SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14830
CONTINENTAL HOMES HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 86-0554624
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7001 N. Scottsdale Road, Suite 2050 85253
Scottsdale, Arizona (Zip Code)
(Address of principal executive offices)
(602) 483-0006
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES / X / No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock September 30, 1994
--------------------- ------------------
$.01 par value 6,962,770
<PAGE>
CONTINENTAL HOMES HOLDING CORP.
FORM 10-Q
FOR THE QUARTER ENDED
AUGUST 31, 1994
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 31, 1994
and May 31, 1994 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the three
months ended August 31, 1994 and 1993 . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three
months ended August 31, 1994 and 1993 . . . . . . . . . . . 5
Notes to unaudited Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of Security Holders . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 13
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
August 31, May 31,
1994 1994
---------- --------
ASSETS (In thousands)
Homebuilding:
Cash $ 14,672 $ 28,809
Receivables 8,165 9,928
Homes, lots and improvements in production 229,793 205,369
Property and equipment, net 1,916 1,914
Prepaid expenses and other assets 14,688 13,621
Excess of cost over related net assets acquired 6,488 6,743
-------- --------
275,722 266,384
-------- --------
Mortgage banking and title operations:
Mortgage loans held for sale 12,319 17,570
Mortgage loans held for long-term
investment, net 18,687 20,132
Other assets 1,445 1,404
-------- --------
32,451 39,106
-------- --------
Total assets $308,173 $305,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding:
Accounts payable and other liabilities $ 36,470 $ 35,179
Notes payable, senior and convertible debt 144,058 144,048
Deferred income taxes 3,100 2,232
-------- --------
183,628 181,459
-------- --------
Mortgage banking and title operations:
Notes payable 1,350 3,439
Bonds payable 19,044 20,832
Other 1,427 1,200
-------- --------
21,821 25,471
-------- --------
Total liabilities 205,449 206,930
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value:
Authorized - 2,000,000 shares
Issued - None -- --
Common stock, $.01 par value:
Authorized - 20,000,000 shares
Issued - 7,080,900 shares 71 71
Treasury stock, at cost - 118,130 shares (83)
(83)
Capital in excess of par value 59,610 59,610
Retained earnings 43,126 38,962
-------- --------
Total stockholders' equity 102,724 98,560
-------- --------
Total liabilities and stockholders' equity $308,173 $305,490
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these unaudited consolidated balance sheets.
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three months ended
August 31,
------------------
1994 1993
---- ----
REVENUES
Home sales $105,100 $ 76,924
Land sales -- 254
Mortgage banking and title operations 1,866 1,182
Other income, net 77 30
-------- --------
Total revenues 107,043 78,390
-------- --------
COSTS AND EXPENSES
Homebuilding:
Cost of home sales 85,617 62,665
Cost of land sales 75 342
Selling, general and
administrative expenses 11,118 7,687
Interest, net 938 1,157
Mortgage banking and title operations:
Selling, general and
administrative expenses 1,439 703
Interest, net (173) 35
-------- --------
Total costs and expenses 99,014 72,589
-------- --------
Income before income taxes 8,029 5,801
Income taxes 3,513 2,564
-------- --------
Net income $ 4,516 $ 3,237
======== ========
Earnings per common share $ .65 $ .62
Earnings per common share
assuming full dilution $ .58 $ .53
Cash dividend per share $ .05 $ .05
Weighted average number of
shares outstanding 6,962,770 5,194,877
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these unaudited consolidated statements.
