The first offering period is expected to commence approximately July 1, 1996. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the Board. Initially, the Purchase Plan will be administered by the Compensation Committee. Employees (including officers and employee directors) of the Company, or of any majority owned subsidiary designated by the Board, are eligible to participate in the Purchase Plan if they are employed by the Company or any such subsidiary for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee's compensation (including payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, commissions and other cash compensation), at a price equal to the lower of 95% of the fair market value of the Company's Common Stock at the beginning of the offering period or at the date of purchase. Employees may end their participation in the offering at any time before 10 days prior to the end of the offering period, and participation ends automatically on termination of employment with the Company. The Purchase Plan provides that in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each right to purchase stock under the Purchase Plan will be assumed or an equivalent right substituted by the successor corporation unless the Board of Directors shortens the offering period so that employees' rights to purchase stock under the Purchase Plan are exercised prior to the merger or sale of assets. The Board of Directors has the power to amend or terminate the Purchase Plan as long as such action does not adversely affect any outstanding rights to purchase stock thereunder. If not terminated earlier, the Purchase Plan will have a term of ten years. 43 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is comprised of Messrs. Leibowitz and Kaplan. The compensation for Messrs. Harter and Mon was and will be set pursuant to their employment agreements. See "Employment Contracts and Termination of Employment and Change-In-Control Agreements" above. Prior to establishing the Compensation Committee, the compensation levels and individual objectives for bonuses under the Incentive Compensation Plan (see "Incentive Compensation Plan" above) for the other executive officers of the Company were set by Mr. Harter. CERTAIN TRANSACTIONS Mr. 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 totaling $160,000 for consulting services rendered in 1995. Concurrent with the consummation of the Offering, the Company also proposes to declare dividends on the Series A Preferred held by Mr. Harter, Mr. Mon and Warburg and on the Series C Preferred held by Warburg. See "Dividends." PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's outstanding Common Stock (assuming the redemption of the Series A Preferred, the payment of accrued dividends on the Series A Preferred and the conversion of the outstanding Series C Preferred and a portion of the accrued dividends thereon as described under "Dividends") as of March 31, 1996, by (i) all those known by the Company to be beneficial owners of more than 5% of the Company's outstanding Common Stock, (ii) each director of the Company and named executive officer of the Company and (iii) all directors and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING --------------------- NUMBER OF --------------------- NUMBER OF SHARES BEING NUMBER OF NAME SHARES PERCENT OFFERED SHARES PERCENT - ---------------------------------------------------- ---------- --------- ------------ ---------- --------- Warburg, Pincus Investors, L.P. (1) 466 Lexington Avenue New York, New York 10017........................... 7,807,117 79.8% -- 7,807,117 54.4% Home Capital Pty. Ltd. and Affiliates (2) c/o Mr. Mark A. Korda Arthur Andersen & Co. The Tower, Melbourne Central 360 Elizabeth Street, Melbourne 3000 GPO Box 5151AA Melbourne 3001...................... 874,358 8.9% 437,100 437,258(3) 3.0% Jack R. Harter and Antonio B. Mon, as Trustees under Voting Trust Agreement (4) c/o Pacific Greystone Corporation 6767 Forest Lawn Drive Los Angeles, CA 90068.............................. 1,106,328 11.3% -- -- -- Jack R. Harter (5).................................. 363,677(6) 3.7% -- 363,677 2.5% Antonio B. Mon (7).................................. 228,451(6) 2.3% -- 228,451 1.6% Steven G. Delva..................................... 31,438(8) * -- 31,438 * Richard D. Baker.................................... 36,009(8) * -- 36,009 * Denis G. Cullumber.................................. 39,052(8) * -- 39,052 * Sidney Lapidus (1).................................. -- -- -- -- --
- ------------ * Less than one percent (TABLE CONTINUES ON NEXT PAGE) 44
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING --------------------- NUMBER OF --------------------- NUMBER OF SHARES BEING NUMBER OF NAME SHARES PERCENT OFFERED SHARES PERCENT - ---------------------------------------------------- ---------- --------- ------------ ---------- --------- Reuben S. Leibowitz (1)............................. -- -- -- -- -- John D. Santoleri (1)............................... -- -- -- -- -- David Kaplan........................................ -- -- -- -- -- All directors and executive officers as a group (17 persons) (9)....................................... 846,530(8) 8.6% -- 846,530 5.9%
(1) The sole general partner of Warburg is Warburg, Pincus & Co., a New York general partnership ("WP"). Lionel I. Pincus is the managing partner of WP and may be deemed to control it. E.M. Warburg, Pincus & Company ("E.M. Warburg"), a New York general partnership that has the same general partners as WP, manages Warburg. WP has a 20% interest in the profits of Warburg and through its wholly owned subsidiary, Warburg Pincus, owns 1.13% of the limited partnership interests in Warburg. Sidney Lapidus, Reuben S. Leibowitz and John D. Santoleri, directors of the Company, are Managing Directors of Warburg Pincus and general partners of WP and E.M. Warburg. As such, Messrs. Lapidus, Leibowitz and Santoleri may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion of the stock beneficially owned by Warburg. Messrs. Lapidus, Leibowitz and Santoleri disclaim "beneficial ownership" of the shares owned by Warburg within the meaning of Rule 13d-3 under the Exchange Act. Upon the consummation of the Offering, Warburg will enter into an agreement with the Company pursuant to which Warburg will agree that, so long as it owns more than 50% of the aggregate voting power of the Company, Warburg will vote shares representing up to 50% of the aggregate voting power of the Company on any matter in its discretion and will vote any additional shares in the same proportion as the shares voted by the other stockholders on that matter. That agreement will provide that it may be terminated only with the approval of a majority of the directors of the Company who are not officers, employees or partners of Warburg or the Company and under certain other specified circumstances. (2) Includes 439,122 shares of common stock beneficially owned by Home Capital Pty. Ltd., 428,824 shares of common stock beneficially owned by Residential Developments Pty., Ltd., and 6,412 shares of common stock beneficially owned by Jennings Operations (USA) Inc., a wholly owned subsidiary of Home Capital Pty. Ltd. (collectively, "Jennings"). Mark A. Korda of Arthur Andersen & Co. has been appointed Receiver and Manager for Home Capital Pty. Ltd. and Residential Developments Pty., Ltd. under the bankruptcy law of Australia. In addition, Mr. Korda has been appointed as the sole director of Jennings Operations (USA) Inc. (3) These shares will be sold pursuant to the Underwriters' over-allotment option if it is exercised for at least 437,258 shares. (4) Includes shares subject to a Voting Trust Agreement, dated as of October 10, 1991, as amended (the "Voting Trust"), under which Jack R. Harter and Antonio B. Mon act as Voting Trustees and share voting power. The Voting Trust will be terminated upon consummation of the Offering. (5) All of these shares are subject to the Voting Trust. Does not include 148,252 shares of common stock held by irrevocable trusts for the benefit of his daughters, over which Mr. Harter has no dispositive power, however all of these shares are subject to the Voting Trust. See footnote (4). (6) Messrs. Harter and Mon may be deemed to be the beneficial owners of the shares held by the Voting Trust. (7) All of these shares are subject to the Voting Trust. Does not include 111,546 shares of common stock held by an irrevocable trust for the benefit of his children, over which Mr. Mon has no dispositive power, however all of these shares are subject to the Voting Trust. See footnote (4). (8) All of these shares are subject to the Voting Trust. See footnote (4). (9) See footnotes (1) through (7) above. 45 DESCRIPTION OF CAPITAL STOCK Upon the completion of the Offering, the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock and 5,000,000 shares of undesignated Preferred Stock after giving effect to the redemption of the Series A Preferred and the payment of the accrued dividends thereon and the conversion of the Series C Preferred and a portion of the accrued dividends thereon into Common Stock, which will occur upon the consummation of the Offering. COMMON STOCK As of March 31, 1996, there were 9,787,803 shares of Common Stock outstanding (as adjusted to reflect the issuance of Common Stock in payment of a portion of the accrued dividends on the Series A Preferred and the conversion of the outstanding Series C Preferred and a portion of the accrued dividends thereon into Common Stock as described under "Dividends"), held of record by six stockholders, and stock options to purchase an aggregate of 14,282 shares of Common Stock were also outstanding. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferential rights with respect to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividends." In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding Preferred Stock. The Common Stock has no preemptive or conversion rights or other subscription rights. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued upon completion of this offering will be, fully paid and non-assessable. PREFERRED STOCK The Board of Directors is authorized to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of the Company without further action of the stockholders. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS Amendments to the Company's Certificate of Incorporation will be effective upon the closing of the Offering, which, among other things, will establish a classified board (see "Management--Terms of Office of Directors and Officers") and will require that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by a consent in writing. In addition, the Certificate of Incorporation and Bylaws of the Company, as amended, will require that stockholders give advance notice to the Company's Secretary of any directorship nominations or other business to be brought by stockholders at any stockholders' meeting. The Certificate of Incorporation also will require the approval of 75% of the Company's voting stock to amend certain provisions of the Certificate of Incorporation. These provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. See "Management." SHAREHOLDERS' AGREEMENT AND REGISTRATION RIGHTS The Company and all of its stockholders have entered into a First Amended and Restated Shareholders' Agreement and Irrevocable Proxy, dated as of September 28, 1992, as amended (the "Shareholders' Agreement"). The Shareholders' Agreement provides, among other things, for the manner of election of directors, requirements for supermajority votes by the Board of Directors to take certain actions, certain preemptive rights of stockholders and the treatment of shares held by the management of the Company ("Management Shareholders"). Upon the consummation of this Offering, all of these provisions of the Shareholders' Agreement will terminate. 46 Subsequent to this Offering, the provisions of the Shareholders' Agreement with respect to a right of first refusal under certain circumstances in favor of the Company with respect to the Common Stock held by Jennings and certain registration rights of the parties to the Shareholders' Agreement will continue. After consummation of this Offering, the parties to the Shareholders' Agreement will hold 9,350,703 shares of Common Stock (assuming the payment of the accrued dividends on the Series A Preferred and the conversion of the Series C Preferred and a portion of the accrued dividends thereon as described under "Dividends"). If the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other securityholders (including for the account of Warburg as discussed below), the parties to the Shareholders' Agreement are entitled to include their shares of Common Stock in the registration statement, subject to certain conditions and limitations. This right to include shares of Common Stock will not apply to registration statements of the Company relating to certain stock option, purchase or incentive plans, any dividend reinvestment plan, or certain merger or exchange transactions. In addition, Warburg has the right at any time subsequent to the consummation of the Offering, to require the Company to register its shares of Common Stock under the Securities Act. Warburg is entitled to three (3) such requested registrations. The right of Warburg to sell securities immediately after the Offering is subject to the lock-up agreement restricting sale for 180 days after the date of this Prospectus. See "Shares Eligible For Future Sale" and "Underwriting." TRANSFER AGENT OR REGISTRAR The Transfer Agent and Registrar for the Common Stock is Bank of Boston. Its telephone number is (617) 575-2000. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 14,350,703 shares of Common Stock outstanding (assuming no exercise of any outstanding options and the payment of the accrued dividends on the Series A Preferred and the conversion of the Series C Preferred and a portion of the accrued dividends thereon as described under "Dividends"). The 5,000,000 shares sold in this Offering (5,675,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restriction under the Securities Act, except for shares held by an "affiliate" of the Company, as such term is defined under Rule 144 of the Securities Act. The remaining 9,350,703 shares (the "Restricted Shares") were issued and sold by the Company in private transactions and may be publicly sold only if registered under the Securities Act or sold in accordance with an applicable exemption from registration, such as Rule 144. All of the shares of Common Stock held by existing stockholders are subject to lock-up agreements (as described below) which restrict their sale prior to 180 days from the date of this Prospectus. A total of approximately 9,350,703 shares subject to these lock-up agreements will become eligible for sale beginning 180 days from the date of this Prospectus, or earlier in the discretion of Smith Barney Inc., upon expiration of these agreements, of which 8,913,445 shares may be sold in accordance with Rule 144 and 437,258 shares held by Jennings may be sold without restriction in reliance on Rule 144(k). Jennings has agreed with the Company that if all or any part of the 437,258 shares held by it are not purchased pursuant to the Underwriters' over-allotment option (the "Jennings Remaining Shares"), for a period of 180 days after the end of the 180-day lock-up period, Jennings will not offer, sell, contract to sell or otherwise dispose of more than one-half of the Jennings Remaining Shares in any 90-day period. In general, under Rule 144 as currently in effect, after this Offering (but subject to the lock-up agreements described below), a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares as to which two years have elapsed between the later of the date of acquisition of the securities from the Company or from an affiliate of the Company, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then-outstanding number of shares of Common Stock (143,507 shares immediately after this Offering) or the average weekly trading volume of the Common Stock on The New York Stock Exchange during the four calendar weeks preceding the sale. Sales under Rule 144 are subject to certain "manner of sale" provisions and notice requirements and to the availability of current public information about the Company. Rule 144(k) provides that a person who is not deemed to have been an "affiliate" during the 90 days preceding a sale, and who beneficially owns Restricted 47 Shares as to which three years have elapsed since the later of the date of acquisition of the security from the Company or from an affiliate of the Company, is entitled to sell the shares under Rule 144 without regard to the limitations described above. The Securities and Exchange Commission has proposed to reduce the Rule 144 holding periods. If enacted, these modifications will have a material effect on the timing of when shares of the Common Stock become eligible for resale. Holders of 9,350,703 shares of Common Stock after the Offering will also be entitled to certain registration rights with respect to shares of Common Stock. See "Description of Capital Stock--Shareholders' Agreement and Registration Rights." The Company, and its executive officers, directors and stockholders have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock of the Company or any securities convertible into, or exercisable or exchangeable for, any class of Common Stock of the Company, other than by the Company pursuant to its existing employee benefit plans. The Company is unable to estimate the number of shares that may be sold in the future by its existing shareholders or the effect, if any, that sales of shares by stockholders will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock by existing stockholders could adversely affect prevailing market prices. 48 UNDERWRITING Upon the terms and subject to the conditions stated in the Underwriting Agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company and the Selling Stockholders have agreed to sell to such Underwriter, the number of shares of Common Stock set forth opposite the name of such Underwriter.
NUMBER OF UNDERWRITER SHARES - ----------------------------------------------------------------------------------------------------- ---------- Smith Barney Inc..................................................................................... Morgan Stanley & Co. Incorporated.................................................................... Robertson, Stephens & Company LLC.................................................................... ---------- Total............................................................................................ 5,000,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc., Morgan Stanley & Co. Incorporated and Robertson, Stephens & Company LLC are acting as Representatives, propose to offer part of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the Offering, the public offering price and such concessions may be changed by the Underwriters. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm any shares to any accounts over which they exercise discretionary authority. The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 675,000 additional shares of Common Stock at the price to the public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the offering of the shares offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite each Underwriter's name in the preceding table bears to the total number of shares listed in such table. If the option is exercised, shares will be purchased first from the Selling Stockholders, up to an aggregate of 437,258 shares, and any remaining shares will be purchased from the Company. The Company, and its executive officers, directors and stockholders have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock of the Company or any securities convertible into, or exercisable or exchangeable for, any class of Common Stock of the Company, other than by the Company pursuant to its existing employee benefit plans. Prior to this Offering, there has not been any public market for the Common Stock of the Company. Consequently, the initial public offering price for the shares of Common Stock included in this Offering has been determined by negotiations between the Company and the Representatives. Among the factors considered in determining such price were the history of and prospects for the Company's business and the industry in which it competes, an assessment of the Company's management and the present state of the Company's development, the past and present revenues and earnings of the Company, the prospects for growth of the Company's revenues and earnings, the current state of the economy in the United States and 49 California and the current level of economic activity in the industry in which the Company competes and in related or comparable industries, and currently prevailing conditions in the securities markets, including current market valuations of publicly traded companies which are comparable to the Company. The Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by O'Melveny & Myers, Los Angeles, California. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles, California. EXPERTS The consolidated financial statements of the Company at December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Certain items are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits filed as a part hereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. The Company is currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended, except the proxy requirements, and files reports and other information with the Commission. The Registration Statement, including exhibits thereto, as well as the reports and other information filed by the Company with the Commission, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, NY 10048, and copies of all or any part thereof may be obtained from such office after payment of fees prescribed by the Commission. The Company will issue to its stockholders annual reports and unaudited quarterly reports for the first three quarters of each fiscal year. Annual reports will include audited financial statements and a report of its independent auditors with respect to the examination of such financial statements. 50 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditors............................................ F-2 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995............................................................ F-3 Consolidated Balance Sheets as of December 31, 1994 and 1995.............. F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993, 1994 and 1995......................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995...................................................... F-6 Notes to Consolidated Financial Statements................................ F-7 Consolidated Statements of Income for the three months ended March 31, 1995 and 1996 (unaudited)...................................... F-16 Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).............................................................. F-17 Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and 1996 (unaudited)...................................... F-18 Notes to Unaudited Consolidated Financial Statements...................... F-19 F-1 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, 1994 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Ernst & Young LLP Los Angeles, California January 24, 1996 F-2 PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Revenues.................................................... $ 172,830 $ 260,185 $ 293,921 Cost of sales............................................... (144,395) (215,437) (247,827) --------- --------- --------- Gross margin................................................ 28,435 44,748 46,094 Equity in pretax income of unconsolidated joint ventures.... 1,096 2,581 1,742 Selling, general and administrative expenses................ (19,521) (29,059) (31,468) Interest and other, net..................................... 32 388 1,162 --------- --------- --------- Pretax income............................................... 10,042 18,658 17,530 Provision for income taxes.................................. (3,966) -- (2,512) --------- --------- --------- Net income.................................................. $ 6,076 $ 18,658 $ 15,018 --------- --------- --------- --------- --------- ---------
See accompanying notes. F-3 PACIFIC GREYSTONE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, ------------------ 1994 1995 -------- -------- Cash and cash equivalents................................... $ 36,026 $ 41,254 Escrow proceeds receivable.................................. 799 8,040 Housing inventories......................................... 207,900 215,043 Deferred tax asset.......................................... 18,010 15,498 Other assets................................................ 12,444 10,135 -------- -------- Total assets............................................ $275,179 $289,970 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and other liabilities.................... $ 24,441 $ 26,738 Notes payable............................................. 14,899 12,337 Senior unsecured notes payable............................ 125,000 125,000 -------- -------- Total liabilities....................................... 164,340 164,075 Shareholders' equity: Series A cumulative senior preferred stock................ 44,747 44,747 Series C cumulative convertible preferred stock........... 20,000 20,000 Common stock, $.01 par value; 5,000,000 shares authorized, 4,081,413 shares issued and outstanding in 1994 and 1995..................................................... 41 41 Additional paid-in capital................................ 27,860 27,898 Retained earnings......................................... 18,191 33,209 -------- -------- Total shareholders' equity.............................. 110,839 125,895 -------- -------- Total liabilities and shareholders' equity............ $275,179 $289,970 -------- -------- -------- --------
See accompanying notes. F-4 PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
SERIES A SERIES B SERIES C CUMULATIVE CUMULATIVE CUMULATIVE RETAINED SENIOR CONVERTIBLE CONVERTIBLE ADDITIONAL EARNINGS PREFERRED PREFERRED PREFERRED COMMON PAID-IN DEFERRED (ACCUMULATED STOCK STOCK STOCK STOCK CAPITAL COMPENSATION DEFICIT) TOTAL ---------- ---------- ---------- ------ ---------- ------------ ------------ -------- Balance at December 31, 1992... $44,747 $ 25,592 $20,000 $15 $ 2,198 $(308) $(6,543) $ 85,701 Amortization of deferred compensation and retirement of common stock.................. -- -- -- -- (31) 163 -- 132 Net income for 1993............ -- -- -- -- -- -- 6,076 6,076 ---------- ---------- ---------- ------ ---------- ----- ------------ -------- Balance at December 31, 1993... 44,747 25,592 20,000 15 2,167 (145) (467) 91,909 Conversion of Series B cumulative convertible preferred stock............... -- (25,592) -- 25 25,567 -- -- -- Issuance of additional common stock......................... -- -- -- 1 126 -- -- 127 Amortization of deferred compensation.................. -- -- -- -- -- 145 -- 145 Net income for 1994............ -- -- -- -- -- -- 18,658 18,658 ---------- ---------- ---------- ------ ---------- ----- ------------ -------- Balance at December 31, 1994... 44,747 -- 20,000 41 27,860 -- 18,191 110,839 Repurchase and issuance of common stock.................. -- -- -- -- 38 -- -- 38 Net income for 1995............ -- -- -- -- -- -- 15,018 15,018 ---------- ---------- ---------- ------ ---------- ----- ------------ -------- Balance at December 31, 1995... $44,747 $ -- $20,000 $41 $27,898 $-- $33,209 $125,895 ---------- ---------- ---------- ------ ---------- ----- ------------ -------- ---------- ---------- ---------- ------ ---------- ----- ------------ --------
See accompanying notes. F-5 PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1993 1994 1995 -------- -------- -------- OPERATING ACTIVITIES: Net income.................................................. $ 6,076 $ 18,658 $ 15,018 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................. 641 978 764 Reduction of deferred tax asset valuation allowance....... -- (7,496) (4,500) Deferred portion of provision for income taxes............ 3,966 7,496 7,012 Equity in pretax income of unconsolidated joint ventures................................................. (1,096) (2,581) (1,742) Changes in operating assets and liabilities: Escrow proceeds receivable................................ (1,520) 721 (7,241) Housing inventories....................................... 8,364 (58,749) 1,996 Other assets.............................................. (491) (5,488) (1,185) Accounts payable and other liabilities.................... 2,114 5,843 2,297 -------- -------- -------- Net cash provided by (used in) operating activities......... 18,054 (40,618) 12,419 INVESTING ACTIVITIES: Distributions from (contributions to) unconsolidated joint ventures................................................... (1,226) 4,219 4,510 -------- -------- -------- Net cash provided by (used in) investing activities......... (1,226) 4,219 4,510 FINANCING ACTIVITIES: Proceeds from revolving credit facility..................... 50,610 5,573 36,000 Repayments of revolving credit facility..................... (72,277) (27,241) (39,000) Proceeds from notes payable................................. 52,384 25,600 5,113 Repayments of notes payable................................. (61,134) (83,493) (13,814) Proceeds from issuance of senior unsecured notes payable.... -- 125,000 -- -------- -------- -------- Net cash provided by (used in) financing activities......... (30,417) 45,439 (11,701) -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (13,589) 9,040 5,228 Cash and cash equivalents at beginning of year.............. 40,575 26,986 36,026 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 26,986 $ 36,026 $ 41,254 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Housing inventories acquired through seller financing....... $ 9,194 $ 12,973 $ 9,139 -------- -------- -------- -------- -------- --------