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
August 31,
------------------
1994 1993
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 4,516 $ 3,237
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 638 458
Increase in deferred income taxes 868 164
Decrease (increase) in assets
Homes, lots and improvements in production (24,424) 3,279
Receivables 8,498 10,090
Prepaid expenses and other assets (1,369) 178
Increase in liabilities
Accounts payable and other liabilities 1,518 2,411
-------- --------
Net cash provided (used) by operating activities (9,755) 19,817
-------- --------
Cash flows from investing activities:
Net additions of property and equipment (121) (66)
Cash received from unconsolidated joint ventures -- 148
Cash paid for Milburn Investments, Inc.
and Subsidiaries, net of cash acquired -- (7,068)
-------- --------
Net cash used by investing activities (121) (6,986)
-------- --------
Cash flows from financing activities:
Decrease in notes payable to financial
institutions (2,088) (9,521)
Retirement of bonds payable (1,821) (1,283)
Stock options exercised -- 268
Dividends paid (352) (259)
-------- --------
Net cash used by financing activities (4,261) (10,795)
-------- --------
Net increase (decrease) in cash (14,137) 2,036
Cash at beginning of period 28,809 11,552
-------- --------
Cash at end of period $ 14,672 $ 13,588
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 1,603 $ 1,734
Income taxes $ 675 $ 135
Supplemental schedule of non-cash investing and financing activities:
On July 29, 1993, the Company acquired Milburn Investments, Inc. and
Subsidiaries. Non-cash consideration paid included the issuance of $6.3
million of Series A preferred stock. As a result of the acquisition, the
Company recorded additional assets of $92,660,000 (primarily homes, lots and
improvements in production and mortgage related assets) and liabilities of
$66,590,000 (primarily notes payable to financial institutions and mortgage
related debt).
The accompanying notes to consolidated financial statements are an integral
part of these unaudited consolidated statements.
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of
Continental Homes Holding Corp. and its subsidiaries ("Company"). In
the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
Company's financial position, results of operations and cash flows for
the periods presented.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and the related disclosures
contained in the Company's annual report on Form 10-K for the year
ended May 31, 1994, filed with the Securities and Exchange Commission.
The results of operations for the three months ended August 31, 1994
are not necessarily indicative of the results to be expected for the
full year.
Note 2. Interest Capitalization
The Company follows the practice of capitalizing for its homebuilding
operations certain interest costs incurred on land under development
and homes under construction. Such capitalized interest is included
in cost of home sales when the units are delivered. The Company
capitalized such interest in the amount of $3,222,000 and $1,953,000
and expensed as a component of cost of goods sold $2,263,000 and
$1,679,000 in the three months ended August 31, 1994 and 1993,
respectively.
Note 3. Notes Payable, Senior and Subordinated Debt
Notes payable, senior and convertible debt for homebuilding consist
of:
August 31, May 31,
1994 1994
--------- --------
(In thousands)
12% senior notes, due 1999, net of
premium of $1,673 and $1,753 $111,673 $111,753
6-7/8% convertible subordinated notes,
due 2002, net of discount of $2,615
and $2,705 32,385 32,295
-------- --------
$144,058 $144,048
======== ========
Note 4. Interest, Net
Interest, net is comprised of interest expense and interest income.
The summary of the components of interest, net is as follows:
Three months ended
August 31,
------------------
1994 1993
---- ----
(In thousands)
Interest expense, homebuilding $ 1,087 $ 1,320
Interest income, homebuilding (149) (163)
------- -------
$ 938 $ 1,157
======= =======
Interest expense, mortgage banking $ 516 $ 513
Interest income, mortgage banking (689) (478)
------- -------
$ (173) $ 35
======= =======
Note 5. Acquisition of Milburn Investments, Inc. and Aspen Homes
(the "Acquisitions")
On July 29, 1993, the Company completed the acquisition of 100% of the
Common Stock of Milburn Investments, Inc. ("Milburn"), for approximately
$26.3 million ("Milburn Acquisition"). The consideration consisted of
approximately $20 million in cash and $6.3 million in Series A Preferred
Stock issued by the Company. On November 4, 1993 the Company redeemed the
Series A Preferred Stock. On January 28, 1994, the Company acquired the
operations of Aspen Homes ("Aspen") for total cash consideration of
$6,982,000.
The following unaudited pro forma combined financial data give effect
to the Milburn Acquisition as if it had occurred on the first day of the
August 31, 1993 quarter. This pro forma information has been prepared
utilizing the historical consolidated financial statements of the Company
and Milburn. This information should be read in conjunction with the
historical financial statements and notes thereto. The pro forma financial
data is provided for comparative purposes only and does not purport to be
indicative of the results which would have been obtained if the Milburn
Acquisition had been effected during the period presented. The pro forma
financial information is based on the purchase method of accounting for the
Milburn Acquisition and reflects adjustments to record the profit of
acquired inventories, amortize the non-compete agreement and the excess
purchase price over the underlying value of net assets acquired, reflect the
additional interest on acquisition indebtedness assumed and adjust income
taxes for the pro forma adjustments.
Three Months ended
August 31, 1993
--------------------
(In thousands)
Total revenues
$ 97,646
Net income 3,678
Earnings per common share .71
Earnings per common share
assuming full dilution .60
Milburn is the subject of an Internal Revenue Service ("IRS") audit for
periods prior to its acquisition by the Company. The final results of this
audit are unknown at this time. However, preliminary discussions with the
IRS indicate a potential tax liability (excluding interest) in excess of
amounts reserved of approximately $1,800,000. Any such liability would be
reflected as an adjustment of the purchase price of Milburn. The Company
would seek to recover payments made in respect of such tax liability under the
indemnification from the seller.
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Homebuilding
The following table sets forth, for the periods indicated, unit
activity, average sales price and revenue from home sales for the Company:
Quarters ended
August 31,
--------------
1994 1993
---- ----
Units delivered 826 671
Average sales price $127,240 $114,641
Revenue from homes sales (000's) $105,100 $ 76,924
Percentage increase from prior year 36.6% 51.8%
Change due to volume 23.1% 48.5%
Change due to average sales price 13.5% 3.3%
The volume increase in the quarter ended August 31, 1994 compared to
the same period in the prior year was attributable to the Texas operations.
Without Texas, the Company's unit volume was 13.4% less during the quarter
than in the same quarter last year. The decrease in unit volume (without
Texas) resulted from fewer home sales in the Phoenix market in prior
quarters. Significant volume increases in earlier quarters resulted in the
Company selling out of several subdivisions in Phoenix faster than
anticipated. This resulted in fewer homes available for sale in Phoenix in
the third and fourth fiscal quarters of 1994 compared to the same period in
fiscal 1993. The increase in average sales price was primarily due to
deliveries in Phoenix and Denver, which are experiencing improved housing
markets.
The following table summarizes information related to the Company's
backlog at the dates indicated:
August 31,
-----------------------------------
(Dollars in thousands)
1994 1993
---- ----
Units Dollars Units Dollars
----- ------- ----- -------
Phoenix 613 $ 79,000 657 $ 74,775
Texas 274 31,004 195 21,185
Denver 99 18,109 77 12,914
California 42 11,709 33 9,403
----- -------- ----- --------
Total backlog 1,028 $139,822 962 $118,277
===== ======== ===== ========
Average price per unit $136 $123
======== ========
As a result of the earlier inventory shortage, the number of units in the
backlog in Phoenix at August 31, 1994 was 7% less than the prior year. New
subdivisions opened in late May and early June increased the number of
active subdivisions in Phoenix to a level consistent with prior years. The
aggregate sales value of new contracts signed increased 42% in the three
months ended August 31, 1994 as a result of the Texas operations to
$95,768,000 representing 718 homes (including $27,533,000 in Texas
representing 248 homes) as compared with $67,289,000 representing 571 homes
(including $12,834,000 in Texas representing 122 homes) for the three months
ended August 31, 1993.
The following table summarizes information related to cost of home
sales, selling, general and administrative ("SG&A") expenses and interest,
net for homebuilding:
Quarters ended August 31,
----------------------------------
1994 1993
Dollars % Dollars %
------- ----- ------- -----
(Dollars in thousands)
Revenue from home sales $105,100 100.0% $ 76,924 100.0%
Cost of home sales 85,617 81.5 62,665 81.5
-------- ----- -------- -----
Gross profit from home sales 19,483 18.5 14,259 18.5
SG&A expenses 11,118 10.5 7,687 10.0
-------- ----- -------- ----
Operating income from
homebuilding 8,365 8.0 6,572 8.5
Interest, net 938 1.0 1,157 1.5
-------- ----- -------- -----
Pre-tax profit from
homebuilding $ 7,427 7.0% $ 5,415 7.0%
======== ===== ======== =====
Gross profit from home sales was 18.5% (19.8% excluding California
operations) for the three months ended August 31, 1994 compared to 18.5%
(20.6% excluding California operations) for the corresponding fiscal 1994
period. The Southern California market has been weak due to difficult
economic conditions, concerns about home values and low consumer confidence.