See accompanying notes. F-6 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, Nevada and Phoenix, Arizona. 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. On September 30, 1992, the Company acquired the California homebuilding operations of A-M Homes (the "AM Operations"). 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. 2. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and controlled joint venture. 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 to be cash equivalents. The Company estimates that the market value of these investments approximates their book value. HOUSING INVENTORIES Housing inventories are stated at the lower of cost or estimated net realizable value for each project. Estimated net realizable value is 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 incorporates a thorough assessment of the Company's liquidity and capital resources. For the years ended December 31, 1993, 1994 and 1995, cost of sales included approximately $865,000, $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 Statement of Financial Accounting Standard ("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. See Note 7. F-7 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE Historical per share data in accordance with Accounting Principles Board Opinion No. 15, "Earnings Per Share," is excluded from the Company's financial statements since such per share data is not indicative of the continuing capital structure of the Company. See Note 12. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which requires impairment losses to be recorded 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 the assets' carrying amount. The Company's adoption of SFAS No. 121, which is required in 1996, is not expected to have a material impact on the Company's consolidated financial statements. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. 3. HOUSING INVENTORIES As of December 31, 1994 and 1995, the finished homes and completed model portion of housing inventories was approximately $35,932,000 and $52,519,000, respectively. An analysis of interest incurred is as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1993 1994 1995 --------- ---------- ---------- (IN THOUSANDS) Interest incurred............................................................... $ 7,225 $ 14,716 $ 15,895 Less: interest capitalized...................................................... (6,788) (14,170) (15,761) --------- ---------- ---------- Net interest expense............................................................ $ 437 $ 546 $ 134 --------- ---------- ---------- --------- ---------- ---------- Interest paid................................................................... $ 7,590 $ 10,383 $ 16,006 --------- ---------- ---------- --------- ---------- ---------- Amortization of capitalized interest included in cost of sales.................. $ 4,424 $ 9,140 $ 14,926 --------- ---------- ---------- --------- ---------- ----------
F-8 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. 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 ASSETS
DECEMBER 31, -------------------- 1994 1995 --------- --------- (IN THOUSANDS) Cash and cash equivalents.................................................................... $ 8,391 $ 4,001 Housing inventories.......................................................................... 25,546 119 Other assets................................................................................. 647 338 --------- --------- Total assets............................................................................... $ 34,584 $ 4,458 --------- --------- --------- --------- LIABILITIES AND EQUITY Liabilities.................................................................................. $ 24,960 $ 1,920 Equity: The Company................................................................................ 3,048 280 Others..................................................................................... 6,576 2,258 --------- --------- Total liabilities and equity............................................................. $ 34,584 $ 4,458 --------- --------- --------- ---------
SUMMARY COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS) Revenues...................................................................... $ 33,435 $ 92,629 $ 43,689 Cost of sales................................................................. (31,058) (85,316) (38,915) ---------- ---------- ---------- Gross margin.................................................................. 2,377 7,313 4,774 Selling, general and administrative expenses.................................. (1,786) (3,571) (1,595) Interest and other, net....................................................... 38 145 78 ---------- ---------- ---------- Pretax income................................................................. $ 629 $ 3,887 $ 3,257 ---------- ---------- ---------- ---------- ---------- ---------- The Company's share of pretax income.......................................... $ 1,096 $ 2,581 $ 1,742 ---------- ---------- ---------- ---------- ---------- ----------
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. 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, 1993, 1994 and 1995 is approximately $1,421,000, $2,139,000 and $1,005,000, respectively. The Company guarantees, on an unsecured basis, certain debt of its joint ventures which is secured by land and improvements. At December 31, 1994 and 1995, approximately $7,370,000 and $325,000, respectively, was guaranteed by the Company. F-9 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, -------------------- 1994 1995 --------- --------- (IN THOUSANDS) Unsecured revolving credit facility......................................................... $ 3,000 $ -- Notes secured by trust deeds; interest payable at 8% to 10%................................. 7,767 10,287 Assessment bond liabilities; interest payable at 6.0% to 7.9%............................... 4,132 2,050 --------- --------- $ 14,899 $ 12,337 --------- --------- --------- ---------
Terms under the unsecured revolving credit facility (the "Facility") dated June 28, 1994 provide for a total commitment not to exceed $60,000,000. The Facility matures June 30, 1997 and includes a provision for a 12-month amortization of outstanding principal starting June 30, 1996. Interest is payable monthly at a bank reference rate plus 1%. 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 $57,000,000 and $60,000,000 available under the Facility for future use at December 31, 1994 and 1995, respectively. On July 24, 1995, the Company amended the Facility to allow the Company to select an interest rate based on the level of outstanding borrowings at either a bank reference rate plus 0.5% to 1% or the London Interbank Offered Rate plus 2% to 2.5%; substantially all other provisions in the Facility remain unchanged. Housing inventories having a carrying value of $17,493,000 and $25,478,000 at December 31, 1994 and 1995, 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: 1996, $3,415,000; 1997, $8,292,000; 1998 to 2000, $30,000 each year; and $540,000 thereafter. The Company's weighted average interest rate on short-term borrowings was 9.6% and 8.0% as of December 31, 1994 and 1995, respectively. 6. 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 $23,600,000 and $31,500,000 at December 31, 1994 and 1995, respectively. The Notes are fully and unconditionally guaranteed by the Company. F-10 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES Included in the table below is the provision for income taxes:
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- (IN THOUSANDS) Deferred tax expense: Federal......................................................................... $ (3,360) $ (6,360) $ (6,005) State........................................................................... (606) (1,136) (1,007) Reduction in valuation allowance.................................................. -- 7,496 4,500 --------- --------- --------- Provision for income taxes........................................................ $ (3,966) $ -- $ (2,512) --------- --------- --------- --------- --------- ---------
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 purchase of the AM Operations was structured to retain the original tax basis of the assets acquired which was approximately $79,000,000 greater than their fair market value. The significant components of the Company's deferred tax asset are as follows:
DECEMBER 31, -------------------- 1994 1995 --------- --------- (IN THOUSANDS) Remaining difference between assigned value and tax basis of AM Operations' assets, primarily housing inventories.............................................................. $ 11,106 $ 4,022 Net operating loss and capital loss carryforwards, tax effected............................. 7,320 8,911 Book accruals not deductible for tax purposes............................................... 3,120 2,315 Other temporary differences, primarily housing inventories.................................. 2,464 1,750 --------- --------- Deferred tax asset.......................................................................... 24,010 16,998 Valuation allowance......................................................................... (6,000) (1,500) --------- --------- Net deferred tax asset...................................................................... $ 18,010 $ 15,498 --------- --------- --------- ---------
At December 31, 1995, the Company had, for federal and California tax purposes, net operating loss carryforwards ("NOLs") totaling $21,319,000 and $9,606,000, respectively (expiring in the years 2006 through 2010 for federal and 1997 through 1999 for California). The Company intends to utilize the estimated tax benefit of the NOLs by offsetting future federal and California taxable income. At December 31, 1994 and 1995, the Company had no significant deferred tax liabilities. 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. At December 31, 1995, 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. F-11 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) The reconciliation of income tax attributable to continuing operations computed at the applicable statutory tax rates to income tax expense is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- (IN THOUSANDS) Tax at U.S. statutory rate........................................................ $ (3,414) $ (6,530) $ (6,135) State income taxes, net of federal tax benefit.................................... (623) (1,138) (1,007) Reduction in valuation allowance.................................................. -- 7,496 4,500 Other............................................................................. 71 172 130 --------- --------- --------- Total income tax expense.......................................................... $ (3,966) $ -- $ (2,512) --------- --------- --------- --------- --------- ---------
8. PREFERRED STOCK 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. Effective March 1, 1994, the dividend rate on the Series A cumulative senior preferred stock ("Series A Preferred") was increased from 10% to 11%. The Series A Preferred has a $.01 par value with 5,100,000 shares authorized and 4,474,706 shares issued and outstanding at December 31, 1993, 1994 and 1995. Dividends are compounded annually and are payable when declared by the Board of Directors. At December 31, 1993, 1994 and 1995, there were cumulative undeclared dividends on the outstanding shares of approximately $6,907,000, $12,503,000 and $18,801,000, respectively. The Series A Preferred may be redeemed in whole or in part at any time at the option of the Company at $10.00 per share plus accrued and undeclared dividends. Also effective March 1, 1994, the sinking fund requirement on the Series C cumulative convertible preferred stock ("Series C Preferred") was removed and the holders of the Series C Preferred were granted the option to convert the Series C Preferred, plus all accrued but unpaid dividends thereon, into common stock upon an initial public offering at a price equal to 80% of the price to the public in the initial public offering. The Series C Preferred has a $.01 par value with 2,000,000 shares authorized, issued and outstanding at December 31, 1993, 1994 and 1995. The Series C Preferred earns dividends at 12% of original issuance price per annum from the date of issuance, September 29, 1992. Dividends are compounded annually and are payable when declared by the Board of Directors. At December 31, 1993, 1994 and 1995, there were cumulative undeclared dividends on the outstanding shares of approximately $3,087,000, $5,857,000 and $8,960,000, respectively. The Series C Preferred may be redeemed in whole or in part at any time at the option of the Company at $10.00 per share plus accrued and undeclared dividends. Dividends on the Series A Preferred and Series C Preferred are cumulative and must be paid in the event of liquidation and before any distribution to holders of common stock. 9. 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: 1996, $1,172,000; 1997, $967,000; 1998, $106,000; and 1999, $25,000. Total rent expense for the years ended December 31, 1993, 1994, and 1995, was $957,000, $969,000 and $877,000, respectively. F-12 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) At December 31, 1994 and 1995, the Company has outstanding performance bonds with an estimated potential obligation of $19,260,000 and $20,117,000, respectively, to the Company 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 totaling $160,000 for consulting services rendered in 1995. Commitments and contingencies include the usual obligations of housing producers 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. 10. 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. GREYSTONE HOMES, INC. SUMMARY CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------- 1994 1995 ---------- ---------- (IN THOUSANDS) Cash and cash equivalents................................................................. $ 26,579 $ 31,973 Escrow proceeds receivable................................................................ 799 8,040 Housing inventories....................................................................... 207,900 215,043 Deferred tax asset........................................................................ 18,010 15,498 Other assets.............................................................................. 12,123 9,668 ---------- ---------- Total assets.......................................................................... $ 265,411 $ 280,222 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Accounts payable and other liabilities.................................................. $ 18,252 $ 21,200 Intercompany payable to the Company..................................................... 2,298 2,314 Notes payable........................................................................... 14,899 12,337 Senior unsecured notes payable.......................................................... 125,000 125,000 ---------- ---------- Total liabilities..................................................................... 160,449 160,851 Shareholder's equity...................................................................... 104,962 119,371 ---------- ---------- Total liabilities and shareholder's equity............................................ $ 265,411 $ 280,222 ---------- ---------- ---------- ----------
F-13 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC. (CONTINUED) GREYSTONE HOMES, INC. SUMMARY CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- (IN THOUSANDS) Revenues................................................................... $ 172,830 $ 259,786 $ 292,538 Cost of sales.............................................................. (144,395) (215,437) (248,026) ----------- ----------- ----------- Gross margin............................................................... 28,435 44,349 44,512 Equity in pretax income of unconsolidated joint ventures................... 1,096 2,581 1,742 Selling, general and administrative expenses............................... (19,365) (28,329) (30,135) Interest and other, net.................................................... (218) 150 802 ----------- ----------- ----------- Pretax income.............................................................. 9,948 18,751 16,921 Provision for income taxes................................................. (3,966) -- (2,512) ----------- ----------- ----------- Net income................................................................. $ 5,982 $ 18,751 $ 14,409 ----------- ----------- ----------- ----------- ----------- -----------
Effective February 1, 1994, the Company transferred the stock of HLDC Acquisition Corporation, a wholly owned subsidiary, to Greystone. In conjunction with the transfer of stock, the Company contributed the intercompany receivable due from Greystone and certain assets and liabilities to Greystone. 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. 11. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA Unaudited quarterly financial data for the years ended December 31, 1994 and 1995 is summarized as follows:
1994 FIRST SECOND THIRD FOURTH - --------------------------------------------------------------------- --------- --------- --------- ---------- (IN THOUSANDS) Revenues............................................................. $ 46,186 $ 59,696 $ 73,869 $ 80,434 Gross margin......................................................... 7,254 9,910 13,950 13,634 Pretax income........................................................ 1,870 4,150 7,348 5,290 Net income........................................................... 1,103 2,810 9,455 5,290
1995 - --------------------------------------------------------------------- Revenues............................................................. $ 34,733 $ 62,283 $ 77,595 $ 119,310 Gross margin......................................................... 5,464 8,196 12,535 19,899 Pretax income........................................................ 524 2,715 4,200 10,091 Net income........................................................... 524 5,919 2,520 6,055
F-14 PACIFIC GREYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SUBSEQUENT EVENTS The Company intends to file in February 1996 a registration statement on Form S-1 with the Securities and Exchange Commission for the issuance of common stock (the "Offering"). In connection with the Offering, the Company is expected to: (a) redeem the Series A Preferred with the net proceeds of the Offering; (b) declare and pay a portion of the accrued dividends on the Series A Preferred through the issuance of common stock; (c) convert all the outstanding shares of the Series C Preferred and a portion of the accrued dividends into common stock and (d) adjust the weighted average number of common shares outstanding for a stock split. F-15 PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS - UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1995 1996 ---------- ---------- Revenues.................................................................................. $ 34,733 $ 63,535 Cost of sales............................................................................. (29,269) (51,840) ---------- ---------- Gross margin.............................................................................. 5,464 11,695 Equity in pretax income (loss) of unconsolidated joint ventures........................... 659 (148) Selling, general and administrative expenses.............................................. (5,970) (8,502) Interest and other, net................................................................... 371 159 ---------- ---------- Pretax income............................................................................. 524 3,204 Provision for income taxes................................................................ -- (1,307) ---------- ---------- Net income................................................................................ $ 524 $ 1,897 ---------- ---------- ---------- ----------
See accompanying notes. F-16 PACIFIC GREYSTONE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, 1995 ------------ MARCH 31, 1996 ----------- (UNAUDITED) Cash and cash equivalents............................................................. $ 41,254 $ 20,309 Escrow proceeds receivable............................................................ 8,040 5,238 Housing inventories................................................................... 215,043 246,780 Deferred tax asset.................................................................... 15,498 14,416 Other assets.......................................................................... 10,135 9,321 ------------ ----------- Total assets...................................................................... $ 289,970 $ 296,064 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and other liabilities.............................................. $ 26,738 $ 20,871 Notes payable....................................................................... 12,337 22,401 Senior unsecured notes payable...................................................... 125,000 125,000 ------------ ----------- Total liabilities................................................................. 164,075 168,272 Shareholders' equity: Series A cumulative senior preferred stock.......................................... 44,747 44,747 Series C cumulative convertible preferred stock..................................... 20,000 20,000 Common stock, $.01 par value; 5,000,000 shares authorized, 4,081,413 shares issued and outstanding in 1995 and 1996................................................... 41 41 Additional paid-in capital.......................................................... 27,898 27,898 Retained earnings................................................................... 33,209 35,106 ------------ ----------- Total shareholders' equity........................................................ 125,895 127,792 ------------ ----------- Total liabilities and shareholders' equity...................................... $ 289,970 $ 296,064 ------------ ----------- ------------ -----------
See accompanying notes. F-17 PACIFIC GREYSTONE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS -- UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1995 1996 ---------- ---------- OPERATING ACTIVITIES: Net income................................................................................ $ 524 $ 1,897 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization........................................................... 170 208 Reduction of deferred tax asset valuation allowance..................................... (210) -- Deferred portion of provision for income taxes.......................................... 210 1,082 Equity in pretax loss (income) of unconsolidated joint ventures......................... (659) 148 Changes in operating assets and liabilities: Escrow proceeds receivable............................................................ (1,550) 2,802 Housing inventories................................................................... (10,366) (30,286) Other assets.......................................................................... (334) 17 Accounts payable and accrued liabilities.............................................. (7,920) (5,867) ---------- ---------- Net cash used in operating activities..................................................... (20,135) (29,999) INVESTING ACTIVITIES: Distributions from unconsolidated joint ventures.......................................... 1,376 441 ---------- ---------- Net cash provided by investing activities................................................. 1,376 441 FINANCING ACTIVITIES: Proceeds from revolving credit facility................................................... 16,000 10,000 Proceeds from notes payable............................................................... 1,254 -- Repayments of notes payable............................................................... (929) (1,387) ---------- ---------- Net cash provided by financing activities................................................. 16,325 8,613 ---------- ---------- Net decrease in cash and cash equivalents................................................. (2,434) (20,945) Cash and cash equivalents at beginning of period.......................................... 36,026 41,254 ---------- ---------- Cash and cash equivalents at end of period................................................ $ 33,592 $ 20,309 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................................................. $ 7,348 $ 7,303 ---------- ---------- ---------- ---------- Income taxes paid......................................................................... $ -- $ 75 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Housing inventories acquired through seller financing..................................... $ -- $ 1,451 ---------- ---------- ---------- ----------
See accompanying notes. F-18 PACIFIC GREYSTONE CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company 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. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included elsewhere in this Prospectus. In the opinion of the Company's management, the accompanying consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the Company's consolidated financial position as of March 31, 1996 and the results of its consolidated operations for the three months ended March 31, 1995 and 1996 and its consolidated cash flows for the three months ended March 31, 1995 and 1996. Certain reclassifications have been made to the 1995 financial information to conform to the current period presentation. The consolidated results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year. 2. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121 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. 3. PER SHARE DATA On February 15, 1996, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for the issuance of common stock (the "Offering"). In connection with the Offering, the Company is expected to: (a) redeem the Series A Cumulative Senior Preferred ("Series A Preferred") using proceeds from the Offering; (b) declare and pay a portion of the accrued dividends on the Series A Preferred through the issuance of common stock; (c) convert all the outstanding shares of the Series C Cumulative Convertible Preferred ("Series C Preferred") and a portion of accrued dividends into common stock and (d) adjust the weighted average number of common shares outstanding for a stock split. Accordingly, historical per share data in accordance with Accounting Principles Board Opinion No. 15, "Earnings Per Share," is excluded from the Company's financial statements since such per share data is not indicative of the continuing capital structure of the Company. 4. HOUSING INVENTORIES As of December 31, 1995 and March 31, 1996, the finished homes and completed model portion of housing inventories was $52,519,000 and $63,045,000, respectively. 5. UNSECURED REVOLVING CREDIT FACILITY On April 10, 1996, the unsecured revolving credit facility (the "Facility") was amended, increasing the total commitment to $100,000,000. This amendment extends the maturity date to 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. F-19 PACIFIC GREYSTONE CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC. Summarized consolidated financial information for Greystone Homes, Inc. ("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. GREYSTONE HOMES, INC. SUMMARY CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, MARCH 31, 1995 1996 ------------ ---------- (IN THOUSANDS) Cash and cash equivalents.............................................................. $ 31,973 $ 12,729 Escrow proceeds receivable............................................................. 8,040 5,238 Housing inventories.................................................................... 215,043 246,780 Deferred tax asset..................................................................... 15,498 14,416 Other assets........................................................................... 9,668 8,865 ------------ ---------- Total assets....................................................................... $ 280,222 $ 288,028 ------------ ---------- ------------ ---------- LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Accounts payable and other liabilities............................................... $ 21,200 $ 16,593 Intercompany payable to the Company.................................................. 2,314 2,755 Notes payable........................................................................ 12,337 22,401 Senior unsecured notes payable....................................................... 125,000 125,000 ------------ ---------- Total liabilities.................................................................. 160,851 166,749 Shareholder's equity................................................................... 119,371 121,279 ------------ ---------- Total liabilities and shareholder's equity......................................... $ 280,222 $ 288,028 ------------ ---------- ------------ ----------
F-20 PACIFIC GREYSTONE CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC. (CONTINUED) GREYSTONE HOMES, INC. SUMMARY CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, ---------------------- 1995 1996 ---------- ---------- (IN THOUSANDS) Revenues.................................................................................. $ 34,596 $ 63,220 Cost of sales............................................................................. (29,269) (51,840) ---------- ---------- Gross margin.............................................................................. 5,327 11,380 Equity in pretax income (loss) of unconsolidated joint ventures........................... 659 (148) Selling, general and administrative expenses.............................................. (5,726) (8,164) Interest and other, net................................................................... 272 147 ---------- ---------- Pretax income............................................................................. 532 3,215 Provision for income taxes................................................................ -- (1,307) ---------- ---------- Net income................................................................................ $ 532 $ 1,908 ---------- ---------- ---------- ----------
Greystone is a wholly owned subsidiary of the Company and is the obligor on the Senior Unsecured Notes Payable (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. F-21 MAP OF CALIFORNIA, NEVADA AND ARIZONA - - NORTHERN CALIFORNIA - SOUTHERN CALIFORNIA - ARIZONA SAN MATEO LOS ANGELES PHOENIX CONTRA COSTA ORANGE - ARIZONA ALAMEDA SAN BERNARDINO-RIVERSIDE LAS VEGAS SANTA CLARA SAN DIEGO SACRAMENTO VENTURA SAN JOAQUIN
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. -------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary............................. 3 Risk Factors................................... 8 Company Formation and Organization............. 11 Use of Proceeds................................ 12 Dividends...................................... 12 Capitalization................................. 13 Dilution....................................... 14 Selected Consolidated Financial and Operating Data......................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 Business....................................... 25 Management..................................... 34 Certain Transactions........................... 44 Principal and Selling Stockholders............. 44 Description of Capital Stock................... 46 Shares Eligible for Future Sale................ 47 Underwriting................................... 49 Legal Matters.................................. 50 Experts........................................ 50 Additional Information......................... 50 Index to Consolidated Financial Statements..... F-1
-------------- UNTIL , 1996 (25 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 5,000,000 SHARES [LOGO] PACIFIC GREYSTONE CORPORATION COMMON STOCK --------- PROSPECTUS , 1996 --------- SMITH BARNEY INC. MORGAN STANLEY & CO. INCORPORATED ROBERTSON, STEPHENS & COMPANY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD fee.
AMOUNT TO BE PAID --------- SEC registration fee................................................. $ 31,311 NASD fee............................................................. 9,580 NYSE fee............................................................. 124,814 Printing and engraving expenses...................................... 100,000 Legal fees and expenses.............................................. 125,000 Accounting fees and expenses......................................... 75,000 Blue Sky qualification fees and expenses............................. 35,000 Transfer Agent and Registrar fees.................................... 5,000 Miscellaneous fees and expenses...................................... 19,295 --------- Total............................................................ $ 525,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Certificate of Incorporation of the Company contains a provision eliminating the personal liability of the directors to the Company or its stockholders to the fullest extent set forth in Section 102(b)(7) of the Delaware General Corporation Law. The Bylaws of the Company provide for indemnification of directors, officers, employees and agents of the Company consistent with the provisions of Section 145 of the Delaware General Corporation Law. Reference is also made to Section 9 of the Underwriting Agreement, contained in Exhibit 1 hereto, indemnifying officers and directors of the Company against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (BEFORE STOCK SPLIT) In March 1994, an aggregate of 2,559,260 shares of Common Stock were issued upon the conversion of shares of Series B Preferred Stock of the Company. These shares were issued in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). In March 1994, a wholly owned subsidiary of the Company sold $125 million aggregate principal amount of 10 3/4% Notes due 2004 guaranteed by the Company. These securities were initially sold to Morgan Stanley & Co. Incorporated in a private placement pursuant to Section 4(2) of the Securities Act. Resales of such securities were limited to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) and certain institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act). In April 1994, the Company issued an aggregate of 57,693 shares of Common Stock to executive employees of the Company in consideration of $.01 per share and services rendered to the Company. These shares were issued in a private placement pursuant to Section 4(2) of the Securities Act. In August and November 1995, an aggregate of 23,936 shares of Common Stock were issued to executive employees of the Company in consideration of $.01 per share and services rendered to the Company. These shares were issued in a private placement pursuant to Section 4(2) of the Securities Act. S-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - ------------ ---------------------------------------------------------------------------------------------------- 1 Form of Underwriting Agreement *3.1 Certificate of Incorporation, as amended, of the Company *3.2 Bylaws of the Company 3.3 Form of Restated Certificate of Incorporation of the Company to be effective upon consummation of the Offering +3.4 Form of amendments to the Bylaws of the Company to be effective upon consummation of the Offering 4.1 Specimen of Common Stock Certificate **4.2 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. 4.3 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 5 Opinion of O'Melveny & Myers regarding the legality of the Common Stock to be issued *9.1 Voting Trust Agreement, dated as of October 10, 1991, as amended September 29, 1992 ***9.2 Amendment to the Voting Trust Agreement, dated November 3, 1995 9.3 Form of Termination of Voting Trust Agreement. *10.1 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 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 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 Employment Agreement, dated as of January 1, 1996, between the Company and Jack R. Harter ***10.5 Employment Agreement, dated as of January 1, 1996, between the Company and Antonio B. Mon **10.6 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 ****10.7 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 Amendment No. 1 to the First Amended and Restated Shareholders' Agreement and Irrevocable Proxy ****10.9 1995 Eligible Directors' Stock Option Plan 10.10 Form of Agreement between Pacific Greystone Corporation and Warburg, Pincus Investors, L.P., to be effective upon consummation of the Offering.
S-2
NUMBER DESCRIPTION - ------------ ---------------------------------------------------------------------------------------------------- 10.11 Form of Amended and Restated 1995 Eligible Directors' Stock Option Plan to be effective upon consummation of the Offering 10.12 Form of 1996 Employee Stock Option and Award Plan 10.13 Form of 1996 Employee Stock Purchase Plan *****10.14 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. *****10.15 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. ***21 List of Subsidiaries 23.1 Consent of Independent Auditors 23.2 Consent of O'Melveny & Myers (included in Exhibit 5) +24 Power of Attorney
- ------------ + Previously filed. * Filed as an exhibit to the Company's Registration Statement No. 33-76628 on Form S-4 and incorporated herein by reference. ** 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. *** Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. **** 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. ***** 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. (b) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Commission are provided in the Notes to the Consolidated Financial Statements included elsewhere in this Registration Statement or are not required under the applicable instructions or are inapplicable and therefore have been omitted. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. S-3 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. S-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California on this 20th day of May, 1996. PACIFIC GREYSTONE CORPORATION By: JACK R. HARTER ----------------------------------- Jack R. Harter CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE - ------------------------------------------------------ ---------------------------------------- --------------- JACK R. HARTER ------------------------------------------- Chairman, President and Chief Executive May 20, 1996 Jack R. Harter Officer (Principal Executive Officer) * ANTONIO B. MON ------------------------------------------- Vice Chairman and Chief Financial May 20, 1996 Antonio B. Mon Officer (Principal Financial Officer) * BRUCE E. GROSS ------------------------------------------- Vice President and Controller (Principal May 20, 1996 Bruce E. Gross Accounting Officer) * SIDNEY LAPIDUS ------------------------------------------- Director May 20, 1996 Sidney Lapidus * REUBEN S. LEIBOWITZ ------------------------------------------- Director May 20, 1996 Reuben S. Leibowitz * JOHN D. SANTOLERI ------------------------------------------- Director May 20, 1996 John D. Santoleri * DAVID KAPLAN ------------------------------------------- Director May 20, 1996 David Kaplan * JACK R. HARTER ------------------------------------------- Jack R. Harter ATTORNEY-IN-FACT
S-5 EXHIBIT INDEX
SEQUENTIALLY NUMBERED NUMBER DESCRIPTION PAGES - ------------ -------------------------------------------------------------------------------------- ------------------- 1 Form of Underwriting Agreement........................................................ *3.1 Certificate of Incorporation, as amended, of the Company *3.2 Bylaws of the Company 3.3 Form of Restated Certificate of Incorporation of the Company to be effective upon consummation of the Offering.......................................................... +3.4 Form of amendments to the Bylaws of the Company to be effective upon consummation of the Offering 4.1 Specimen of Common Stock Certificate.................................................. **4.2 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. 4.3 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...................................... 5 Opinion of O'Melveny & Myers regarding the legality of the Common Stock to be issued................................................................................ *9.1 Voting Trust Agreement, dated as of October 10, 1991, as amended September 29, 1992 ***9.2 Amendment to the Voting Trust Agreement, dated November 3, 1995 9.3 Form of Termination of Voting Trust Agreement *10.1 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 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 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 Employment Agreement, dated as of January 1, 1996, between the Company and Jack R. Harter ***10.5 Employment Agreement, dated as of January 1, 1996, between the Company and Antonio B. Mon **10.6 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 ****10.7 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 Amendment No. 1 to the First Amended and Restated Shareholders' Agreement and Irrevocable Proxy ****10.9 1995 Eligible Directors' Stock Option Plan
SEQUENTIALLY NUMBERED NUMBER DESCRIPTION PAGES - ------------ -------------------------------------------------------------------------------------- ------------------- 10.10 Form of Agreement between Pacific Greystone Corporation and Warburg, Pincus Investors, L.P., to be effective upon consummation of the Offering. 10.11 Form of Amended and Restated 1995 Eligible Directors' Stock Option Plan to be effective upon consummation of the Offering........................................... 10.12 Form of 1996 Employee Stock Option and Award Plan..................................... 10.13 Form of 1996 Employee Stock Purchase Plan............................................. *****10.14 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. *****10.15 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. ***21 List of Subsidiaries 23.1 Consent of Independent Auditors....................................................... 23.2 Consent of O'Melveny & Myers (included in Exhibit 5).................................. +24 Power of Attorney
- ------------ + Previously filed. * Filed as an exhibit to the Company's Registration Statement No. 33-76628 on Form S-4 and incorporated herein by reference. ** 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. *** Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. **** 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. ***** 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. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 5,000,000 Shares PACIFIC GREYSTONE CORPORATION Common Stock UNDERWRITING AGREEMENT June __, 1996 SMITH BARNEY INC. MORGAN STANLEY & CO. INCORPORATED ROBERTSON, STEPHENS & COMPANY LLC As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Gentlemen: Pacific Greystone Corporation, a Delaware corporation (the "Company"), proposes to issue and sell an aggregate of 4,562,900 shares of its common stock, $0.01 par value per share, to the several Underwriters named in Schedule II hereto (the "Underwriters") and the persons named in Part A of Schedule I hereto (the "Selling Stockholders") propose to sell to the several Underwriters an aggregate of 437,100 shares of Common Stock of the Company. The Company and the Selling Stockholders are hereinafter sometimes referred to as the "Sellers." The Company's common stock, $0.01 par value, is hereinafter referred to as the "Common Stock" and the 4,562,900 shares of Common Stock to be issued and sold to the Underwriters by the Company and the 437,100 shares of Common Stock to be sold to the Underwriters by the Selling Stockholders are hereinafter referred to as the "Firm Shares." The Company and the Selling Stockholders listed in Part B of Schedule I hereto also propose to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional 675,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares." Prior to the consummation of the sale of the Shares as contemplated by this Agreement, the Company intends to provide notice of the redemption of and payment of accrued dividends on the Company's Series A Cumulative Senior Preferred Stock (the "Series A Preferred"). The redemption of the Series A Preferred and the payment of accrued dividends thereon shall occur simultaneously with the closing of the offering contemplated by this Agreement. An aggregate of 4,474,706 shares of the Series A Preferred Stock are outstanding as of the date of this 1 Agreement, 4,405,606 shares of which are owned by Warburg Pincus Investors, L.P. ("Warburg Pincus"). Simultaneous with the redemption of the Series A Preferred Stock and the payment of accrued dividends thereon, the Company also intends to effect the conversion of all of the outstanding shares of the Company's Series C Senior Preferred Stock (the "Series C Preferred") and the payment of all accrued dividends thereon. The redemption of the Series A Preferred, the conversion of the Series C Preferred and the other transactions contemplated in connection therewith are described in full in the Prospectus (as defined below) in the section entitled "Dividends" and are herein referred to collectively as the "Preferred Stock Transactions." The Company and the Selling Stockholders wish to confirm their respective agreements with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-1 under the Act (the "registration statement"), including a prospectus subject to completion relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective, or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. 2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $_____ per Share (the "purchase price per share"), the number of Firm Shares which bears the same proportion to the aggregate number of Firm Shares to be issued and sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or 2 such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholders. Subject to such adjustments as you may determine in order to avoid fractional shares, each Selling Stockholder agrees, subject to all the terms and conditions set forth herein, to sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, each Underwriter, severally and not jointly, agrees to purchase from each Selling Stockholder at the purchase price per share that number of Firm Shares which bears the same proportion to the number of Firm Shares set forth opposite the name of such Selling Stockholder in Schedule I hereto as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholders. The Company and the Selling Stockholders listed in Part B of Schedule I hereto also agree, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company and the Selling Stockholders listed in Part B of Schedule I hereto, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of 237,742 Additional Shares from the Company and up to an aggregate of 437,258 shares from the Selling Stockholders listed in Part B of Schedule I hereto (the maximum number of Additional Shares which each of them agrees to sell upon the exercise by the Underwriters of the over-allotment option is set forth opposite their respective names in Part B of Schedule I). Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The number of Additional Shares which the Underwriters elect to purchase upon any exercise of the over-allotment option shall be provided first by each Selling Stockholder who has agreed to sell Additional Shares in proportion to the respective maximum numbers of Additional Shares which the Company and each such Selling Stockholder has agreed to sell and then by the Company. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase first from each Selling Stockholder who has agreed to sell Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) the number of Additional Shares which bears the same proportion to the number of Additional Shares to be sold by each Selling Stockholder who has agreed to sell Additional Shares as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Selling Stockholders and then from the Company the number of Additional Shares which bears the same proportion to the number of Additional Shares to be sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares 3 increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company. Certificates in transferable form for the Shares (including any Additional Shares) which each of the Selling Stockholders agrees to sell pursuant to this Agreement have been placed in custody with Bank of Boston (the "Custodian") for delivery under this Agreement pursuant to a Custody Agreement and Power of Attorney (the "Custody Agreement") executed by each of the Selling Stockholders appointing Jack R. Harter and Antonio B. Mon as agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling Stockholder agrees that (i) the Shares represented by the certificates held in custody pursuant to the Custody Agreement are subject to the interests of the Underwriters, the Company and each other Selling Stockholder, (ii) the arrangements made by the Selling Stockholders for such custody are, except as specifically provided in the Custody Agreement, irrevocable and (iii) the obligations of the Selling Stockholders hereunder and under the Custody Agreement shall not be terminated by any act of such Selling Stockholder or by operation of law, or the occurrence of any other event. If any Selling Stockholder shall be incapacitated or if any other event shall occur before the delivery of the Shares hereunder, certificates for the Shares of such Selling Stockholder shall be delivered to the Underwriters by the Attorneys-in-Fact in accordance with the terms and conditions of this Agreement and the Custody Agreement as if such incapacity or other event had not occurred, regardless of whether or not the Attorneys-in-Fact or any Underwriter shall have received notice of such incapacity or other event. Each Attorney-in-Fact is authorized, on behalf of each of the Selling Stockholders, to execute this Agreement and any other documents necessary or desirable in connection with the sale of the Shares to be sold hereunder by such Selling Stockholder, to make delivery of the certificates for such Shares, to receive the proceeds of the sale of such Shares, to give receipts for such proceeds, to pay therefrom any expenses to be borne by such Selling Stockholder in connection with the sale and public offering of such Shares, to distribute the balance thereof to such Selling Stockholder, and to take such other action as may be necessary or desirable in connection with the transactions contemplated by this Agreement. Each Attorney-in-Fact agrees to perform his duties under the Custody Agreement. 3. TERMS OF PUBLIC OFFERING. The Sellers have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York City time, on June __, 1996 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement among you, the Company and the Attorneys-in-Fact. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Smith Barney Inc. at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no 4 event be earlier than the Closing Date nor earlier than three nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company and the Attorneys-in-Fact of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement among you, the Company and the Attorneys-in-Fact. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor by certified or official bank check or checks payable in New York Clearing House (next-day) funds to the order of the Company and the Attorneys- in-Fact. 5. AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, 5 the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, four signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request. (d) The Company will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto, and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, the 6 Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. (i) During the period of five years hereafter, the Company will furnish to you as soon as available, a copy of each report of the Company mailed to stockholders or filed with the Commission. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 12 hereof or by notice given by you terminating this Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company or the Selling Stockholders to comply with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all out-of-pocket expenses (including reasonable fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder substantially in accordance with the description set forth in the Prospectus. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) Except as provided in this Agreement, the Company will not sell, contract to sell or otherwise dispose of any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or grant any options or warrants to purchase Common Stock (other than pursuant to the Company's existing Amended and Restated 1995 Eligible Directors' Stock Option Plan, 1996 Stock Option and Award Plan and 1996 Employee Stock Purchase Plan), for a period of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. 7 (n) The Company has furnished or will furnish to you "lock-up" letters, in form and substance satisfactory to you, signed by each of its current officers, directors and stockholders. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (p) The Company will use its best efforts to have the Common Stock listed, subject to notice of issuance, on the New York Stock Exchange concurrently with the effectiveness of the Registration Statement. 6. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each of the Selling Stockholders agrees with the several Underwriters as follows: (a) Such Selling Stockholder will cooperate to the extent necessary to cause the registration statement or any post-effective amendment thereto to become effective at the earliest possible time. (b) Such Selling Stockholder will pay all Federal, state, foreign and other taxes, if any on the transfer or sale of the Shares being sold by the Selling Stockholder to the Underwriters. (c) Such Selling Stockholder will do or perform all things required to be done or performed by the Selling Stockholder prior to the Closing Date or any Option Closing Date, as the case may be, to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. (d) Such Selling Stockholder has executed or will execute a "lock-up" letter as provided in Section 5(n) above and will not sell, contract to sell or otherwise dispose of any Common Stock, except for the sale of Shares to the Underwriters pursuant to this Agreement, prior to the expiration of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (e) Except as stated in this Agreement and in the Prepricing Prospectus and the Prospectus, such Selling Stockholder will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (f) Such Selling Stockholder will advise you promptly, and if requested by you, will confirm such advice in writing, within the period of time referred to in Section 5(f) hereof, of any change in information relating to such Selling Stockholder or any new information relating to any matter stated in the Prospectus or any amendment or supplement thereto which comes to the attention of such Selling Stockholder that suggests that any statement made in the Registration Statement or the Prospectus (as then amended or supplemented, if amended or supplemented) is or may be untrue in any material respect or that the Registration Statement or 8 Prospectus (as then amended or supplemented, if amended or supplemented) omits or may omit to state a material fact or a fact necessary to be stated therein in order to make the statements therein not misleading in any material respect, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented, if amended or supplemented) in order to comply with the Act or any other law. 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The Registration Statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) As of the date of this Agreement, the capitalization of the Company is as set forth under the column entitled "Actual" in the section of the Prospectus entitled "Capitalization" and, as of the time of the sale of the Shares and the consummation of the transactions contemplated in connection therewith, the capitalization of the Company shall be as set forth under the column entitled "Pro Forma As Adjusted" in the section of the Prospectus entitled "Capitalization"; all the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable and, at the time of the sale of the Shares and the consummation of the transactions contemplated in connection therewith, will be free of any preemptive or similar rights; the Shares to be issued and sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and free of any preemptive or similar rights; the shares of Common Stock to be issued by the Company in connection with the Preferred Stock Transactions have been duly authorized and, when delivered to the recipients thereof against therefor, will be validly issued, fully paid and non-assessable and free of any preemptive or similar rights, and the issuance of such shares will not create in any person the right to obtain or subscribe for any capital stock of the Company, whether by virtue of anti- dilution rights (including any such rights under the First Amended and Restated Shareholders' Agreement and Irrevocable Proxy dated as of September 28, 1992 by and among the Company and the other persons named therein, as amended by that certain Amendment No. 1 thereto dated 9 as of May 11, 1995 (as amended, the "Shareholders' Agreement")) or otherwise; and the capital stock of the Company conforms to the description thereof in the Registration Statement and the Prospectus. (d) The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, prospects, net worth or results of operations of the Company and the Subsidiaries (as hereinafter defined), taken as a whole. (e) All the Company's significant subsidiaries within the meaning of Rule 1-02 of Regulation S-X (collectively, the "Subsidiaries") are listed in an exhibit to the Registration Statement. Each Subsidiary is a corporation duly organized, validly existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, prospects, net worth or results of operations of such Subsidiary; all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest, equity or other encumbrance. (f) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or to which any of their respective properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the Act. (g) Neither the Company nor any of the Subsidiaries is in violation of its certificate or articles of incorporation or by-laws, or other organizational documents, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries, or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties 10 may be bound, except where such violation or default would not reasonably be expected to have a material adverse effect, individually or in the aggregate, on the condition (financial or other), business, net worth or results of operations of the Company and the Subsidiaries, taken as a whole. (h) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the Preferred Stock Transactions or the transactions contemplated hereby (A) requires any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and compliance with the securities or Blue Sky laws of various jurisdictions, all of which have been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or (B) conflicts or will conflict with or constitutes or will constitute a breach of, or a default or Repayment Event (as defined below) under, any agreement (including the Shareholders' Agreement), indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of the property or assets of any of them is subject. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its Subsidiaries. (i) The accountants, Ernst & Young LLP, who have certified the financial statements included in the Registration Statement and the Prospectus (or any amendment or supplement thereto) are independent public accountants as required by the Act. (j) The financial statements, together with related schedules and notes, included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and the Subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial data included in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and the Subsidiaries. 