Accordingly, the Company has aggressively marketed its California homes by
offering sales incentives and discounts. The Company opened one new
subdivision in June and anticipates opening two additional subdivisions
during the current fiscal year. Deliveries from these new subdivisions are
expected to generate a significant improvement in the Southern California
gross margins. The California market, however, will continue to have a
negative impact on the Company's earnings since volume is not sufficient to
offset general and administrative expenses and interest which is expensed
and not capitalized.
The increase in total SG&A expenses for the quarter ended August 31, 1994
was primarily due to the Texas operations. The current fiscal quarter
included $3,961,000 of SG&A expenses from Texas compared to $1,366,000 in
the first quarter of fiscal 1994. SG&A expenses for each home delivered
were $13,460 and $11,456 in the first quarter of fiscal 1995 and 1994,
respectively. The Company capitalizes certain SG&A expenses for
homebuilding. Accordingly, total SG&A costs incurred for homebuilding were
$12,660,000 for the three months ended August 31, 1994 compared to
$8,822,000 for the corresponding fiscal 1994 period.
The Company capitalizes certain interest costs for its homebuilding
operations and includes such capitalized interest in cost of home sales when
the related units are delivered. Accordingly, total interest incurred by
the Company was $4,309,000 for the three months ended August 31, 1994
compared to $3,174,000 for the three months ended August 31, 1993.
Interest, net for homebuilding was $938,000 and $1,157,000 for the three
months ended August 31, 1994 and 1993, respectively.
The Company's pre-tax profit from homebuilding for the three months ended
August 31, 1994 was $7,427,000 compared to $5,415,000 for the corresponding
quarter ended August 31, 1993. The increase in pre-tax profit was due
primarily to Texas results which contributed $2,036,000 and $873,000 of pre-
tax profit in the three months ended August 31, 1994 and 1993, respectively.
Mortgage Banking
The Company's mortgage banking operations are conducted through its
wholly-owned subsidiaries American Western Mortgage Company ("AWMC") in
Arizona and Miltex Management, Inc. ("MMI") in Texas. The following table
summarizes operating information for the Company's mortgage banking
operations:
Quarters ended
August 31,
-------------
1994 1993
---- ----
(Dollars in thousands)
Number of loans originated 548 419
Loan origination fees $ 517 $ 388
Sale of servicing and marketing gains 800 578
Other revenue 163 79
------ ------
Total revenues 1,480 1,045
General and administrative expenses 1,201 703
------ ------
Operating income from mortgage banking 279 342
Interest, net (173) 35
------ ------
Pre-tax profit from mortgage banking $ 452 $ 307
====== ======
Revenues and general and administrative expenses from mortgage banking
increased in the quarter ended August 31, 1994 primarily as a result of the
higher Texas operations. Additionally, revenues increased due to higher
servicing release premiums received on the sale of servicing. The Company
retains a portion of the loan servicing of the loans it originates. At
August 31, 1994, the servicing portfolio was approximately $57,189,000
compared to $56,586,000 at August 31, 1993.
Consolidated Operations
Net income was $4,516,000 ($.65 per share, $.58 fully diluted) for the
three months ended August 31, 1994 compared to $3,237,000 ($.62 per share,
$.53 fully diluted) for the period ended August 31, 1993.