11 (k) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally or by general equitable principles and except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws. (l) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), neither the Company nor any of the Subsidiaries has incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Company and the Subsidiaries taken as a whole, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Company or any of the Subsidiaries, or any material adverse change, or any development involving or which may reasonably be expected to involve a prospective material adverse change, in the condition (financial or other), business, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (m) Each of the Company and the Subsidiaries has good and marketable title to all property (real and personal) owned by it, free and clear of all liens, claims, security interests or other encumbrances, except such as are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement or such as do not interfere with the use made or proposed to be made of such property by the Company and the Subsidiaries, and all the property described in the Prospectus as being held under lease by each of the Company and the Subsidiaries is held by it under valid, subsisting and enforceable leases. (n) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (o) The Company and each of the Subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its respective properties and to conduct its business in the manner described in the Prospectus (subject to such qualifications as may be set forth in the Prospectus), except only to the extent the absence thereof would not reasonably be expected to have a material adverse effect on the condition (financial or other), business, properties, prospects, net worth or results of operations of the Company and the Subsidiaries taken as a whole; the Company and each of the Subsidiaries has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and, 12 except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company or any of the Subsidiaries. (p) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (q) To the Company's knowledge, neither the Company nor any of its Subsidiaries nor any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (r) The Company and each of the Subsidiaries have filed all tax returns required to be filed or obtained valid extensions on a timely basis, which returns are complete and correct, and neither the Company nor any Subsidiary is in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto. (s) No holder of any security of the Company (including, without limitation, Home Capital Pty. Ltd., Residential Developments Pty., Ltd. and Jennings Operations (USA) Inc. (collectively, "Jennings")) has any right (which has not been waived) to require registration of shares of Common Stock or any other security of the Company because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement. (t) The Company and the Subsidiaries own or possess all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing. (u) The Company is not now, and after sale of the Shares to be sold by it hereunder and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for an "investment company" as such terms are defined under the Investment Company Act of 1940, as amended. (v) The Company has filed in a timely manner each document or report required to be filed by it pursuant to the Exchange Act and the rules and regulations thereunder; each such document or report at the time it was filed conformed to the requirements of the Exchange Act and the rules and regulations thereunder; and none or such documents or reports 13 contained an untrue statement of any material fact or omitted to state any material fact required to be stated therein, in the light of the circumstances under which they were made, or necessary to make the statements therein not misleading. (w) The Company has complied with all provisions of Florida Statutes, Section 517.075, relating to issuers doing business with Cuba. (x) There is no claim pending or threatened or, to the best knowledge of the Company, contemplated under any Environmental Law (as defined below) against the Company or any Subsidiary which, if adversely determined, might be reasonably likely to have a material adverse effect on the condition (financial or other), business, properties, prospects, net worth or results of operations of the Company and its Subsidiaries taken as a whole; there are no past or present actions or conditions, including without limitation the release of any hazardous substance or waste regulated under any Environmental Law, that are likely to form the basis of any such claim under existing law against the Company or any of its Subsidiaries which, if adversely determined, might be reasonably likely to have a material adverse effect on the condition (financial or other), business, properties, prospects, net worth or results of operations of the Company and its Subsidiaries taken as a whole; there are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) that might be reasonably likely, singly or in the aggregate, to have a material adverse effect on the condition (financial or other), business, properties, prospects, net worth or results of operations of the Company and the Subsidiaries taken as a whole. The term "Environmental Law" means any federal, state, local or foreign law, rule or regulation now in effect governing pollution or protection of the environment or governing the use or release of any material or substance presently known to be toxic or hazardous including, without limitation, any radioactive substance, methane, volatile hydrocarbon or industrial solvents. (y) The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged or propose to engage; neither the Company nor any Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or other) business, properties, prospects, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (z) Neither the Company nor any Subsidiary is involved in any labor dispute nor, to the knowledge of the Company, is any such dispute threatened, which dispute would have a material adverse effect on the condition (financial or other) business, properties, prospects, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (A)The Shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. (A) The Shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. 14 (B) None of the Company nor any of its Subsidiaries or any of their respective directors, officers or controlling persons, has taken or will take, directly or indirectly, any action resulting in a violation of Rule 10b-6 under the 1934 Act, or designed to cause or result in, or that has constituted or that is reasonably likely to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (C) Neither the Company nor any of its Subsidiaries has incurred any liability for finder's or broker's fees or agent's commissions (other than those payable to the Underwriters) in connection with the execution and delivery of this Agreement, the offer and sale of the Shares or the transactions contemplated thereby. (D) Neither the Company nor any of its Subsidiaries is required to register as a "broker" or a "dealer" in accordance with the provisions of the 1934 Act or the rules and regulations promulgated thereunder. 8. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each Selling Stockholder represents and warrants to each Underwriter that: (a) Such Selling Stockholder now has, and on the Closing Date and any Option Closing Date will have, valid and marketable title to the Shares to be sold by such Selling Stockholder, free and clear of any lien, mortgage, pledge, charge, equity, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer. (b) Such Selling Stockholder now has, and on the Closing Date and any Option Closing Date will have, full legal right, power and authorization, and any approval required by law, to sell, assign transfer and deliver such Shares in the manner provided in this Agreement, and upon delivery of and payment for such Shares hereunder, the several Underwriters will acquire good and marketable title to such Shares free and clear of any lien, claim, mortgage, pledge, charge, equity, security interest or other encumbrance of any kind. (c) This Agreement and the Custody Agreement have been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and are the valid and binding agreements of such Selling Stockholder enforceable against such Selling Stockholder in accordance with their terms except that (i) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, (ii) the remedy of specific performance and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which the proceeding may be brought and (iii) rights to indemnity and contribution hereunder or thereunder may be limited by federal or state securities laws or the public policy underlying such laws. (d) Neither the execution and delivery of this Agreement or the Custody Agreement by or on behalf of such Selling Stockholder nor the consummation of the transactions herein or therein contemplated by or on behalf of such Selling Stockholder requires any consent, approval, authorization or order of, or filing or registration with, any court, regulatory body, administrative agency or other governmental body, agency or official 15 (except such as may be required under the Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) or conflicts or will conflict with or constitutes or will constitute a breach of, or default under, or violates or will violate, any agreement, indenture or other instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is or may be bound or to which any of such Selling Stockholder's property or assets is subject, or any statute, law, rule, regulation, ruling, judgment, injunction, order or decree applicable to such Selling Stockholder or to any property or assets of such Selling Stockholder. (e) The information pertaining to such Selling Stockholder provided to the Company for inclusion under the caption "Principal and Selling Stockholders" in the Prospectus, insofar as they relate to such Selling Stockholder, does not and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (f) Such Selling Stockholder does not have any knowledge or any reason to believe that the Registration Statement or the Prospectus (or any amendment or supplement thereto) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (g) The representations and warranties of such Selling Stockholder in the Custody Agreement are, and on the Closing Date and any Option Closing Date will be, true and correct. Certificates for all of the Shares to be sold by the Selling Stockholders pursuant to this Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with the Custodian with irrevocable unconditional instructions to deliver such Shares to the Underwriters pursuant to this Agreement. (h) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares, except for the lock-up arrangements described in the Prospectus. (i) Such Selling Stockholder will not, in connection with the Preferred Stock Transactions, assert (A) any preemptive or similar rights in favor of any of the Selling Stockholders or (B) the right to obtain or subscribe for any capital stock of the Company whether by virtue of anti-dilution rights (including rights under the Shareholders' Agreement) or otherwise that it may have. 9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any 16 omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company or any Selling Stockholder, such Underwriter or such controlling person shall promptly notify the parties against whom indemnification is being sought (the "indemnifying parties"), and such indemnifying parties shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the indemnifying parties have agreed in writing to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the indemnifying parties and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and any indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the indemnifying parties shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The indemnifying parties shall not be liable for any settlement of any such action, suit or proceeding effected without their written consent, 17 but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the indemnifying parties agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, the Company, its directors, its officers who sign the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with respect to the information furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against any Underwriter, any such controlling person of any Underwriter, the Company, any of its directors, any such officer, or any such controlling person of the Company, based on the Registration Statement, the Prospectus or any Prepricing Prospectus or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Selling Stockholder pursuant to this paragraph (c), such Selling Stockholder shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Selling Stockholder shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Selling Stockholder's expense), and each Underwriter, each such controlling person of any Underwriter, the Company, its directors, any such officer, and any such controlling person of the Company shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which any Selling Stockholder may otherwise have. (d) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Stockholders, its directors, its officers who sign the Registration Statement and any person who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company and the Selling Stockholders to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, any Selling Stockholder or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, the Selling Stockholder and any such controlling person shall have the 18 rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which any Underwriter may otherwise have. (e) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand from the offering of the Shares and the consummation of the transactions contemplated thereby, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Shares hereunder, any determination of the relative benefits received by the Company, the Selling Stockholders or the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company and the Selling Stockholders, and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Shares, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (f) The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (e) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (e) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the 19 total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 9, each Selling Stockholder shall not be required to contribute any amount in excess of the aggregate proceeds received by such Selling Stockholder from the sale of its Shares pursuant to this Agreement (net of underwriting discounts and commissions and after deducting expenses). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule II hereto (or such numbers of Firm Shares increased as set forth in Section 12 hereof) and not joint. (g) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (h) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 9 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 9 and the representations and warranties of the Company and the Selling Stockholders set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 9. 10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for 20 additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, properties, prospects, net worth, or results of operations of the Company or the Subsidiaries not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or any officer or director of the Company or any Selling Stockholder which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially adversely affect the market for the Shares. (c) You shall have received on the Closing Date, an opinion of O'Melveny & Myers, counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) Each of the Company and Greystone Homes, Inc. ("Greystone") has been a corporation duly incorporated, and is validly existing and in good standing under the laws of its respective jurisdiction of organization with the corporate power to own its properties and conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); (ii) Each of the Company and Greystone is duly registered as a foreign corporation and qualified to conduct its business in the State of California and is in good standing under the laws of that state; (iii) All the outstanding shares of capital stock of Greystone has been duly authorized by all necessary corporate action on the part of Greystone, and are validly issued, fully paid and non-assessable, and are owned of record by the Company directly, free and clear of any perfected lien and, to the best of such counsel's knowledge, free and clear of any security interest, claim, unperfected lien, encumbrance or pre-emptive right, and, to the best of such counsel's knowledge, there are no rights, warrants or options to acquire or instruments convertible into, or exchangeable for, any shares of capital stock or other equity interest in each of the Company and Greystone, except as may be described in the Prospectus; (iv) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; (v) All the shares of capital stock of the Company outstanding prior to the issuance of the Shares to be issued and sold by the Company hereunder, have been duly 21 authorized by all necessary corporate action on the part of the Company and are validly issued, fully paid and non-assessable; (vi) The Shares to be issued and sold to the Underwriters by the Company hereunder have been duly authorized by all necessary corporate action on the part of the Company and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and non-assessable, free of statutory and, to such counsel's knowledge, contractual preemptive rights; (vii) The shares of Common Stock of the Company to be issued in connection with the consummation of the Preferred Stock Transactions have been duly authorized by all necessary corporate action on the part of the Company and, when issued and delivered to the recipients thereof against payment therefor, will be validly issued, fully paid and non-assessable, free of statutory and, to such counsel's knowledge, contractual preemptive rights, and, to the best knowledge of such counsel, the issuance of such shares will not create in any person the right to obtain or subscribe for any capital stock of the Company pursuant to the Company's certificate of incorporation, bylaws or Section 2(e) of the Shareholders' Agreement; (viii) The form of certificates for the Shares conforms to the requirements of the Delaware General Corporation Law; (ix) The Registration Statement and all post-effective amendments, if any, have been declared effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued or threatened by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (x) The Company has the corporate power to enter into this Agreement and to issue, sell and deliver the Shares to be sold by it to the Underwriters as provided herein, and this Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company; (xi) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, nor consummation by the Company of the transactions contemplated thereby do not and will not constitute a breach of, or result in a default under, the certificate or articles of incorporation or bylaws of the Company or Greystone or any agreement (including the Shareholders' Agreement), indenture, lease, instrument, order injunction or judgment identified to such counsel in an Officers' Certificate (a copy of which will be delivered to you) as agreements, indentures, leases, instruments, orders, injunctions or judgments binding on the Company or Greystone or their respective properties and material to the Company and the Subsidiaries, taken as a whole, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries, nor will any such action result in any violation of any federal, California or New York statute or regulation or provision of the Delaware General Corporation Law that such counsel has, in the exercise of customary professional diligence, recognized as applicable to the Company, Greystone or transactions of the type contemplated by this Agreement, except that such counsel need express 22 no opinion regarding any federal securities laws or state securities laws or Section 7 of this Agreement; (xii) No consent, approval, authorization or other order of, or registration or filing with, any California, New York, Delaware or Federal court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company for the issuance and sale of the Shares to the Underwriters as contemplated by this Agreement, except such as have been obtained under the Act or the Exchange Act and such as may be required under applicable Blue Sky or state securities laws; (xiii) The Registration Statement, on the date it was filed, and any amendments thereto on the date such amendments were filed, appeared on their face to comply in all material respects with the requirements as to form for registration statements on Form S-1 under the Act and related rules and regulations in effect at the date of filing, except that such counsel need express no opinion concerning the financial statements and other financial information contained therein; (xiv) To such counsel's knowledge, there is no contract or other document of a character required to be filed as an exhibit to the Registration Statement which is not filed as required; and (xv) The statements in the Prospectus under the caption "Description of Capital Stock," insofar as they summarize provisions of the Certificate of Incorporation or Bylaws of the Company or the Shareholders' Agreement fairly present the information required by Form S-1; and (xvi) Except as described in the Prospectus, to such counsel's knowledge, there is no holder of any security of the Company (including Jennings) or any other person who has the right, contractual or otherwise which has not been waived or is otherwise inapplicable, to cause the Company to sell or otherwise issue to such holders the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement. Such counsel shall also state that in connection with such counsel's participation in the preparation of the Registration Statement and the Prospectus, such counsel has not independently verified the accuracy, completeness or fairness of the statements contained therein, and the limitations inherent in the examinations made by such counsel and the knowledge available to such counsel are such that such counsel is unable to assume, and does not assume, any responsibility for such accuracy, completeness or fairness (except as otherwise specifically stated in paragraph (xv) above). However, such counsel shall state that on the basis of such counsel's review and participation in conferences in connection with the preparation of the Registration Statement and the Prospectus, such counsel does not believe that the Registration Statement as of its effective date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and such counsel does not believe that the Prospectus on the date of the opinion, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make 23 the statements therein, in light of the circumstances under which they were made, not misleading. However, such counsel need express no opinion or belief as to the financial statements and other financial information contained in the Registration Statement or the Prospectus. In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Company as to laws of any jurisdiction other than the United States or the States of California or New York, provided that (1) each such local counsel is acceptable to the Representatives, (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance satisfactory to them and their counsel, and (3) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon. (d) You shall have received on the Closing Date, an opinion of Dewey Ballantine, solely with respect to Jennings Operations (USA) Inc., or from Arthur Robinson & Hedderwicks, with respect to Home Capital Pty. Ltd. and Residential Developments Pty. Ltd., dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) This Agreement and the Custody Agreement have each been duly executed and delivered by or on behalf of each of the Selling Stockholders and are valid and binding agreements of each Selling Stockholder enforceable against each Selling Stockholder in accordance with their terms, except that (i) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, (ii) the remedy of specific performance and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which the proceeds may be brought and (iii) rights to indemnity and contribution hereunder or thereunder may be limited by federal or state securities laws or the public policy underlying such laws; (ii) To the knowledge of such counsel, each Selling Stockholder has full legal right, power and authorization, and any approval required by law, to sell, assign, transfer and deliver good and marketable title to the Shares which such Selling Stockholder has agreed to sell pursuant to this Agreement upon delivery of the Shares pursuant to this Agreement and payment therefor as contemplated herein and assuming that the several Underwriters are bona fide purchasers within the meaning of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), the Underwriters will acquire good and marketable title to the Shares free and clear of any adverse claim (within the meaning of Section 8.302 of the UCC). (iii) The execution and delivery of this Agreement and the Custody Agreement by the Selling Stockholders and the consummation of the transactions contemplated hereby and thereby will not conflict with, violate, result in a breach of or constitute a default under the terms or provisions of any agreement, indenture, mortgage or other instrument known to such counsel to which any Selling Stockholder is a party or by which any of them or any of their assets or property is bound, or any court order or decree or any law, rule, or 24 regulation applicable to any Selling Stockholder or to any of the property or assets of any Selling Stockholder; (iv) No filing with, or consent, approval, authorization, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, (other than the issuance of the order of the Commission declaring the Registration Statement effective and such authorizations, approvals or consents as may be necessary under state securities laws, as to which we need express no opinion) is necessary or required to be obtained by the Selling Stockholders for the performance by the Selling Stockholders of their respective obligations under this Agreement or in the Custody Agreement, or in connection with the offer, sale or delivery of the Shares. (v) To the knowledge of such counsel, the sale of the Shares by the Selling Stockholders is not subject to preemptive or similar rights of any securityholder of the Company except as have been waived. (vi) The Attorneys-in-Fact have been duly authorized by the Selling Stockholders to deliver the Shares on behalf of the Selling Stockholders in accordance with the terms of this Agreement. (e) You shall have received on the Closing Date, an opinion of Robert W. Garcin, Esq., corporate counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) Each of the Company and Greystone is duly qualified as a foreign corporation to do business in those jurisdictions in which the ownership of properties, or the conduct of business, requires such qualification and in which the failure, individually or in the aggregate, to be so qualified should have material adverse effect on the condition (financial or other), business, properties, prospects, net worth or results of operations of the Company and Greystone taken as a whole; (ii) The Company owns of record, directly or indirectly through one of the other Subsidiaries, all the outstanding shares of capital stock of each of the Subsidiaries free and clear of any lien, adverse claim, security interest, preemptive right or other encumbrance; (iii) Other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or, to the knowledge of such counsel, threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or any of their property, is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto); (iv) There are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be; 25 (v) neither the Company nor any of the Subsidiaries is in violation of its respective certificate or articles of incorporation or bylaws, or is in breach of or in default under (nor has any event occurred which with notice, lapse of time or both would constitute a breach of or default under) any license, indenture, lease, mortgage, deed of trust, bank loan or credit agreement or any other agreement or instrument of which such counsel has knowledge and to which Greystone, the Company or any of its Subsidiaries is a party or by which Greystone, the Company or any of its Subsidiaries or their respective properties are bound or affected or under any law, regulation or rule, or any decree, judgment or order of which such counsel has knowledge and applicable to Greystone, the Company or any of its Subsidiaries, except for such matters as are not reasonably likely, individually or in the aggregate, to have a material adverse effect on the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and its Subsidiaries taken as a whole; (vi) Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and such counsel does not know of any commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company; and (vii) Except as described in the Prospectus, to such counsel's knowledge, there is no holder of any security of the Company (including Jennings) or any other person who has the right, contractual or otherwise which has not been waived or is otherwise inapplicable, to cause the Company to sell or otherwise issue to such holders the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement. (f) You shall have received on the Closing Date an opinion of Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to the matters referred to in clauses (vi), (ix), (x) and (xiii) and the penultimate subparagraph of the foregoing paragraph (c) and such other related matters as you may request. (g) You shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from Ernst & Young LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (h) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short-term or long-term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of 26 operations of the Company and the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Subsidiaries, taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 10(g) and in Section 10(h) hereof. (i) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (j) All the representations and warranties of the Selling Stockholders contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by or on behalf of the Selling Stockholders to the effect set forth in this Section 10(i) and in Section 10(j) hereof. (k) The Selling Stockholders shall not have failed at or prior to the Closing Date to have performed or complied with any of their agreements herein contained and required to be performed or complied with by them hereunder at or prior to the Closing Date. (l) The Shares shall have been listed or approved for listing upon notice of issuance on the New York Stock Exchange. (m) The Sellers shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Company or any Attorney-in-Fact or any Selling Stockholder and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company or the Selling Stockholders to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 10, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (i) shall be dated the Option Closing Date in question and the opinions and letter called for by paragraphs (c), (d), (e) and (f) shall be revised to reflect the sale of Additional Shares. 27 11. EXPENSES. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by them of their obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the registration of the Shares under the Exchange Act and the listing of the Shares on the New York Stock Exchange; (v) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vi) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (vii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (viii) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company. 12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company and the Selling Stockholders. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule II hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate 28 number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule II hereto who, with your approval and the approval of the Company, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 12 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 13. TERMINATION OF AGREEMENT. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company, by notice to the Company or any Selling Stockholder, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in California or New York shall have been declared by either federal or state authorities or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 14. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements in the first and third paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 7(b) and 9 hereof. 15. MISCELLANEOUS. Except as otherwise provided in Sections 5, 12 and 13 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at 6767 Forest Lawn Drive, Suite 300, Los Angeles, California 90068, Attention: President; or (ii) if to the Selling Stockholders, at Arthur Andersen & Co., S.C., at The Tower, Melbourne Central, 360 Elizabeth Street, Melbourne 3000, GPO Box 515AA Melbourne 3001, Australia, Attention: Mark Korda, with a copy to Dewey 29 Ballantine, 333 South Hope Street, Suite 3000, Los Angeles, California 90071, Attention: Matthew I. Roslin, Esq. or (iii) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, its directors and officers, and the other controlling persons referred to in Section 9 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. 30 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, PACIFIC GREYSTONE CORPORATION By: ------------------------------------- Chairman of the Board Each of the Selling Stockholders named in Schedule I hereto By: ------------------------------------- Attorney-in-Fact By: ------------------------------------- Attorney-in-Fact Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule II hereto. SMITH BARNEY INC. MORGAN STANLEY & CO. INCORPORATED ROBERTSON, STEPHENS & COMPANY LLC As Representatives of the Several Underwriters By: SMITH BARNEY INC. By: --------------------------------- 31 SCHEDULE I PACIFIC GREYSTONE CORPORATION PART A - FIRM SHARES Number of Selling Stockholders Firm Shares -------------------- ----------- ----------------------------------- Total .................................. 437,100 ----------------------------------- ----------------------------------- PART B - ADDITIONAL SHARES Number of Selling Stockholders Additional Shares -------------------- ----------------- ----------------------------------- Total................................... 437,258 ----------------------------------- ----------------------------------- S1-1 SCHEDULE II PACIFIC GREYSTONE CORPORATION Number of Underwriter Firm Shares ----------- ----------- Smith Barney Inc....................................... Morgan Stanley & Co. Incorporated...................................... Robertson, Stephens & Company LLC.................................... --------- Total............................................. 5,000,000 --------- --------- S2-2 EX-3.3 3 RESTATED CERTIFICATE OF INCORPORATION FORM OF RESTATED CERTIFICATE OF INCORPORATION OF PACIFIC GREYSTONE CORPORATION PACIFIC GREYSTONE CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY THE FOLLOWING: FIRST: The name of the Corporation is PACIFIC GREYSTONE CORPORATION. The Corporation was originally incorporated under the name PACIFIC CLASSIC CORPORATION, and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on September 6, 1991. SECOND: This Restated Certificate of Incorporation which restates and further amends the provisions of the Certificate of Incorporation of the Corporation was duly adopted pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware. THIRD: By written consent of the Board of Directors of the Corporation as of _______ __, 1996, resolutions were duly adopted setting forth the following restatement of and further amendment to the Certificate of Incorporation of the Corporation, declaring such restatement and amendments to be advisable and, in accordance with Section 242 of the General Corporation Law of the State of Delaware, that such restated and further amended Certificate of Incorporation be considered by the stockholders of the Corporation. FOURTH: Thereafter, by written consent of the holders of the issued and outstanding shares of Common Stock and Preferred Stock of the Corporation, such written consent obtained in accordance with Section 228 of the General Corporation Law of the State of Delaware, the following restatement of and further amendment to the Certificate of Incorporation of the Corporation was consented to and authorized by holders of the necessary number of shares required by statute and the Certificate of Incorporation of the Corporation. FIFTH: The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: "ARTICLE I The name of the corporation is: Pacific Greystone Corporation ARTICLE II The address of its registered office in the State of Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover, County of Kent. The 2 name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV The total number of shares of all classes of stock which the corporation shall have authority to issue is Twenty Five Million (25,000,000), consisting of Twenty Million (20,000,000) shares of Common Stock, par value $.01 per share, and Five Million (5,000,000) shares of Preferred Stock, par value $.01 per share. Upon amendment of this Article IV as hereinabove set forth, each outstanding share of Common Stock is converted into 1.4282 shares of Common Stock; provided, however, that no fractional shares shall be issued to stockholders, but instead cash shall be distributed to each stockholder who would otherwise be entitled to a fractional share, and the amount of cash to be distributed shall be based upon a value of $____ per share of Common Stock. The Board of Directors is authorized, subject to limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) the number of shares constituting that series and the distinctive designation of that series; (b) the dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; 3 (d) whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) whether the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) any other relative rights, preferences and limitations of that series. ARTICLE V No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the bylaws, and no action shall be taken by the stockholders by written consent. ARTICLE VI Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the bylaws of the corporation. ARTICLE VII Election of directors need not be by written ballot unless the bylaws of the corporation shall so provide. 4 ARTICLE VIII The Board of Directors shall consist of such number of Directors as shall be determined from time to time in the manner provided by the bylaws, and in the absence of such determination, the number of directors shall be seven (7). The Board of Directors shall be and is divided into three classes, Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director is elected; PROVIDED, HOWEVER, that each initial director of Class I shall hold office until the annual meeting of stockholders in 1997; each initial director of Class II shall hold office until the annual meeting of stockholders in 1998; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1999. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, retirement, resignation or removal, and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. Notwithstanding any of the foregoing provisions of this Article VIII, each director shall serve until his or her successor is elected and qualified, or until his or her death, retirement, resignation or removal. Should a vacancy occur or be created, whether arising through death, resignation or removal of a director, or through an increase in the number of directors of any class, such vacancy shall be filled by a majority vote of the remaining directors of the class in which such vacancy occurs or by the sole remaining director of that class if only one such director remains, or by the majority vote of the members of the remaining classes if no such director remains. A director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the class to which he or she is elected. Notwithstanding any of the provisions of this Certificate of Incorporation, whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors of the corporation by the provisions of this Certificate of Incorporation, or any resolution or resolutions of the Board of Directors fixing the terms and provisions of such class or series, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by the sole remaining director so elected. 5 Any director may be removed by the holders of a majority of the shares of the corporation then entitled to vote for the election of directors but only for cause. ARTICLE IX No director of this corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. ARTICLE X (A) The corporation reserves the right to repeal, alter, amend or rescind any provision contained in the Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph (B) of this Article X, and all rights conferred on stockholders herein are granted subject to this reservation. (B) Notwithstanding any other provision of the Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, the Certificate of Incorporation or any designation of Preferred Stock, the affirmative vote of the holders of at least 75% of the voting of the then- outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Article V, Article VI, Article VIII or this Article X. ARTICLE XI In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, amend or repeal the bylaws of the corporation." 6 IN WITNESS WHEREOF, PACIFIC GREYSTONE CORPORATION has caused this Restated Certificate of Incorporation to be signed by Jack R. Harter, its President, and attested by Robert W. Garcin, its Secretary, this ___ day of _______, 1996. PACIFIC GREYSTONE CORPORATION By: ______________________________ Jack R. Harter, President ATTEST: _____________________ Robert W. Garcin Secretary 7 EX-4.1 4 COMMON STOCK CERTIFICATE TEMPORARY CERTIFICATE-EXCHANGEABLE FOR DEFINITIVE CERTIFICATE WHEN READY FOR DELIVERY COMMON STOCK PACIFIC COMMON STOCK GREYSTONE THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS IN BOSTON, MA OR IN NEW YORK, NY CUSIP 694351 10 7 PACIFIC GREYSTONE CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE PER SHARE OF PACIFIC GREYSTONE CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ Robert W. Garcin [GREYSTONE /s/ Jack R. Harter SECRETARY CORPORATE SEAL] CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: THE FIRST NATIONAL BANK OF BOSTON TRANSFER AGENT AND REGISTRAR BY -------------------------------------- AUTHORIZED SIGNATURE The Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporations' Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- ________________Custodian______________ (Cust) (Minor) under Uniform Gifts to Minors Act__________________________________ (State) UNIF TRF MIN ACT -- _____________Custodian (until age _____) (Cust) _______________under Uniform Transfers (Minor) to Minors Act_________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ___________________________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________ - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - ------------------------------------------------------------------------Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated______________________________________ X _________________________________ X _________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT NOTICE MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By__________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-5 5 OPINION May 20th 1 9 9 6 (213) 669-6000 644,352-007 LA1-699508.V1 Pacific Greystone Corporation 6767 Forest Lawn Drive, Suite 300 Los Angeles, California 90068-1027 Re: Registration of Shares of Common Stock of Pacific Greystone Corporation Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form S-1 (File No. 333-1388), as amended (the "Registration Statement"), of Pacific Greystone Corporation, a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, of shares of Common Stock, $.01 par value per share, of the Company having an aggregate offering price of up to $90,800,000 (the "Shares"). We are familiar with the proceedings taken by the Company in connection with the authorization, issuance and sale of the Shares. Subject to the proposed additional proceedings being taken as now contemplated by us as your counsel prior to the issuance of the Shares, we are of the opinion that the Shares have been duly authorized by all necessary corporate action on the part of the Company and, upon payment for and delivery of the Shares as contemplated by the Registration Statement and the countersigning of the certificates representing the Shares by a duly authorized signatory of the registrar for the Company's Common Stock, the Shares will be validly issued, fully paid and non-assessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the Prospectus constituting part of the Registration Statement. Respectfully submitted, O'MELVENY & MYERS EX-9.3 6 TERMINATION OF VOTING TRUST AGREEMENT TERMINATION OF VOTING TRUST AGREEMENT The undersigned constitute all the parties to a Voting Trust Agreement, dated as of October 10, 1991, as amended by the Amendment to Voting Trust Agreement, dated November 3, 1995 (as amended, the "Voting Trust Agreement"), relating to certain securities of Pacific Greystone Corporation. The undersigned hereby agree that the Voting Trust Agreement is hereby terminated and the Stock (as defined in the Voting Trust Agreement) deposited with the Trustees (as defined in the Voting Trust Agreement) shall be distributed to the appropriate Stockholders (as defined in the Voting Trust Agreement). Dated: June __, 1996 TRUSTEES: STOCKHOLDERS: _______________________ Harter 1991 Trust No. 1 Jack R. Harter, Trustee By: __________________________ _______________________ Harter 1991 Trust No. 2 Antonio B. Mon, Trustee By: __________________________ Irrevocable Mon Family Trust By: __________________________ ______________________________ Robert W. Garcin ______________________________ Peter J. Kiesecker ______________________________ Jack R. Harter ______________________________ Antonio B. Mon ______________________________ Denis G. Cullumber ______________________________ Richard D. Baker ______________________________ Bruce E. Gross ______________________________ Steven G. Delva ______________________________ Todd Palmaer ______________________________ Chuck Dragicevich 2 EX-10.10 7 FORM OF AGREEMENT y AGREEMENT This Agreement ("AGREEMENT") is entered into as of this ____ day of May, 1996 by and between Warburg, Pincus Investors, L.P., a Delaware corporation ("WARBURG"), and Pacific Greystone Corporation, a Delaware Corporation (the "COMPANY"). W I T N E S S E T H WHEREAS, Warburg owns 6,853,366 shares of Common Stock, par value $.01 per share, of the Company, such stock representing in excess of 50% of the voting power of the Company's voting stock; WHEREAS, the parties hereto have been advised by the Company's independent public accountants that pooling of interests accounting treatment is generally unavailable for a transaction involving a company that within two years prior to the transaction had a shareholder that controlled more than 50% of the voting power of such company; and WHEREAS, the parties have been further advised by the Company's independent public accountants that upon execution of this Agreement, Warburg will be deemed to have divested itself of voting power in excess of the 50% limitation for the purposes of the pooling of interest accounting rules referred to above; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party, the parties hereto, intending to be legally bound, agree as follows: 1. VOTING At any time when a matter is brought to the vote of the Company's shareholders and Warburg beneficially owns shares of the Company voting stock representing more than 50% of th voting power of the Company's shares entitled to vote on such matter (the "LIMIT"), then: (a) Warburg may vote shares up to the Limit in its discretion; and (b) Warburg shall vote shares beneficially owned by it in excess of the Limit in the same proportion as the shares voted by holders other than Warburg are voted on such matter. 2. AMENDMENT OR TERMINATION Except as set forth in paragraph 3 below, this Agreement may not be amended or terminated without the concurrence of: (a) a majority of the Directors of the Board of the Company that are not officers, employees or partners of Warburg or the Company; or (b) a majority of the votes of the shares of the Company voting stock voting on the matter at a meeting duly called other than shares of Company voting stock beneficially owned by Warburg. 3. ADDITIONAL RIGHT TO TERMINATION This Agreement shall also be terminated by either Warburg or the Company if it shall have received an opinion from a certified public accounting firm contrary to the advice referred to in the third "Whereas" clause hereto and such opinion is delivered to all the parties hereto. 4. COUNTERPARTS This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5. NOTICES All notices, requests, demands and other communications under this Agreement shall be in writing, shall be given by one of the methods specified below, and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is to be given, (ii) on the second business day after delivery to an overnight courier service, provided receipt of delivery has been confirmed, or (iii) upon receipt by the transmitting party of confirmation or answer-back if delivery is by telex or telefax. If to Warburg: Warburg, Pincus Investors, L.P. 466 Lexington Avenue New York, New York 10017 Attention: John Santoleri Telephone: (212) 878-9382 Facsimile: (212) 878-9351 2 If to the Company: Pacific Greystone Corporation 6767 Forest Lawn Drive, Suite 300 Los Angeles, California 90068-1027 Attention: Jack R. Harter Telephone: (213) 436-6300 Facsimile: (213) 876-3866 6. GOVERNING LAW This Agreement shall be construed in accordance with, and governed by, the laws of the State of Delaware. IN WITNESS WHEREOF, the parties to this Agreement have duly executed it as of the date set forth above. WARBURG, PINCUS INVESTORS, L.P. By:____________________________ Name: Title: PACIFIC GREYSTONE CORPORATION By:____________________________ Name: Title: 3 EX-10.11 8 STOCK OPTION PLAN FORM OF AMENDED AND RESTATED PACIFIC GREYSTONE CORPORATION 1995 ELIGIBLE DIRECTORS STOCK OPTION PLAN TABLE OF CONTENTS PAGE NO. -------- ARTICLE 1. THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 SHARES AVAILABLE FOR OPTIONS . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2. THE OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 AUTOMATIC OPTION GRANTS. . . . . . . . . . . . . . . . . . . . . . 2 2.2 PAYMENT OF EXERCISE PRICE. . . . . . . . . . . . . . . . . . . . . 3 2.3 OPTION PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.4 EFFECT OF TERMINATION OF SERVICE . . . . . . . . . . . . . . . . . 3 2.5 LIMITATIONS ON EXERCISE AND VESTING OF OPTIONS . . . . . . . . . . 3 ARTICLE 3. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 4 3.1 RIGHTS OF PARTICIPANTS AND BENEFICIARIES . . . . . . . . . . . . . 4 3.2 ADJUSTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.3 ACCELERATION UPON A CHANGE IN CONTROL EVENT. . . . . . . . . . . . 5 3.4 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . 5 3.5 PLAN AMENDMENT, STOCKHOLDER APPROVAL AND SUSPENSION; CHANGES IN OUTSTANDING OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . 6 3.6 PRIVILEGES OF STOCK OWNERSHIP. . . . . . . . . . . . . . . . . . . 6 3.7 EFFECTIVE DATE OF PLAN . . . . . . . . . . . . . . . . . . . . . . 6 3.8 TERM OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.9 LEGAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 4. RESTRICTIONS ON TRANSFER AND VOTING; STATUS UNDER SHAREHOLDERS' AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.1 RESTRICTIONS ON TRANSFER.. . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 5. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 i PACIFIC GREYSTONE CORPORATION AMENDED AND RESTATED 1995 ELIGIBLE DIRECTORS STOCK OPTION PLAN ARTICLE 1. THE PLAN 1.1 PURPOSE. The purpose of this Plan is to promote the success of the Corporation by providing an additional means through the grant of Options to attract, motivate and retain experienced and knowledgeable Eligible Directors. Capitalized terms are defined in Article 5. 1.2 ADMINISTRATION. (a) AUTHORITY AND POWERS; INTERPRETATION. This Plan shall be, to the maximum extent possible, self-effectuating. This Plan shall be interpreted and, to the extent any determinations are required hereunder, shall be administered by the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or by unanimous written consent of its members. Subject to the express provisions of this Plan, the Committee shall have the authority to construe and interpret this Plan and any agreements defining the rights and obligations of the Corporation and Participants under this Plan. (b) BINDING DETERMINATIONS. Any action taken by, or inaction of, the Corporation, the Board or the Committee relating or pursuant to this Plan shall be within the absolute discretion of that entity and shall be conclusive and binding upon all persons. No member of the Board, the Committee nor any officer of the Corporation shall be liable for any such action or inaction, except in circumstances involving such person's bad faith. (c) RELIANCE ON EXPERTS. In making any determination or in taking or not taking any action under this Plan, the Board or the Committee may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No director, officer or agent of the Corporation shall be liable for any such action or determination taken or made or omitted in good faith. (d) DELEGATION. The Committee may delegate ministerial, non- discretionary functions to individuals who are officers of the Corporation. 1.3 SHARES AVAILABLE FOR OPTIONS. Subject to the provisions of Section 3.2, the capital stock that may be delivered under this Plan shall be shares of the Corporation's authorized but unissued Common Stock and (if permitted under applicable state law) any shares of its Common Stock held as treasury shares. The shares may be delivered for any lawful consideration, but not for less than the minimum lawful consideration under applicable state law. (a) NUMBER OF SHARES. The maximum number of shares of Common Stock that may be issued or delivered pursuant to Options granted to Eligible Directors under this Plan shall not exceed 75,000 shares, subject to adjustments contemplated by Section 3.2. (b) CALCULATION OF AVAILABLE SHARES AND REPLENISHMENT. Shares subject to outstanding Options shall be reserved for issuance. If any Option to acquire shares of Common Stock under an Option shall expire or be cancelled or terminated without having been exercised in full, the undelivered shares subject thereto shall again be available for the purposes of this Plan; provided, however, that if the Corporation withholds Common Stock pursuant to Section 3.10, the aggregate number of shares issuable with respect to the applicable Option and under this Plan shall be reduced by the number of shares so withheld and such shares shall not be available for additional Options under this Plan. ARTICLE 2. THE OPTIONS 2.1 AUTOMATIC OPTION GRANTS. Subject to adjustments contemplated by Section 3.2, (a) OPTION DATE AND AMOUNT. There shall be granted to any person who becomes an Eligible Director of the Corporation after the Board and stockholders of the Corporation approve this Plan an Option (the Option Date of which shall be the first day of the first month at least 10 days after the date such person takes office) to purchase 5,000 shares of Common Stock. (b) SUBSEQUENT OPTIONS. On the close of business on the date of the annual shareholders meeting in each calendar year during the term of this Plan, commencing in 1997, there shall be granted automatically (without any action by the Board) an Option (the Option Date of which shall be the date of such annual shareholders meeting) to purchase 1,000 shares of Common Stock, to each person who is a continuing Eligible Director. (c) MAXIMUM NUMBER OF SHARES. Any annual grant under Section 2.1(b) that would otherwise exceed the maximum number of shares under Section 1.3(a) shall be prorated within such limitation among the number of Eligible Directors entitled thereto. 2 (d) OPTION PRICE. The exercise price per share of the Common Stock covered by each Option granted pursuant to Section 2.1 shall be the Fair Market Value of the Common Stock on the Option Date. (e) OPTION PERIOD AND EXERCISABILITY. Each Option shall become exercisable in cumulative installments at the rate of one-third of the shares underlying such Option on the first anniversary of the Option Date and an additional one-third of such shares on each of the next two anniversaries thereof. (f) NON-QUALIFIED OPTIONS. Each Option granted under this Plan is intended to be a non-qualified stock option (i.e., not an "incentive stock option") under the Code and shall be so designated. (g) OPTION AGREEMENTS. Each Option granted under this Plan shall be evidenced by an Option Agreement substantially in the form attached hereto as Exhibit A and shall be executed by the Participant and the Corporation. 2.2 PAYMENT OF EXERCISE PRICE. The exercise price of any Option granted under this Plan shall be paid in full at the time of each exercise in cash or by check or (if the Corporation is a Public Company) in shares of Common Stock valued at their Fair Market Value on the date of exercise of the Option, or partly in such shares and partly in cash, PROVIDED THAT any such shares used in payment shall have been owned by the Participant at least six months prior to the date of exercise. 2.3 OPTION PERIOD. Each Option granted under this Plan and all rights or obligations thereunder shall expire five (5) years after the Option Date and shall be subject to earlier termination as provided herein. 2.4 EFFECT OF TERMINATION OF SERVICE. If a Participant's services as a member of the Board terminate for any reason, then any portion of an Option granted pursuant to this Plan which is not then exercisable shall terminate and any portion of such Option which is then exercisable may be exercised for six (6) months after the date of such termination or until the expiration of the stated term, whichever first occurs, and shall thereafter terminate. 2.5 LIMITATIONS ON EXERCISE AND VESTING OF OPTIONS. (a) PROVISIONS FOR EXERCISE. To the extent an Option becomes exercisable, it shall remain exercisable until the expiration or earlier termination of the Option. 3 (b) PROCEDURE. An exercisable Option may be exercised only by delivery to the Secretary of the Corporation of written notice of such exercise from the Participant, together with the required payment of the exercise price and any documents required by the provisions of Sections 3.4 and 4.3. (c) FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests shall be disregarded, but may be accumulated. No fewer than 100 shares (subject to adjustments under Section 3.2) may be purchased on exercise of any Option at one time unless the number purchased is the total number at the time available for purchase under the Option. ARTICLE 3. OTHER PROVISIONS. 3.1 RIGHTS OF PARTICIPANTS AND BENEFICIARIES. (a) NO SERVICE COMMITMENT. Nothing contained in this Plan (or in any other documents related to this Plan or to any Option) shall confer upon any Participant any right to continue to serve as a director of the Corporation nor shall interfere in any way with the right of the Corporation to change director compensation or other benefits or to terminate the director's service as a director, with or without cause, subject to applicable law (including any applicable charter provisions). Nothing contained in this Plan or any document related hereto, however, shall influence the construction or interpretation of the Corporation's Certificate of Incorporation or Bylaws regarding service on the Board or adversely affect any independent contractual right of any Eligible Director without his or her consent thereto. (b) PLAN NOT FUNDED. Options payable under this Plan shall be payable in shares and (except as provided in Section 1.3 (b)) no special or separate reserve, fund or deposit shall be made to assure payment of such Options. 3.2 ADJUSTMENTS. If there shall occur any extraordinary distribution in respect of the Common Stock (whether in the form of Common Stock, other securities, or other property), or any recapitalization, stock split (including a stock split in the form of a stock dividend), reverse stock split, reorganization, merger, combination, consolidation, split-up, spin-off, combination, or exchange of Common Stock or other securities of the Corporation, or a sale of substantially all of the assets of the Corporation as an entirety, then the Committee shall, in such manner and to such extent (if any) as may be appropriate and equitable, (1) proportionately adjust any or all of (a) the number and type of shares of Common Stock (or other securities) which thereafter may be made the subject of Options (including the specific maxima and numbers of shares set forth elsewhere in this Plan), (b) the 4 number, amount and type of shares of Common Stock (or other securities or property) subject to any or all outstanding Options and the vesting provisions of the Options, (c) the grant, purchase, or exercise price of any or all outstanding Options, (d) the securities, cash or other property deliverable upon exercise of any outstanding Options, or (2) in the case of an extraordinary distribution, merger, reorganization, consolidation, combination, sale of assets, split up, exchange, or spin off, make provision for a substitution or exchange of any or all outstanding Options or for a change in the securities, cash or property deliverable upon exercise of outstanding Options, based upon the distribution or consideration payable to holders of the Common Stock of the Corporation upon or in respect of such event; PROVIDED, HOWEVER, that (i) such adjustment and the Committee's actions in respect thereof are based on objective criteria, (ii) such adjustment is consistent with adjustments to comparable options (if any) held by persons other than directors of the Corporation under any similar plan of the Corporation, and (iii) such adjustment of consideration payable on exercise in the case of an event described in clause (2) that involves a Change in Control Event is consistent with the terms of a reorganization agreement (if any) approved by the shareholders of the Corporation. 