Liquidity and Capital Resources
The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisition and inventory balances. The Company has
financed, and expects to continue to finance, its working capital needs
through funds generated by operations and borrowings. Funds for future land
acquisitions and construction costs are expected to be provided primarily by
cash flows from operations and future borrowings as permitted under the 12%
Senior Note Indenture. At August 31, 1994, the Company had unsecured lines
of credit from two lenders for aggregate borrowings (excluding mortgage
warehouse lines) of up to $15,000,000. In connection with the Milburn
Acquisition, the Company assumed a $25,000,000 secured revolving line of
credit. At August 31, 1994, there were no amounts outstanding under these
credit lines. The Company's revolving lines of credit bear interest at
rates ranging from prime plus 1/2% to prime plus 1%. The Company believes
that amounts generated from operations and such additional borrowings will
provide funds adequate to finance its homebuilding activities and meet its
debt service requirements. The Company does not have any significant
current commitments for capital expenditures.
AWMC has a warehouse line of credit for $15,000,000 which is guaranteed
by the Company. In addition, MMI has a warehouse line of credit for
$10,000,000. Pursuant to the warehouse lines of credit, the Company issues
drafts to fund its mortgage loans. The amount represented by a draft is
drawn on the warehouse line of credit when the draft is presented for
payment. At August 31, 1994, no amounts were outstanding under the
warehouse lines of credit and the amount of funding drafts outstanding was
$1,350,000. The Company believes that these lines are sufficient for its
mortgage banking operations.
On July 29, 1993 the Company acquired all of the outstanding capital
stock of Milburn for approximately $26.2 million ($20 million in cash and
$6.2 million of Series A Preferred Stock). On January 28, 1994, the Company
acquired the operations of Aspen Homes for total cash consideration of
$6,982,000.
In November 1993, the Company completed a public offering of 1,704,400
shares of Common Stock at $21.50 per share. The net proceeds of the
offering (approximately $34,228,000) were used to redeem the Series A
Preferred Stock and to reduce temporarily all amounts outstanding under the
Company's revolving lines of credit and mortgage banking warehouse lines of
credit.
On March 22, 1994, the Company obtained the consent of the holders of
the majority of the outstanding 12% Senior Notes to certain amendments to
the Indenture, including to permit the sale of an additional $35,000,000 of
Senior Notes. In connection therewith, the Company paid $1,102,020 to the
holders of the outstanding Notes. On March 31, 1994, the Company completed
the sale of the additional Senior Notes at 107% of par.
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 4. Submission of matters to a vote of Security Holders
At the Company's Annual Meeting of Stockholders held on August 30,
1994, the stockholders elected the following persons to the Board of
Directors:
Nominee For Withheld
------- ---- --------
Donald R. Loback 6,340,525 1,517
Kathleen R. Wade 6,339,358 2,017
Robert J. Wade 6,317,191 21,517
W. Thomas Hickcox 6,340,525 2,517
Jo Ann Rudd 6,338,483 3,517
William Steinberg 6,335,636 4,717
Bradley S. Anderson 6,336,803 3,717
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Statement of Computation of Earnings Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K: There were no reports on Form 8-K
filed for the three months ended August 31, 1994.
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL HOMES HOLDING CORP.
Date: October 7, 1994 By: /s/ Kenda B. Gonzales
--------------------------
KENDA B. GONZALES
Secretary and Treasurer
(Chief Financial Officer)
Date: October 7, 1994 By: /s/ Donald R. Loback
--------------------------
DONALD R. LOBACK
Co-Chief Executive Officer
Exhibit 11
Continental Homes Holding Corp.
Computation of Earnings Per Share
(In thousands, except per share data)
Three months ended
August 31,
------------------
1994 1993
---- ----
Fully diluted:
Net income $ 4,516 $ 3,237
Interest expense on convertible
subordinated notes, net of income taxes 401 401
------- -------
$ 4,917 $ 3,638
======= =======
Weighted average number of shares outstanding 6,963 5,195
Conversion of convertible subordinated notes
(42.55 shares per $1,000 principal
amount of notes) 1,489 1,489
Incremental shares relating to stock
options exercisable 50 131
------- -------
Weighted average number of shares outstanding
assuming full dilution 8,502 6,815
======= =======
Fully diluted net income per share $ .58 $ .53
======= =======
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