3.3 ACCELERATION UPON A CHANGE IN CONTROL EVENT. Each Option granted under this Plan shall become immediately exercisable in full immediately prior to adjustments contemplated by Section 3.2 upon the occurrence of a Change in Control Event; provided, however, that none of the Options granted under this Plan shall be accelerated to a date less than six months after the Option Date of such Option. To the extent that any Option granted under this Plan is not exercised prior to (i) dissolution of the Corporation or (ii) a merger or other corporate event that the Corporation does not survive, and no provision is (or consistent with the provisions of Section 3.2 can be) made for the payment, assumption, conversion, substitution or exchange of the Option, the Option shall terminate upon the occurrence of such event. If a Change in Control Event under Section 5.1(c)(i), (ii) or (iii) has occurred but the shareholder approved transaction is abandoned or terminated, the acceleration with respect to the Options outstanding on the date of such abandonment or termination shall be rescinded. 3.4 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Options under this Plan and the issuance and delivery of shares of Common Stock, and/or of other securities or property pursuant to Section 3.2, under this Plan or under Options granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal tax and securities laws) and to such approvals by any listing, regulatory or governmental authority as may, in the 5 opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Corporation, provide such assurances and representations to the Corporation, as the Corporation may deem necessary or desirable to assure such compliance. 3.5 PLAN AMENDMENT, STOCKHOLDER APPROVAL AND SUSPENSION; CHANGES IN OUTSTANDING OPTIONS. (a) BOARD AUTHORIZATION. The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan, in whole or in part. No Options may be granted during any suspension of this Plan or after termination of this Plan, but the Committee shall retain jurisdiction as to Options then outstanding in accordance with the terms of this Plan. (b) STOCKHOLDER APPROVAL. To the extent required by law or (if the directors are then subject to Section 16) the provisions of Rule 16b-3 (whether to assure disinterested administration of other plans or to assure the exempt status of transactions under this Plan), any amendment to this Plan or any then outstanding Option shall be subject to stockholder approval. (c) LIMITATIONS ON AMENDMENTS TO PLAN AND OPTIONS. No amendment, suspension or termination of this Plan or change of or affecting any outstanding Option shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Corporation under any Option granted under this Plan prior to the effective date of such change. Changes contemplated by Section 3.2 shall not be deemed to constitute changes or amendments for purposes of this Section 3.5. If and for so long as the Corporation is a Public Company, the provisions of this Plan shall not be amended more than once every six months (other than as may be necessary to conform to any applicable changes in the Code or the rules thereunder), unless such amendment would be consistent with the provisions of Rule 16b-3(c)(2)(ii)(or any successor provision). 3.6 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly authorized by this Plan, a Participant shall not be entitled to any privilege of stock ownership as to any Director Shares prior to the satisfaction of all conditions to the valid exercise of the Option. 3.7 EFFECTIVE DATE OF PLAN. This Plan shall be effective as of the date of its approval by the Board and the requisite majority of stockholders of the Corporation. 6 3.8 TERM OF PLAN. No Option shall be granted more than five (5) years after the effective date of this Plan. Unless otherwise expressly provided in this Plan or in an applicable Option Agreement, any Option theretofore granted may extend beyond such date, and this Plan shall continue to apply thereto. 3.9 LEGAL ISSUES. (a) CHOICE OF LAW. This Plan, the Options, all documents evidencing Options and all other related documents shall be governed by, and construed in accordance with the laws of the state of incorporation of the Corporation. (b) SEVERABILITY. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue in effect. (c) PLAN CONSTRUCTION. It is the intent of the Corporation that this Plan and Options hereunder satisfy and be interpreted in a manner that in the case of persons who are or may be subject to Section 16 of the Exchange Act satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act, will not be subjected to avoidable liability thereunder, and will be Disinterested for purposes of administration of other discretionary plans of the Corporation or its affiliates. If any provision of this Plan or of any Option would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any remaining irreconcilable conflict with such intent as to such persons in the circumstances, such provision shall be disregarded. (d) NON-EXCLUSIVITY OF PLAN. Nothing in this Plan shall limit or be deemed to limit the authority of the Board to grant awards or authorize any other compensation under any other plan or authority. ARTICLE 4. RESTRICTIONS ON TRANSFER AND VOTING; STATUS UNDER SHAREHOLDERS' AGREEMENT 4.1 RESTRICTIONS ON TRANSFER. (a) NO TRANSFERABILITY OF OPTIONS. No Option shall be transferrable by the Participant or, if the Participant has died, the Participant's Beneficiary or, if the Participant has suffered a Total Disability, the Participant's Personal Representative, if any, or shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge (other than to the Corporation), except by will or the laws of 7 descent and distribution, or pursuant to a qualified domestic relations order as defined under the Code. Any attempted transfer in violation of these provisions shall be void and the Corporation shall disregard any attempt at transfer, assignment or other alienation prohibited hereby. The designation of a Beneficiary to receive a Director's benefits or rights under outstanding Options in the event of such Director's death shall not constitute a transfer for these purposes. Notwithstanding the foregoing, if and for so long as the Corporation is a Public Company, the Committee may permit the transfer of an Option in a particular case if to do so will not compromise the status of this Plan (or of the subject Options (without the holder's consent) or of other Options) under Rule 16b-3 or the disinterested administration of any of the Corporation's other stock incentive plans that are subject to Section 16 of the Exchange Act. ARTICLE 5. MISCELLANEOUS 5.1 DEFINITIONS. (a) "BENEFICIARY" shall mean the person, persons, trust or trusts designated by a Participant or, in the absence of a designation, entitled by will or the laws of descent and distribution to receive the benefits specified in the Option Agreement and under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is identified and able to act under the circumstances. (b) "BOARD" shall mean the Board of Directors of the Corporation or, with respect to administrative matters (as distinguished from Plan amendments, suspension, or termination), any duly authorized Committee of members of the Board designated to administer this Plan. (c) "CHANGE IN CONTROL EVENT" shall mean the occurrence of any of the following: (i) approval by the stockholders of the Corporation of the dissolution or liquidation of the Corporation; (ii) approval by the stockholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned, directly or indirectly, by stockholders of the Corporation immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Corporation's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization, but including in such determination any securities of the other parties to such reorganization held by affiliates of the 8 Corporation); (iii) approval by the stockholders of the Corporation of the sale, lease, conveyance or other disposition of all or substantially all of the Corporation's business and/or assets to a person or entity which is not a wholly-owned subsidiary of the Corporation; (iv) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a person who is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding shares of Common Stock of the Corporation at the time of the effectiveness of this Plan (or an affiliate, successor, heir, descendent or related party of or to any such person), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 25% of the combined voting power of the Corporation's then outstanding securities entitled to then vote generally in the election of directors of the Corporation; or (v) a majority of the Board of Directors of the Corporation not being comprised of Continuing Directors. For purposes of this clause, "Continuing Directors" are persons who were (A) members of the Board of Directors of the Corporation at the time of adoption of this Plan or (B) nominated for election or elected to the Board of Directors of the Corporation with the affirmative vote of at least a majority of the directors who were Continuing Directors at the time of such nomination or election. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "COMMISSION" shall mean the Securities and Exchange Commission. (f) "COMMITTEE" shall mean the Board as a whole or a committee appointed by the Board to administer this Plan, comprised of two or more directors or such greater number of directors as may be required under applicable law. (g) "COMMON STOCK" shall mean the Common Stock of the Corporation and such other securities or property as may become the subject of Options, or become subject to Options, pursuant to an adjustment made under Section 3.2 of this Plan. (h) "CORPORATION" shall mean Pacific Greystone Corporation, a Delaware corporation, and its successors. (i) "DIRECTOR SHAREHOLDER" shall mean a member of the Board of Directors who acquires shares upon exercise of an Option granted under this Plan or, if the Director Shareholder has died, the Director Shareholder's Beneficiary or, if the Director Shareholder has suffered a Total Disability, the Director Shareholder's Personal Representative. 9 (j) "DIRECTOR SHARES" shall mean the shares of Common Stock acquired upon exercise of any Option under this Plan by a Participant (or, in the event of the Participant's death or Total Disability, his Beneficiary or Personal Representative, as applicable). (k) "DISINTERESTED" shall mean disinterested for purposes of satisfying the disinterested administration requirements of Rule 16b-3. (l) "ELIGIBLE DIRECTOR" shall mean a member of the Board of Directors of the Corporation who as of the applicable date of grant is NOT (1) an officer or employee of the Corporation or any subsidiary; or (2) a person to whom equity securities of the Corporation or an affiliate have been granted or awarded within the prior year, under or pursuant to any other plan of the Corporation or an affiliate (except this Plan or any other formula or ongoing securities acquisition plan, the participation in which does NOT compromise the disinterested administration of any other such plan under Rule 16b-3) that provides for the grant or award of equity securities; or (3) an affiliate, associate, officer or employee of Warburg, Pincus Investors, L.P. (m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. (n) "FAIR MARKET VALUE" on any specified date shall mean : (i) if the Corporation is a Public Company: (A) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (B) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (C) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD or a similar organization; or 10 (ii) if the Corporation is NOT a Public Company or the NASD or a similar organization does not furnish the mean between the bid and asked prices for the Common Stock on such date, the fair value of the Common Stock as of the date of determination, on a consolidated, fully diluted basis assuming the exercise of all outstanding options and rights (whether or not vested), in good faith by the members of the Board who are not eligible to participate in this Plan or by the Committee, based on the most recent available quarterly financial statements of the Corporation and such other factors (including but not limited to the liquidity of the Common Stock (and recent trading if any therein), material developments subsequent to the end of the period covered by such financial statements, and industry and general economic developments) as the determining body may deem relevant for such purposes. (o) "OPTION" shall mean an option to purchase Common Stock authorized and granted under this Plan. (p) "OPTION AGREEMENT" shall mean an agreement substantially in the form of Exhibit A, completed in the manner required by this Plan and executed on behalf of the Corporation by an executive officer of the Corporation. (q) "OPTION DATE" shall mean the applicable date set forth in Article 2. (r) "PARTICIPANT" shall mean an Eligible Director who has been granted an Option under the provisions of this Plan (including in respect of any outstanding Options only, a person who is not eligible for additional Options). (s) "PERSONAL REPRESENTATIVE" shall mean the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive benefits under this Plan and who shall have become the legal representative of the Participant. (t) "PLAN" shall mean this 1995 Eligible Directors Stock Option Plan, as hereby amended. (u) "PUBLIC COMPANY" shall mean a corporation, a class of the equity securities of which is registered under Section 12 of the Exchange Act. (v) "RULE 16b-3" shall mean Rule 16b-3 as promulgated by the Commission pursuant to the Exchange Act, as amended from time to time. 11 (w) "SHARE" shall have the meaning ascribed to such term in Section 4.1 hereof. (x) "SUBSIDIARY" shall mean any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. (y) "TOTAL DISABILITY" shall mean a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code. 5.2 NOTICES. Notices sent to the Corporation shall be sent to its principal executive office (Attention: Corporate Secretary). Notices sent to an Optionee or Participant shall be sent to his or her most recent address as set forth in the Corporation's records. 12 EXHIBIT A PACIFIC GREYSTONE CORPORATION ELIGIBLE DIRECTOR NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT dated as of the _____ day of _____________, ____, between Pacific Greystone Corporation, a Delaware corporation (the "Corporation"), and ________________ (the "Director"). Capitalized terms used herein without definition shall have the meanings ascribed to them in the Amended and Restated 1995 Eligible Directors Stock Option Plan (the "Plan"). W I T N E S S E T H WHEREAS, the Corporation has adopted and the shareholders of the Corporation have approved the Plan. WHEREAS, pursuant to Section 2.1 of the Plan, the Corporation has granted an option (the "Option") to the Director upon the terms and conditions evidenced hereby, as required by the Plan, which Option is not intended as and shall not be deemed to be an incentive stock option within the meaning of Section 422 of the Code. NOW, THEREFORE, in consideration of the services rendered and to be rendered by the Director, the Corporation and the Director agree to the terms and conditions set forth herein, as required by the terms of the Plan. 1. OPTION GRANT. This Agreement evidences the grant to the Director, as of ___________, ____ (the "Option Date"), of an Option to purchase an aggregate of ___________ shares(1) of Common Stock, par value $.01 per share, under Section 2.1 of the Plan, subject to the terms and conditions and to adjustment as set forth herein or pursuant to the Plan and the limitations set forth in the Plan. 2. EXERCISE PRICE. The Option entitles the Director to purchase (subject to the terms of this Agreement and the Plan), all or any part of the Option shares at a price per share of $________, which amount represents the Fair Market Value of the shares on the Option Date. - ------------------------- (1)If this is an initial award and an event requiring an adjustment under Section 3.2 has occurred, insert adjusted number pursuant to Section 3.2 of the Plan in lieu of ___________. 3. OPTION EXERCISABILITY AND TERM. The Option shall first become and remain exercisable as to one-third of the number of shares in Section 1 on the first anniversary of the Option Date and as to an additional one-third of the number of shares in Section 1 on each of the next two anniversaries thereof, subject to adjustments under Section 3.2 of the Plan and to acceleration under Section 3.3 of the Plan. The Option shall terminate on the day before the fifth anniversary of the Option Date, unless earlier terminated in accordance with the terms of Sections 2.4 and 3.2 of the Plan. 4. SERVICE AND EFFECT OF TERMINATION OF SERVICE. The Director agrees to serve as a director in accordance with the provisions of the Corporation's Certificate of Incorporation, bylaws and applicable law. If the Director's services as a member of the Board shall terminate, this Option shall terminate at the times and to the extent set forth in Section 2.4 of the Plan. 5. GENERAL TERMS. The Option and this Agreement are subject to, and the Corporation and the Director agree to be bound by, all of the provisions of the Plan. Such provisions are incorporated herein by this reference. The Director acknowledges receiving a copy of the Plan and reading and understanding its terms and provisions. 6. NONTRANSFERABILITY OF OPTION. This Option shall be non- transferable (except in the limited circumstances set forth in Section 4.1(a) of the Plan) and shall be exercisable only by the Director. The grant of the Option is intended to constitute an exempt transaction under Rule 16b-3 which does not adversely affect the disinterested administration of any of the Corporation's other stock incentive plans subject to Section 16 of the Exchange Act and any provisions required to effect that result shall be deemed incorporated herein by this reference. 2 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PACIFIC GREYSTONE CORPORATION (a Delaware corporation) By ___________________________ Title _____________________ DIRECTOR _____________________________ (Signature) _____________________________ (Print Name) _____________________________ (Address) _____________________________ (City, State, Zip Code) 3 ________________________________________________________________ SPOUSAL CONSENT ________________________________________________________________ In consideration of the execution of the foregoing Stock Option Agreement by Pacific Greystone Corporation, I, ____________________________, the spouse of the Director therein named, do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: ______________, 19__. _________________________ Signature of Spouse CALIFORNIA-BASED OPTIONEE STATEMENT REPRESENTATION RE OPTION AWARD The undersigned recipient ("Optionee") of an Option under the Pacific Greystone Corporation Amended and Restated 1995 Eligible Directors Stock Option Plan (the "Plan"), evidenced by an Option Agreement dated as of __________, ____, hereby represents, for purposes of California Corporations Code Section 25102(f) and otherwise, that Optionee is acquiring the Option (and thus may be deemed to be thereby acquiring the underlying shares) for Optionee's own account, for investment and not with a view to or for sale of the Option or such shares in connection with any distribution. Optionee acknowledges and agrees that the Option is essentially non-transferable under any circumstances as provided in Section 4.1 of the Plan and that unless the issuance of the shares is registered under the Securities Act of 1933 prior to exercise, the shares will be subject to substantial restrictions on transfer. Executed as of the ____ day of ________________, ____. ______________________________ (Signature) ______________________________ (Print Name) EX-10.12 9 EMPLOYEE STOCK OPTION PLAN FORM OF PACIFIC GREYSTONE CORPORATION 1996 STOCK OPTION AND AWARD PLAN TABLE OF CONTENTS PAGE I.THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 SHARES AVAILABLE FOR AWARDS . . . . . . . . . . . . . . . . 3 1.5 GRANT OF AWARDS . . . . . . . . . . . . . . . . . . . . . . 4 1.6 AWARD PERIOD. . . . . . . . . . . . . . . . . . . . . . . . 4 1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS . . . . . . . 4 1.8 ACCEPTANCE OF NOTES TO FINANCE EXERCISE . . . . . . . . . . 5 1.9 NO TRANSFERABILITY. . . . . . . . . . . . . . . . . . . . . 6 II. EMPLOYEE OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 OPTION PRICE. . . . . . . . . . . . . . . . . . . . . . . . 6 2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.4 LIMITS ON 10% HOLDERS . . . . . . . . . . . . . . . . . . . 8 2.5 OPTION REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . 8 2.6 OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS . . . . . . . . . . . . . . . 8 III. STOCK APPRECIATION RIGHTS. . . . . . . . . . . . . . . . . . . . . 9 3.1 GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.2 EXERCISE OF SARS. . . . . . . . . . . . . . . . . . . . . . 9 3.3 PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.4 LIMITED SARS. . . . . . . . . . . . . . . . . . . . . . . . 10 IV. RESTRICTED STOCK AWARDS. . . . . . . . . . . . . . . . . . . . . . 10 4.1 GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.2 RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . 11 4.3 RETURN TO THE CORPORATION . . . . . . . . . . . . . . . . . 11 V. PERFORMANCE SHARE AWARDS AND STOCK BONUSES . . . . . . . . . . . . 11 5.1 GRANTS OF PERFORMANCE SHARE AWARDS. . . . . . . . . . . . . 11 5.2 GRANTS OF STOCK BONUSES . . . . . . . . . . . . . . . . . . 12 5.3 DEFERRED PAYMENTS . . . . . . . . . . . . . . . . . . . . . 12 5.4 SPECIAL PERFORMANCE-BASED SHARE AWARDS. . . . . . . . . . . 12 VI. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.1 RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS AND BENEFICIARIES . . . . . . . . . . . . . . . . . . . . . . . 13 i 6.2 ADJUSTMENTS; ACCELERATION . . . . . . . . . . . . . . . . . 14 6.3 TERMINATION OF SERVICE; TERMINATION OF SUBSIDIARY STATUS; DISCRETIONARY PROVISIONS. . . . . . . . . . . . . . 15 6.4 COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . . . . . . 16 6.5 TAX WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . 17 6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION. . . . . . . . . 17 6.7 PRIVILEGES OF STOCK OWNERSHIP . . . . . . . . . . . . . . . 18 6.8 EFFECTIVE DATE OF THIS PLAN . . . . . . . . . . . . . . . . 18 6.9 TERM OF THIS PLAN . . . . . . . . . . . . . . . . . . . . . 18 6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY . . . . . . . . . . 18 6.11 CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.12 NON-EXCLUSIVITY OF PLAN . . . . . . . . . . . . . . . . . . 20 VII. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 20 ii PACIFIC GREYSTONE CORPORATION 1996 STOCK OPTION AND AWARD PLAN I. THE PLAN. 1.1 PURPOSE. The purpose of this Plan is to promote the success of the Company and the interest of its stockholders by providing an additional means through the grant of Awards to attract, motivate, retain and reward key employees and other selected persons by providing them long-term incentives to improve the financial performance of the Company. "Corporation" means Pacific Greystone Corporation, a Delaware corporation, and its successors, and "Company" means the Corporation and its Subsidiaries, collectively. These terms and other capitalized terms are defined in Article VII. 1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE. (a) COMMITTEE. This Plan shall be administered by, and all Awards to Eligible Employees shall be authorized by, the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or by written consent of its members. (b) PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the express provisions of this Plan, the Committee shall have the authority: (i) to determine the particular Eligible Employees who will receive Awards; (ii) to grant Awards to Eligible Employees, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards shall become exercisable or shall vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion of such Awards; (iii) to approve the forms of Award Agreements (which need not be identical either as to type of award or among Participants); (iv) to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Employee Participants 1 under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (v) to cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Employees, subject to any required consent under Section 6.6; (vi) to accelerate or extend the exercisability or extend the term of any or all such outstanding Awards within the maximum ten-year term of Awards under Section 1.6; and (vii) to make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. (c) BINDING DETERMINATIONS. Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. No member of the Board or Committee, or officer of the Corporation or any Subsidiary, shall be liable for any such action or inaction of the entity or body, of another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with the express provisions hereof, the Board and Committee may act in their absolute discretion in matters within their authority related to this Plan. (d) RELIANCE ON EXPERTS. In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No director, officer or agent of the Company shall be liable for any such action or determination taken or made or omitted in good faith. (e) DELEGATION. The Committee may delegate ministerial, non-discretionary functions to individuals who are officers or employees of the Company. 1.3 PARTICIPATION. Awards may be granted by the Committee only to those persons that the Committee determines to be Eligible Employees. An Eligible Employee who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. Non-Employee Directors shall not be eligible to receive any Awards. 2 1.4 SHARES AVAILABLE FOR AWARDS. Subject to the provisions of Section 6.2, the capital stock that may be delivered under this Plan shall be shares of the Corporation's authorized but unissued Common Stock. The shares may be delivered for any lawful consideration. (a) NUMBER OF SHARES. The maximum number of shares of Common Stock that may be delivered pursuant to Awards granted to Eligible Employees under this Plan shall not exceed 790,000 shares. The maximum number of shares subject to those options and stock appreciation rights that during any calendar year are granted to any individual shall be limited to 179,000 and the maximum number of shares in the aggregate subject to all Awards that during any calendar year are granted to any individual under this Plan shall be 179,000. Each of the three foregoing numerical limits shall be subject to adjustment as contemplated by this Section 1.4 and Section 6.2. (b) CALCULATION OF AVAILABLE SHARES AND REPLENISHMENT. Shares subject to outstanding Awards of derivative securities (as defined in Rule 16a-1(c) under the Exchange Act) shall be reserved for issuance. If any Option or other right to acquire shares of Common Stock under or receive cash or shares in respect of an Award shall expire or be cancelled or terminated without having been exercised or paid in full, or any Common Stock subject to a Restricted Stock Award or other Award shall not vest or be delivered, the unpurchased, unvested or undelivered shares of Common Stock subject thereto shall again be available for the purposes of this Plan, subject only to any applicable limitations under Rule 16b-3 or Section 162(m) of the Code. If the Corporation withholds shares of Common Stock pursuant to Section 6.5, the number of shares that would have been deliverable with respect to an Award but that are withheld pursuant to the provisions of Section 6.5 may in effect not be issued, but the aggregate number of shares issuable with respect to the applicable Award and under this Plan shall be reduced by the number of shares withheld and such shares shall not be available for additional Awards under this Plan. Subject only to the preceding sentence, Section 1.4(c) and Section 6.10(c), (1) Awards payable solely in cash, and Awards that do not constitute equity securities as defined in Rule 16a-1(d), shall not reduce the number of shares available for Awards under this Plan, (2) any imputed charges to the maximum number of shares deliverable under this Plan (through reserves or otherwise) shall be reversed in the case of Awards actually paid in cash, and (3), to the extent any shares were previously reserved in respect of Awards payable in cash or shares, the number of shares not delivered shall again be available for purposes of this Plan. (c) PROVISIONS FOR CERTAIN CASH AWARDS. The number of awards payable solely in cash or actually paid in cash ("Cash Awards") shall be determined by reference to the number of shares by which the value or price of the Award is measured and shall not, together with the aggregate number of shares theretofore delivered and subject to then outstanding Awards payable in shares (or alternatively payable in cash or shares) under this Plan, exceed the aggregate or individual limits of Section 1.4(a), subject to adjustments under this Section 1.4 and Section 6.2. Cash Awards that are forfeited or 3 for any reason are not paid in cash under this Plan may again, subject to Section 6.10(c), be the subject of and available for subsequent Awards under the Plan. If an Award satisfies the requirements for an exclusion from the definition of derivative security under Rule 16a-1(c) that does not require that the Award be made under a Rule 16b-3 plan and is not intended to constitute a performance-based award for purposes of Section 162(m) of the Code, such Award need not be counted against the limits under Section 1.4(a), (b) or (c). 1.5 GRANT OF AWARDS. Subject to the express provisions of this Plan, the Committee has the authority to determine those individuals who are Eligible Employees, whether any of them will receive an Award and, if so, the type of Award, the number of shares of Common Stock subject to each Award, the price (if any) to be paid for the shares or the Award, the other terms of the Award, and, in the case of Performance Share Awards, in addition to the matters addressed in Section 1.2(b), the specific objectives, goals and performance criteria (such as an increase in sales, market value, earnings or book value over a base period, the years of service before vesting, the relevant job classification or level of responsibility or other factors) that further define the terms of the Performance Share Award. Each Award shall be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. The Award Agreement shall set forth the material terms and conditions of the Award established by the Committee consistent with the specific provisions of this Plan. 1.6 AWARD PERIOD. Each Award and all executory rights or obligations under the related Award Agreement shall expire on such date (if any) as shall be determined by the Committee, but in the case of Options, stock appreciation rights ("SARs") or other rights to acquire Common Stock not later than ten (10) years after the Award Date. 1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS. (a) PROVISIONS FOR EXERCISE. Unless the Committee otherwise expressly provides in the applicable Award Agreement, no Award shall be exercisable or shall vest until at least six months after the initial Award Date, and once exercisable an Award shall remain exercisable until the expiration or earlier termination of the Award. (b) PROCEDURE. Any exercisable Award shall be deemed to be exercised when the Corporation receives written notice of such exercise from the Participant, together with any required payment in accordance with Sections 2.2 and 6.5. (c) FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests shall be disregarded, but may be accumulated. The Committee, however, may determine in the case of Eligible Employees that cash, other securities, or other property will be paid or 4 transferred in lieu of any fractional share interests. No fewer than 100 shares may be purchased on exercise of any Award at one time unless the number purchased is the total number at the time available for purchase under the Award. 1.8 ACCEPTANCE OF NOTES TO FINANCE EXERCISE. The Corporation may, with the Committee's approval, accept one or more notes from any Eligible Employee in connection with the exercise or receipt of any outstanding Award; PROVIDED that any such note shall be subject to the following terms and conditions: (a) The principal of the note shall not exceed the amount required to be paid to the Corporation upon the exercise or receipt of one or more Awards under this Plan and the note shall be delivered directly to the Corporation in consideration of such exercise or receipt. (b) The initial term of the note shall be determined by the Committee; PROVIDED that the term of the note, including extensions, shall not exceed a period of 10 years. (c) The note shall provide for full recourse to the Employee Participant and shall bear interest at a rate determined by the Committee but not less than the interest rate necessary to avoid the imputation of interest under the Code. (d) If the employment of the Employee Participant terminates, the unpaid principal balance of the note shall become due and payable on the 10th business day after such termination; PROVIDED, HOWEVER, that if a sale of such shares would cause such Employee Participant to incur liability under Section 16(b) of the Exchange Act, the unpaid balance shall become due and payable on the 10th business day after the first day on which a sale of such shares could have been made without incurring such liability assuming for these purposes that there are no other transactions (or deemed transactions in securities of this Corporation) by the Employee Participant subsequent to such termination. (e) If required by the Committee or by applicable law, the note shall be secured by a pledge of any shares or rights financed thereby in compliance with applicable law. (f) The terms, repayment provisions, and collateral release provisions of the note and the pledge securing the note shall conform with all applicable laws, including rules and regulations of the Federal Reserve Board as then in effect. 5 1.9 NO TRANSFERABILITY. (a) LIMIT ON EXERCISE. Except as provided herein and subject to Section 6.10, Awards may be exercised only by, and amounts payable or shares issuable pursuant to an Award shall be paid only to (or for the account of), the Participant or, if the Participant has died, the Participant's Beneficiary or, if the Participant has suffered a Disability, the Participant's Personal Representative, if any, or if there is none, the Participant. Subject to Section 6.4 and 6.10, the Committee may by express written authorization permit Awards to be exercised by and/or paid to certain persons or entities related to the Participant who are transferees of the Participant without consideration, or to such other persons as the Committee deems appropriate, pursuant to such conditions and procedures as the Committee in writing may establish and set forth in or by amendment to an Award Agreement. (b) LIMIT ON TRANSFER. No option, right or other Award granted under this Plan including, without limitation, any undistributed performance share or share of Restricted Stock that has not vested, shall be transferrable by the Participant or shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge (other than to the Corporation), except (i) by will or the laws of descent and distribution, or (ii) pursuant to a qualified domestic relations order or pursuant to any other exception to transfer restrictions expressly permitted by the Committee and set forth in the Award Agreement (or an amendment thereto), but (in the case of Awards intended to satisfy the conditions of Rule 16b-3), only to the extent permitted by Section 6.10(d) and Rule 16b-3, and (iii) in the case of Awards comprising Incentive Stock Options, as permitted by the Code. The Corporation shall disregard any attempted transfer in violation of these provisions, and the attempt shall be void. (c) DESIGNATION OF BENEFICIARY. The designation of a Beneficiary shall not constitute a transfer prohibited by the foregoing provisions. II. EMPLOYEE OPTIONS 2.1 GRANTS. One or more Options may be granted under this Article to any Eligible Employee. Each Option granted shall be designated by the Committee in the applicable Award Agreement as either a Nonqualified Stock Option or an Incentive Stock Option. 2.2 OPTION PRICE. (a) PRICING LIMITS. The purchase price per share of the Common Stock covered by each Option shall be determined by the Committee at the time of the Award, but in the case of Incentive Stock Options shall not be less than 100% (110% in the case 6 of a Participant described in Section 2.4) of the Fair Market Value of the Common Stock on the date of grant. (b) PAYMENT PROVISIONS. The purchase price of any shares purchased on exercise of an Option granted under this Article shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by certified or cashier's check payable to the order of the Corporation; (iii) if authorized by the Committee or specified in the applicable Award Agreement, by a promissory note of the Participant consistent with the requirements of Section 1.8; or (iv) by the delivery of shares of Common Stock of the Corporation already owned by the Participant, PROVIDED, HOWEVER, that the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by delivering shares, and PROVIDED FURTHER that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. In addition to the payment methods described above, the Committee may provide that the Option can be exercised and payment made by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Corporation the amount of sale proceeds necessary to pay the exercise price and, unless otherwise allowed by the Committee, any applicable tax withholding under Section 6.5. The Corporation shall not be obligated to deliver certificates for the shares unless and until it receives full payment of the exercise price therefor and any related withholding obligations have been satisfied. 2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS. (a) $100,000 LIMIT. To the extent that the aggregate Fair Market Value of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company or any parent corporation, such options shall be treated as nonqualified stock options. For this purpose, the Fair Market Value of the stock subject to options shall be determined as of the date the options were awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Committee may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (b) OPTION PERIOD. Each Option and all rights thereunder shall expire no later than ten years after the Award Date or at such earlier time as provided in or pursuant to Section 6.3. 7 (c) OTHER CODE LIMITS. There shall be imposed in any Award Agreement relating to Incentive Stock Options such terms and conditions as from time to time are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. (d) OPTIONEE NOTICE REQUIREMENT. A holder of shares of Common Stock acquired upon exercise of an Incentive Stock Option shall give written notice to the Company of the disposition of the shares within two years of the Award Date or one year of the date of exercise. 2.4 LIMITS ON 10% HOLDERS. No Incentive Stock Option may be granted to any person who, at the time the Option is granted, owns (or is deemed to own under Section 424(d) of the Code) shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 2.5 OPTION REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. Subject to Section 1.4 and Section 6.6 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Employee any adjustment in the exercise or purchase price, the vesting schedule, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Article by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid means. Such amendment or other action may result, among other changes, in an exercise or purchase price which is higher or lower than the exercise or purchase price of the original or prior Award, provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. 2.6 OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options and Stock Appreciation Rights may be granted to Eligible Employees under this Plan in substitution for employee stock options granted by other entities to persons who are or who become employees of the Company, in connection with a distribution, merger or reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company, directly or indirectly, of all or a substantial part of the stock or assets of the employing entity. 8 III. STOCK APPRECIATION RIGHTS. 3.1 GRANTS. In its discretion, the Committee may grant to any Eligible Employee SARs concurrently with the grant of Options [or other Awards or in respect of an outstanding Award, in whole or in part, or independently of any other Award, all] on such terms as set forth by the Committee in the Award Agreement. Any SAR granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder, unless the holder otherwise agrees. 3.2 EXERCISE OF SARS. (a) EXERCISABILITY. An SAR granted independently of any other Award shall be exercisable pursuant to the terms of the Award Agreement. Unless the Award Agreement or the Committee otherwise provides, an SAR related to another Award shall be exercisable at such time or times, and to the extent, that the related Award shall be exercisable and only when the Fair Market Value of the stock subject to the related Award exceeds the base price of the SAR. (b) EFFECT ON AVAILABLE SHARES. To the extent that a SAR is exercised, the number of shares of Common Stock subject to any related Award shall be charged against the maximum amount of Common Stock that may be delivered pursuant to Awards under this Plan. The number of shares subject to the SAR and the related Award of the Participant shall also be reduced by such number of shares, unless the Award Agreement otherwise provides. (c) PROPORTIONATE REDUCTION. If an SAR extends to less than all the shares covered by the related Award and if a portion of the related Award is thereafter exercised, the number of shares subject to the unexercised SAR shall be reduced only if and to the extent that the remaining number of shares covered by such related Award is less than the remaining number of shares subject to the SAR. 3.3 PAYMENT. (a) AMOUNT. Unless the Committee otherwise provides in the applicable Award Agreement, upon exercise of an SAR and surrender of an exercisable portion of any related Award (to the extent required by Section 3.2), the Participant shall be entitled to receive, subject to Section 6.5, payment of an amount determined by multiplying (i) the difference obtained by subtracting the base price per share of Common Stock under the SAR from the Fair Market Value of a share of Common Stock on the date of exercise of the SAR, by 9 (ii) the number of shares with respect to which the SAR shall have been exercised. (b) FORM OF PAYMENT. The Committee, in its sole discretion, shall determine the form in which payment shall be made of the amount determined under paragraph (a) above, either solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the SAR), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. If the Committee permits the Participant to elect to receive cash or shares (or a combination thereof) on such exercise, any such election shall be subject to such conditions as the Committee may impose and, in the case of any Section 16 Person, any election to receive cash shall be subject to any applicable limitations under Rule 16b-3, unless the Committee otherwise provides. 3.4 LIMITED SARS. The Committee may grant to any Eligible Employee SARs exercisable only upon or in respect of a change in control or any other specified event ("Limited SARs") and such Limited SARs may relate to or operate in tandem or combination with or substitution for Options, other SARs or other Awards (or any combination thereof), and may be payable in cash or shares based on the spread between the base price of the SAR and a price based upon or equal to the Fair Market Value of the Shares during a specified period (not more than seven months) or at a specified time within a period of not more than seven months before, after or including the date of such event. IV. RESTRICTED STOCK AWARDS. 4.1 GRANTS. The Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock Award Agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the consideration for such shares (but not less than the minimum lawful consideration under applicable state law) by the Participant, the extent (if any) to which and the time (if ever) at which the Participant shall be entitled to dividends, voting and other rights in respect of the shares prior to vesting, and the restrictions (which may be based on performance criteria, passage of time or other factors or any combination thereof) imposed on such shares and the conditions of release or lapse of such restrictions. Such restrictions shall not lapse earlier than one year after the Award Date, except to the extent the Committee may otherwise provide in the applicable Award Agreement. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions ("Restricted Shares") shall bear a legend making the appropriate reference to the restrictions imposed hereunder and shall be held by the Corporation or 10 by a third party designated by the Committee until the restrictions on such shares shall have lapsed and the shares shall have vested in accordance with the provisions of the Award and Section 1.7(a). Upon issuance of the Restricted Stock Award, the Participant may be required to provide such further assurance and documents as the Committee may require to enforce the restrictions. 4.2 RESTRICTIONS. (a) PRE-VESTING RESTRAINTS. Except as provided in Section 4.1 and 1.9, restricted shares comprising any Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until the restrictions on such shares have lapsed and the shares become vested. (b) DIVIDEND AND VOTING RIGHTS. Unless otherwise provided in the applicable Award Agreement, the holder of a Restricted Stock Award shall not be entitled to receive dividends on any of the shares of Restricted Stock until the shares vest. Dividends so restricted shall be retained in a restricted account until the shares have vested and shall revert to the Corporation if they fail to vest. Holders of Restricted Stock shall be entitled to vote (or instruct voting) prior to vesting. (c) CASH PAYMENTS. If the Participant shall have paid or received cash (including any dividends) or other property in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to what extent such cash or other property shall be returned (with or without an earnings factor) as to shares of Restricted Stock which do not vest. 4.3 RETURN TO THE CORPORATION. Unless the Committee otherwise expressly provides, shares of Restricted Stock that are subject to restrictions at the time of termination of employment or are subject to other conditions to vesting that have not been satisfied by the time specified in the applicable Award Agreement shall not vest and shall be returned to the Corporation in such manner and on such terms as the Committee shall therein provide. V. PERFORMANCE SHARE AWARDS AND STOCK BONUSES. 5.1 GRANTS OF PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant Performance Share Awards to Eligible Employees based upon such factors, which in the case of any Award to a Section 16 Person shall include but not be limited to the contributions, responsibilities and other compensation of the person as the Committee shall deem relevant in light of the specific type and terms of the award. An Award Agreement shall 11 specify the maximum number of shares of Common Stock (if any) subject to the Performance Share Award, the consideration (but not less than the minimum lawful consideration) to be paid for any such shares as may be issuable to the Participant, the duration of the Award and the conditions upon which delivery of any shares or cash to the Participant shall be based. The amount of cash or shares or other property that may be deliverable pursuant to such Award shall be based upon the degree of attainment over a specified period of not more than ten years (a "performance cycle") as may be established by the Committee of such measure(s) of the performance of the Company (or any part thereof) or the Participant as may be established by the Committee. The Committee may provide for full or partial credit, prior to completion of such performance cycle or the attainment of the performance achievement specified in the Award, in the event of the Participant's death, Retirement, or Total Disability, a Change in Control Event or in such other circumstances as the Committee (consistent with Section 6.10(c)(2), if applicable) may determine. 5.2 GRANTS OF STOCK BONUSES. The Committee may grant a Stock Bonus to any Eligible Employee to reward exceptional or special services, contributions or achievements in the manner and on such terms and conditions (including any restrictions on such shares) as determined from time to time by the Committee. The number of shares so awarded shall be determined by the Committee. The Award may be granted independently or in lieu of a cash bonus. 5.3 DEFERRED PAYMENTS. The Committee may authorize for the benefit of any Eligible Employee the deferral of any payment of cash or shares that may become due or of cash otherwise payable under this Plan, and provide for accreted benefits thereon based upon such deferment, at the election or at the request of such Participant, subject to the other terms of this Plan. Such deferment shall be subject to such further conditions, restrictions or requirements as the Committee may impose, subject to any then vested rights of Participants. 5.4 SPECIAL PERFORMANCE-BASED SHARE AWARDS Without limiting the generality of the foregoing, and in addition to awards granted under other provisions of this Plan, other performance-based awards within the meaning of Section 162(m) of the Code ("Performance-Based Awards"), whether in the form of restricted stock, performance stock, phantom stock or other rights, the vesting of which depends on the performance of the Company on a consolidated, segment, subsidiary or division basis with reference to net earnings (before or after tax), cash flow, return on equity or on assets or on net investment, or cost containment or reduction, or any combination thereof (the "criteria") relative to preestablished performance goals, may be granted under this Plan. The applicable business 12 criteria and specific performance goal or goals ("targets") must be approved by the Committee in advance of applicable deadlines under the Code and while the performance relating to such targets remains substantially uncertain. The applicable performance measurement period may be not less than one nor more than ten years. Performance targets may be adjusted to mitigate the unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time the targets were set. (a) ELIGIBLE CLASS. The eligible class of persons for Awards under this Section 5.4 shall be executive officers of the Company. (b) MAXIMUM AWARD. In no event shall grants made in any fiscal year to any eligible person under this Section 5.4 relate to more than 143,500 shares or, if payable in cash, a cash amount of more than $3.5 million. (c) COMMITTEE CERTIFICATION. Before any Performance-Based Award under this Section 5.4 is paid, the Committee must certify that the material terms of the Performance-Based Award were satisfied. (d) TERMS AND CONDITIONS OF AWARDS. The Committee will have discretion to determine the restrictions or other limitations of the individual Awards under this Section 5.4, including the authority to reduce Awards, payouts or vesting or to pay no Awards, in its sole discretion, if the Committee preserves such authority at the time of grant by language to this effect in its authorizing resolutions, the applicable Award Agreement or otherwise. VI. OTHER PROVISIONS. 6.1 RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS AND BENEFICIARIES. (a) EMPLOYMENT STATUS. Status as an Eligible Employee shall not be construed as a commitment that any Award will be made under this Plan to an Eligible Employee or to Eligible Employees generally. (b) NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in any other documents related to this Plan or to any Award) shall confer upon any Eligible Employee or other Participant any right to continue in the employ or other service of the Company or constitute any contract or agreement of employment or other service, nor shall interfere in any way with the right of the Company to change such person's compensation or other benefits or to terminate the employment of such person, with or without cause, but nothing contained in this Plan or any document related hereto shall adversely affect any independent contractual right or duty of such person without the consent of the party to be bound. 13 (c) PLAN NOT FUNDED. Awards payable under this Plan shall be payable in shares or from the general assets of the Corporation, and (except as provided in Section 1.4(b)), no special or separate reserve, fund or deposit shall be made to assure payment of such Awards. No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock, except as expressly otherwise provided) of the Company by reason of any Award hereunder. Neither the provisions of this Plan (nor of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive payment pursuant to any Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 6.2 ADJUSTMENTS; ACCELERATION. (a) ADJUSTMENTS. If there shall occur any extraordinary dividend or other extraordinary distribution in respect of the Common Stock (whether in the form of cash, Common Stock, other securities, or other property), or any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend), reverse stock split, reorganization, merger, combination, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Corporation, or there shall occur any similar extraordinary corporate transaction (or event in respect of the Common Stock) or a sale of substantially all the assets of the Corporation as an entirety, then the Committee shall, in such manner and to such extent (if any) as it deems appropriate and equitable (1) proportionately adjust any or all of (a) the number and type of shares of Common Stock (or other securities) which thereafter may be made the subject of Awards (including the specific maxima and numbers of shares set forth elsewhere in this Plan), (b) the number, amount and type of shares of Common Stock (or other securities or property) subject to any or all outstanding Awards, (c) the grant, purchase, or exercise price of any or all outstanding Awards, (d) the securities, cash or other property deliverable upon exercise of any outstanding Awards, and/or (e) the performance standards appropriate to any outstanding Awards, or (2) in the case of an extraordinary dividend or other distribution, recapitalization, reclassification, reorganization, merger, consolidation, combination, sale of assets, split up, exchange, or spin off, make provision for a cash payment or for the substitution or exchange of any or all outstanding Awards (or the cash, securities or property deliverable to the holder of any or all outstanding Awards) based upon the distribution or consideration payable to holders of the Common Stock of the Corporation upon or in respect of such event; PROVIDED, HOWEVER, in each case, that with respect to Awards of Incentive Stock Options, no such adjustment shall be made which would cause the Plan to violate Section 424(a) of the Code or any successor provisions thereto without the written consent of holders materially adversely affected thereby. In any of such events, the Committee may take such action sufficiently prior to such event if necessary to permit the Participant to 14 realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is available to shareholders generally. (b) ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. Unless prior to a Change in Control Event the Committee determines that, upon its occurrence, there shall be no acceleration of benefits under Awards or determines that only certain or limited benefits under Awards shall be accelerated and the extent to which they shall be accelerated, and/or establishes a different time in respect of such Event for such acceleration, then upon the occurrence of a Change in Control Event (i) each Option and SAR shall become immediately exercisable, (ii) Restricted Stock shall immediately vest free of restrictions, and (iii) the number of shares, cash or other property covered by each Performance Share Award shall be issued to the Participant; PROVIDED, HOWEVER, that in no event shall any Award be accelerated as to any Section 16 Person to a date less than six months after the Award Date of such Award. The Committee may override the limitations on acceleration in this Section 6.2(b) by express provision in the Award Agreement and may accord any Eligible Employee a right to refuse any acceleration, whether pursuant to the Award Agreement or otherwise, in such circumstances as the Committee may approve. Any acceleration of Awards shall comply with applicable legal requirements. (c) POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Option or other right to acquire Common Stock under this Plan has been fully accelerated as permitted by Section 6.2(b), the holder thereof has been accorded an opportunity to exercise or otherwise realize the benefits thereof and the Option or other right is not exercised prior to (i) a dissolution of the Corporation, or (ii) an event described in Section 6.2(a) that the Corporation does not survive, or (iii) the consummation of an event described in Section 6.2(a) that results in a Change of Control approved by the Board, the Option or right shall thereupon terminate, subject to any provision that has been expressly made by the Committee for the survival, substitution, exchange or other settlement of the Option or right. 6.3 TERMINATION OF SERVICE; TERMINATION OF SUBSIDIARY STATUS; DISCRETIONARY PROVISIONS. (a) OPTIONS/SAR - RESIGNATION OR DISMISSAL. Unless the Committee otherwise provides in the applicable Award Agreement, if the Participant's employment by or service to the Company terminates for any reason other than Retirement, Total Disability or death, the Participant shall have, subject to earlier termination pursuant to 15 or as contemplated by Section 1.6 or 6.2, three months from the date of termination to exercise any Option to the extent it shall have become exercisable on the date of termination, and any Option to the extent not exercisable on that date shall terminate. (b) OPTIONS/SAR - RETIREMENT, DEATH OR DISABILITY. Unless the Committee otherwise provides in the applicable Award Agreement, and except for limitations under the Code in respect of ISOs, if the Participant's employment by or service to the Company terminates as a result of Retirement, Total Disability or death, the Participant, Participant's Personal Representative or his or her Beneficiary, as the case may be, shall have, subject to earlier termination pursuant to or as contemplated by Section 1.6, ___ months from the date of termination to exercise any Option or SAR to the extent it shall have become exercisable by the date of termination, and any Option or SAR to the extent not exercisable on that date shall terminate. (c) CERTAIN SARS. Each SAR granted concurrently or in tandem with an Option shall have the same post-termination provisions and exercisability periods as the Option to which it relates, unless the Committee otherwise provides. (d) OTHER AWARDS. The Committee shall establish in respect of each other Award granted hereunder the Participant's rights and benefits (if any) in the event of a termination of employment or service and in so doing may make distinctions based upon the cause of termination and the nature of the Award. (e) CHANGE IN SUBSIDIARY STATUS/CHANGE IN SERVICE. For purposes of this Plan and any Award hereunder, if an entity ceases to be a Subsidiary, a termination of employment shall be deemed to have occurred with respect to each employee of such Subsidiary who does not continue as an employee of another entity owned, controlled by or under common control with the Company. In the case of Awards to or held by an Other Eligible Person, the Committee shall determine the applicable service requirements and the effect of a change in the extent, status or terms of service. (f) COMMITTEE DISCRETION. Notwithstanding the foregoing provisions of this Section 6.3, in the event of, or in anticipation of, a termination of employment or service with the Company for any reason, other than discharge for cause, the Committee may, in its discretion, increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, or, subject to the provisions of Section 1.6, extend the exercisability period upon such terms as the Committee shall determine and expressly set forth in or by amendment to the Award Agreement. 6.4 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Awards under this Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money under this Plan or under Awards granted hereunder are subject to compliance with all 16 applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, agency or any regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Corporation, provide such assurances and representations to the Corporation as the Corporation may deem necessary or desirable to assure compliance with all applicable legal requirements. 6.5 TAX WITHHOLDING. Upon any exercise, vesting, or payment of any Award (or upon the disposition of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code), the Company shall have the right at its option to (i) require the Participant (or Personal Representative or Beneficiary, as the case may be) to pay or provide for payment of the amount of any taxes which the Company may be required to withhold with respect to such Award event or payment or (ii) deduct from any amount payable the amount of any taxes which the Company may be required to withhold with respect to such cash payment. In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock under this Plan, the Committee may in its sole discretion grant (either at the time of the Award or thereafter) to the Participant the right to elect, pursuant to such rules and subject to such conditions as the Committee may establish, to have the Corporation reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares valued at their then Fair Market Value, to satisfy such withholding obligation. 6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION. (a) BOARD OR COMMITTEE AUTHORIZATION. The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan, in whole or in part. No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee shall retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. (b) SHAREHOLDER APPROVAL. To the extent then required by Rule 16b-3 to secure benefits thereunder or to avoid liability under Section 16 of the Exchange Act (and Rules thereunder) or required under Sections 422 and 424 of the Code or any other applicable law, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to shareholder approval. (c) AMENDMENTS TO AWARDS. Without limiting any other express authority of the Committee under, but subject to the express limits, of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Eligible Employees that the Committee in the prior exercise of its discretion has 17 imposed, without the consent of a Participant, and may make other changes to the terms and conditions of Awards that do not affect, in any manner materially adverse to the Employee Participant, his or her rights and benefits under an Award. (d) LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment, suspension or termination of this Plan or change of or affecting any outstanding Award shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Corporation under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 6.2 shall not be deemed to constitute changes or amendments for purposes of this Section 6.6. 6.7 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly authorized by the Committee or this Plan, a Participant shall not be entitled to any privilege of stock ownership as to any shares of Common Stock not actually delivered to and held of record by him or her. No adjustment will be made for dividends or other rights as a shareholders for which a record date is prior to such date of delivery. 6.8 EFFECTIVE DATE OF THIS PLAN. This Plan shall be effective as of the date it is approved by the Board, subject to approval of the shareholders of the Corporation. 6.9 TERM OF THIS PLAN. No Award shall be granted under this Plan after January 31, 2006 (the "termination date"). Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award granted prior to the termination date may extend beyond such date, and all authority of the Committee with respect to Awards hereunder, including the authority to amend an Award, shall continue during any suspension of this Plan and shall continue in respect of Awards outstanding on the termination date. 6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY. (a) CHOICE OF LAW. This Plan, the Awards, all documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with the laws of the State of California. (b) SEVERABILITY. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue in effect. 18 (c) PLAN CONSTRUCTION. (1) RULE 16b-3; BIFURCATION. It is the intent of the Corporation that this Plan and Awards hereunder satisfy and be interpreted in a manner that in the case of Participants who are or may be subject to Section 16 of the Exchange Act satisfies the applicable requirements of Rule 16b-3 so that such persons (unless they otherwise agree) will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any remaining irreconcilable conflict with such intent as to such persons in the circumstances, such provision shall be disregarded. Notwithstanding anything to the contrary in this Plan, the provisions of this Plan may at any time be bifurcated by the Board or the Committee in any manner so that certain provisions of this Plan or any Award Agreement intended (or required in order) to satisfy the applicable requirements of Rule 16b-3 are only applicable to Section 16 Persons and to those Awards to Section 16 Persons intended to satisfy the requirements of Rule 16b-3. (2) SECTION 162(m). It is the further intent of the Company that Options or SARs with an exercise or base price not less than Fair Market Value on the date of grant and performance awards under Section 5.4 of this Plan that are granted to or held by an executive officer of the Corporation shall (if so designated by the Committee) qualify as performance-based compensation under Section 162(m) of the Code, and this Plan shall be interpreted consistent with such intent. (d) TRANSITION PERIOD PROVISIONS. During the applicable transition period under new Rule 16b-3, any derivative security the grant of which is intended to be exempt from Rule 16b-3 shall not be transferable other than as permitted by former Rule 16b-3(d)(ii), and the consideration for any grant or award shall conform to any additional limitations under former Rule 16b-3. 6.11 CAPTIONS. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof. 19 6.12 NON-EXCLUSIVITY OF PLAN. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. VII. DEFINITIONS. 7.1 DEFINITIONS. (a) "AWARD" shall mean an award of any Option, SAR, Restricted Stock, Stock Bonus, Performance-Based Award or other Performance Share Award, dividend equivalent or deferred payment right or other right or security that would constitute a "derivative security" under Rule 16a-1(c) of the Exchange Act, or any combination thereof, whether alternative or cumulative, authorized by and granted under this Plan. (b) "AWARD AGREEMENT" shall mean any writing setting forth the terms of an Award that has been authorized by the Committee. (c) "AWARD DATE" shall mean the date upon which the Committee took the action granting an Award or such later date as the Committee designates as the Award Date. (d) "AWARD PERIOD" shall mean the period beginning on an Award Date and ending on the expiration date of such Award. (e) "BENEFICIARY" shall mean the person, persons, trust or trusts designated by a Participant or, in the absence of a designation, entitled by will or the laws of descent and distribution, to receive the benefits specified in the Award Agreement and under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. (f) "BOARD" shall mean the Board of Directors of the Corporation. (g) "CHANGE IN CONTROL EVENT" shall mean any of the following: (1) Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; (2) Approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately 20 after the reorganization are, or will be, owned, directly or indirectly, by shareholders of the Corporation immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Corporation's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization, but including in such determination any securities of the other parties to such reorganization held by affiliates of the Corporation); (3) Approval by the shareholders of the Corporation of the sale, lease, conveyance or other disposition of all or substantially all of the Corporation's business and/or assets to a person or entity which is not a Subsidiary; (4) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a person who is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding Shares of Common Stock at the time of adoption of this Plan (or an affiliate, successor, heir, descendent or related party of or to any such person), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities of the Corporation representing more than 25% of the combined voting power of the Corporation's then outstanding securities entitled to then vote generally in the election of directors of the Corporation; or (5) A majority of the Board of Directors of the Company not being comprised of Continuing Directors. For purposes of this clause, "Continuing Directors" are persons who were (A) members of the Board of Directors of the Company at the time of adoption of this Plan or (B) nominated for election or elected to the Board of Directors of the Company with the affirmative vote of at least a majority of the directors who were Continuing Directors at the time of such nomination or election. (h) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. (i) "COMMISSION" shall mean the Securities and Exchange Commission. (j) "COMMITTEE" shall mean a committee appointed by the Board to administer this Plan, which committee shall be comprised of at least two directors, each of whom, during such time as one or more Participants may be subject to Section 16 of the Exchange Act, shall be Disinterested; PROVIDED, that until the Corporation has a class of securities registered pursuant to Section 12 of the Exchange Act and the applicable transition period under Rule 16b-3 has expired, the Board as a whole shall comprise the 21 Committee without regard to whether its members are "Disinterested" unless the Board has appointed a committee comprised of at least three Disinterested directors to administer the Plan. (k) "COMMON STOCK" shall mean the Common Stock of the Corporation and such other securities or property as may become the subject of Awards, or become subject to Awards, pursuant to an adjustment made under Section 6.2 of this Plan. (l) "COMPANY" shall mean, collectively, the Corporation and its Subsidiaries. (m) "CORPORATION" shall mean Pacific Greystone Corporation, a Delaware corporation, and its successors. (n) "DISINTERESTED" shall mean disinterested or "outside" director within the meaning of any applicable regulatory requirements, including Rule 16b-3 and Section 162(m) of the Code. (o) "ELIGIBLE EMPLOYEE" shall mean an officer (whether or not a director) or key employee of the Company, or any Other Eligible Person, as determined by the Committee in its discretion. (p) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (q) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. (r) "FAIR MARKET VALUE" on any date shall mean (i) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of THE WALL STREET JOURNAL, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (ii) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (iii) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD or a similar organization; or (iv) if the stock is not listed or admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the stock are not furnished by 22 the NASD or a similar organization, the value as established by the Committee at such time for purposes of this Plan. (s) "INCENTIVE STOCK OPTION" shall mean an Option which is designated and intended as an incentive stock option within the meaning of Section 422 of the Code, the award of which contains such provisions (including but not limited to the receipt of shareholder approval of this Plan, if the award is made prior to such approval) and is made under such circumstances and to such persons as may be necessary to comply with that section. (t) "NONQUALIFIED STOCK OPTION" shall mean an Option that is designated as a Nonqualified Stock Option and shall include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. Any Option granted hereunder that is not designated as an incentive stock option shall be deemed to be designated a nonqualified stock option under this Plan and not an incentive stock option under the Code. (u) "OPTION" shall mean an option to purchase Common Stock under this Plan. The Committee shall designate any Option granted to an Eligible Employee as a Nonqualified Stock Option or an Incentive Stock Option. (v) "OTHER ELIGIBLE PERSON" shall mean any individual consultant or advisor, or (to the extent provided in the next sentence) agent, who (A) renders or has rendered BONA FIDE services (other than services in connection with the offering or sale of securities of the Company in a capital raising transaction) to the Company, (B) is not a director of the Corporation, and (C) is selected to participate in this Plan by the Committee. A non-employee agent providing BONA FIDE services to the Company (other than as an eligible advisor or consultant) may also be selected as an Other Eligible Person if such agent's participation in this Plan would not adversely affect (x) the Corporation's eligibility to use Form S-8 to register under the Securities Act the offer and sale by the Company of shares issuable under this Plan or (y) the Corporation's compliance with any other applicable laws. (w) "PARTICIPANT" shall mean an Eligible Employee who has been granted an Award under this Plan. (x) "PERFORMANCE SHARE AWARD" shall mean an award of a right to receive shares of Common Stock under Section 5.1, or to receive shares of Common Stock or other compensation (including cash) under Section 5.4, the issuance or payment of which is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. (y) "PERSONAL REPRESENTATIVE" shall mean the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive 23 benefits under this Plan by virtue of having become the legal representative of the Participant. (z) "PLAN" shall mean this Pacific Greystone Corporation 1996 Stock Option and Award Plan. (aa) "RESTRICTED STOCK" shall mean shares of Common Stock awarded to a Participant subject to payment of such consideration, if any, and such conditions on vesting (which may include, among others, the passage of time, specified performance objectives or other factors) and such transfer and other restrictions as are established in or pursuant to this Plan and the related Award Agreement, for so long as such shares remain unvested under the terms of the applicable Award Agreement. (bb) "RETIREMENT" shall mean retirement with the consent of the Company or retirement from active service as an employee or officer of the Company on or after attaining age 65. (cc) "RULE 16b-3" shall mean Rule 16b-3 as promulgated by the Commission pursuant to the Exchange Act, as amended from time to time, but subject to any applicable transition rules. (dd) "SECTION 16 PERSON" shall mean a person subject to Section 16(a) of the Exchange Act. (ee) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended from time to time. (ff) "STOCK APPRECIATION RIGHT" or "SAR" shall mean a right authorized under this Plan to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, the aggregate amount or value of which is determined by reference to a change in the Fair Market Value of the Common Stock. (gg) "STOCK BONUS" shall mean an Award of shares of Common Stock for no consideration other than past services and without restriction other than such transfer or other restrictions as the Committee may deem advisable to assure compliance with law. (hh) "SUBSIDIARY" shall mean any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. (ii) "TOTAL DISABILITY" shall mean a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code and such other disabilities, infirmities, afflictions or conditions as the Committee by rule may include. 24 EX-10.13 10 EMPLOYEE STOCK PURCHASE PLAN FORM OF PACIFIC GREYSTONE CORPORATION 1996 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1996 Employee Stock Purchase Plan of Pacific Greystone Corporation. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "BOARD" shall mean the Board of Directors of the Company. (b) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" shall mean the Common Stock of the Company. (d) "COMPANY" shall mean Pacific Greystone Corporation, a Delaware corporation. (e) "COMPENSATION" shall mean all regular straight time gross earnings, payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, commissions and other cash compensation. (f) "CONTINUOUS STATUS AS AN EMPLOYEE" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. (g) "CONTRIBUTIONS" shall mean all amounts credited to the account of a participant pursuant to the Plan. (h) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan (including any Subsidiaries which have been so designated after the date the Plan is approved by stockholders). (i) "EMPLOYEE" shall mean any person, including an officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (j) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (k) "EXERCISE DATE" shall mean the last day of each Offering Period of the Plan. (l) "OFFERING DATE" shall mean the first business day of each Offering Period of the Plan, except that in the case of an individual who becomes an eligible Employee after the first business day of an Offering Period but prior to the first business day of the three months of such Offering Period, the term "Offering Date" shall mean the first business day of the calendar quarter coinciding with or next succeeding the day on which that individual becomes an eligible Employee. Options granted after the first business day of an Offering Period will be subject to the same terms as the options granted on the first business day of such Offering Period except that they will have a different grant date (thus, potentially, a different exercise price) and, because they expire at the same time as the options granted on the first business day of such Offering Period, a shorter term. (m) "OFFERING PERIOD" shall mean a period of six (6) months, subject to Section 4. (n) "PLAN" shall mean this Employee Stock Purchase Plan. (o) "SUBSIDIARY" shall mean any corporation, domestic or foreign, in an unbroken line of corporations (beginning with the Company) in which each corporation (other than the last corporation) has stock possessing 50% or more of the total combined voting power of all classes of stock in one or more of the other corporations in the chain, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. ELIGIBILITY. (a) Any person who has been employed as an Employee for three (3) months as of the Offering Date of a given Offering Period (except for the first Offering Period under the Plan, in which case the person shall be an Employee as of the Offering Date) shall be eligible to participate during such 2 Offering Period under the Plan, provided that such person was not eligible to participate in such Offering Period as of any prior Offering Date, and further, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (after applying the attribution rules contained in Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary, or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty Five Thousand Dollars ($25,000) of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. For this purpose, a right to purchase stock occurs when it first becomes exercisable during the calendar year. 4. OFFERING PERIODS. The Plan shall be implemented by a series of Offering Periods, with new Offering Periods commencing on or about January 1 and July 1 of each year (or at such other time or times as may be determined by the Board of Directors). The first Offering Period shall commence on July 1, 1996 (or such other date as the Board of Directors shall determine). The Plan shall continue until terminated in accordance with Sections 19 or 23 hereof. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without stockholder approval if such change is announced at least ten (10) days prior to the scheduled beginning of the first Offering Period to be affected. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. The subscription agreement shall set forth the percentage of the participant's Compensation (which shall be not less than 1% and not more than 10%) to be applied as Contributions pursuant to the Plan. (b) Payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid on or prior to the Exercise Date of the 3 Offering Period to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. 6. METHOD OF PAYMENT OF CONTRIBUTIONS. (a) The participant shall elect to have payroll deductions made on each payday during the Offering Period in an amount not less than one percent (1%) and not more than ten percent (10%) of such participant's Compensation on each such payday; provided that the aggregate of such payroll deductions during the Offering Period shall not exceed ten percent (10%) of the participant's aggregate Compensation during said Offering Period. The Company will maintain on its books or cause to be maintained by a recordkeeper an account in the name of such participant. All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (b) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, on one occasion only during the Offering Period, may decrease the rate of his or her Contributions during the Offering Period by completing and filing with the Company a new subscription agreement. The change in rate shall be effective as of the beginning of the calendar quarter following the date of filing of the new subscription agreement. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased to 0% at such time during any Offering Period which is scheduled to end during the current calendar year that the aggregate of all payroll deductions accumulated with respect to such Offering Period and any other Offering Period ending within the same calendar year equal $21,250. Payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. 7. GRANT OF OPTION. (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date a number of shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Exercise Date and retained in the participant's account as of the Exercise Date by the lower of (i) ninety-five percent (95%) of the fair market value of a share of the Company's Common Stock on the Offering Date, or (ii) ninety-five percent (95%) of the fair market value of a share of the Company's Common Stock on the 4 Exercise Date; PROVIDED, HOWEVER, that the maximum number of shares an Employee may purchase during each Offering Period shall be determined at the Offering Date by dividing $12,500 by the fair market value of a share of the Company's Common Stock on the Offering Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12. The fair market value of a share of the Company's Common Stock shall be determined as provided in Section 7(b). (b) The option price per share of the shares offered in a given Offering Period shall be the lower of: (i) 95% of the fair market value of a share of the Common Stock of the Company on the Offering Date; or (ii) 95% of the fair market value of a share of the Common Stock of the Company on the Exercise Date. The fair market value of the Company's Common Stock on a given date shall be the closing price on The New York Stock Exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in THE WALL STREET JOURNAL or, in the event the Common Stock is not listed on The New York Stock Exchange, the fair market value shall be the closing price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, if such prices are not so reported, as determined by the Board in its discretion. 8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as provided in paragraph 10, his or her option for the purchase of shares will be exercised automatically on the Exercise Date of the Offering Period, without any further action on the optionee's part, and the maximum number of full shares subject to option will be purchased at the applicable option price with the accumulated Contributions in his or her account. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Exercise Date. During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. DELIVERY. As promptly as practicable after the Exercise Date of each Offering Period, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. Only cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of shares at the termination of each Offering Period which is insufficient to purchase a whole share of Common Stock of the Company shall be carried over in the participant's account and applied to the option price for the succeeding Offering Period. 5 10. WITHDRAWAL; TERMINATION OF EMPLOYMENT; REDUCTION IN SERVICE. (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to ten (10) days prior to the Exercise Date of the Offering Period by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated. No further Contributions for the purchase of shares will be made during the Offering Period. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Exercise Date of the Offering Period for any reason, including retirement or death, the Contributions credited to his or her account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 11. INTEREST. No interest shall accrue on the Contributions of a participant in the Plan. 12. STOCK. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 50,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 18. If the total number of shares which would otherwise be subject to options granted pursuant to Section 7(a) on the Offering Date of an Offering Period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform a manner as shall be practicable and as it shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number 6 of shares subject to the option to each Employee affected thereby and shall similarly reduce the rate of Contributions, if necessary. (b) The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or, if requested by the participant, in the name of the participant and his or her spouse. 13. ADMINISTRATION. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power and discretion to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The composition of the committee shall be in accordance with the requirements to obtain or retain any available exemption from the operation of Section 16(b) of the Exchange Act. 14. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of the Offering Period but prior to delivery to him or her of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the Exercise Date of the Offering Period. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective in a form prescribed by the Board. (b) Such designation of beneficiary may be changed by the participant (and his or her spouse, if any) at any time by written notice to the Company. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 7 15. TRANSFERABILITY. Neither Contributions credited to a participant's account nor any options or rights with regard to the exercise of options or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 14) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 16. USE OF FUNDS. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 17. REPORTS. Individual bookkeeping accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees promptly following the Exercise Date, which statements will set forth the amount of Contributions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; PROVIDED, HOWEVER, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) CORPORATE TRANSACTIONS. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of 8 such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Board shortens the Offering Period then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify each participant in writing, at least ten (10) days prior to the New Exercise Date, that the Exercise Date for his or her option has been changed to the New Exercise Date and that his or her option will be exercised automatically on the New Exercise Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this paragraph, an option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the option confers the right to purchase, for each share of option stock subject to the option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each share of Common Stock held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); PROVIDED, HOWEVER, that if such consideration received in the sale of assets or merger was not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in fair market value of the per share consideration received by holders of Common Stock in the sale of assets or merger. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. AMENDMENT OR TERMINATION. (a) The Board of Directors of the Company may at any time terminate or amend the Plan. Except as provided in Section 18, no such termination shall affect options previously 9 granted, nor shall an amendment make any change in an outstanding option which adversely affects the rights of the optionee. In addition, to the extent necessary to comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any successor rule or provision or any applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as so required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. In addition, the Board (or its committee) shall have the right to designate from time to time the Subsidiaries where employees may be eligible to participate in the Plan and such designations shall not constitute an amendment to the Plan requiring stockholder approval in accordance with Treasury Regulations Section 1.423-2(c)(4). 20. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the Plan is adopted by the Board. Such stockholder approval shall be obtained in the manner and to the extent required under applicable federal and state law. 21. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for that purpose. 22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, any applicable state securities laws, the rules and regulations 10 promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19. 24. ADDITIONAL RESTRICTIONS OF RULE 16b-3. The terms and conditions of options granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11 EX-23.1 11 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial and Operating Data" and to the use of our report dated January 24, 1996, in the Registration Statement (Form S-1 No. 333-1388) and related Prospectus of Pacific Greystone Corporation for the registration of $90,800,000 aggregate maximum offering price of its common stock. Ernst & Young LLP Los Angeles, California May 20, 1996 -----END PRIVACY-ENHANCED MESSAGE-----