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, 1996
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 practical date.
Outstanding at
Class of Common Stock September 30, 1996
- - --------------------- ------------------
$.01 par value 7,007,330
________________________________________________________________________________
<PAGE>
CONTINENTAL HOMES HOLDING CORP.
FORM 10-Q
FOR THE QUARTER ENDED
AUGUST 31, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 31, 1996 and
May 31, 1996.................................................... 3
Consolidated Statements of Income for the three months ended
August 31, 1996 and 1995........................................ 4
Consolidated Statements of Cash Flows for the three months ended
August 31, 1996 and 1995........................................ 5
Notes to Unaudited Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 8
PART II. OTHER INFORMATION
Item 3. Legal Proceedings................................................ 13
Item 4. Submission of matters to a vote of Security Holders.............. 13
Item 6. Exhibits and Reports on Form 8-K................................. 13
2
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
August 31, May 31,
1996 1996
---- ----
(In thousands)
<S> <C> <C>
ASSETS
Homebuilding:
Cash and cash equivalents $ 24,557 $ 25,236
Receivables 12,658 16,693
Homes, lots and improvements in production 371,519 344,880
Property and equipment, net 2,498 2,271
Prepaid expenses and other assets 21,327 16,797
Excess of cost over related net assets acquired 12,320 11,715
-------- --------
444,879 417,592
-------- --------
Mortgage banking:
Mortgage loans held for sale 21,804 20,350
Mortgage loans held for long-term investment, net -- 86
Other assets 460 406
-------- --------
22,264 20,842
-------- --------
Total assets $467,143 $438,434
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding:
Accounts payable and other liabilities $ 61,450 $ 52,240
Notes payable, senior and convertible subordinated debt 246,496 244,999
Deferred income taxes 924 1,236
-------- --------
308,870 298,475
-------- --------
Mortgage banking:
Notes payable 14,569 5,359
Bonds payable -- 168
Other 1,038 686
-------- --------
15,607 6,213
-------- --------
Total liabilities 324,477 304,688
-------- --------
Minority Interest 4,686 4,797
-------- --------
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 - 73,570 and 88,265 shares (321) (384)
Capital in excess of par value 60,475 60,396
Retained earnings 77,755 68,866
-------- --------
Total stockholders' equity 137,980 128,949
-------- --------
Total liabilities and stockholders' equity $467,143 $438,434
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these unaudited consolidated balance sheets.
3
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
August 31,
----------
1996 1995
---- ----
<S> <C> <C>
REVENUES
Home sales $183,664 $132,946
Land sales 481 10,761
Mortgage banking and title operations 3,266 2,586
Other income, net 235 112
-------- --------
Total revenues 187,646 146,405
-------- --------
COSTS AND EXPENSES
Homebuilding:
Cost of home sales 149,674 108,426
Cost of land sales 496 10,831
Selling, general and administrative expense 18,640 14,956
Interest, net 1,385 1,149
Mortgage banking and title operations:
Selling, general and administrative expense 2,056 1,724
Interest, net (201) 55
-------- --------
Total costs and expenses 172,050 137,141
-------- --------
Income before income taxes 15,596 9,264
Income taxes 6,360 4,040
-------- --------
Net income $ 9,236 $ 5,224
======== ========
Earnings per common share $ 1.32 $ .75
Earnings per common share assuming full dilution $ .95 $ .66
Cash dividend per share $ .05 $ .05
Weighted average number of shares outstanding 7,003,206 6,927,672
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these unaudited consolidated statements.
4
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
August 31,
----------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,236 $ 5,224
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 812 840
Minority interest (111) --
Increase (decrease) in deferred income taxes (312) 1,024
Decrease (increase) in assets:
Homes, lots and improvements in production (18,842) 4,148
Receivables 2,824 1,909
Prepaid expenses and other assets (4,353) (3,118)
Increase in liabilities:
Accounts payable and other liabilities 8,118 3,555
------- -------
Net cash provided (used) by operating activities (2,628) 13,582
------- -------
Cash flows from investing activities:
Net additions of property and equipment (421) (123)
Cash paid for acquisitions, net of cash acquired (1,205) --
------- -------
Net cash used by investing activities (1,626) (123)
------- -------
Cash flows from financing activities:
Increase (decrease) in notes payable
to financial institutions 3,948 (11,468)
Retirement of bonds payable (168) (311)
Stock options exercised 142 65
Dividends paid (347) (345)
------- -------
Net cash used by financing activities 3,575 (12,059)
------- -------
Net increase (decrease) in cash (679) 1,400
Cash at beginning of period 25,236 12,848
------- -------
Cash at end of period $24,557 $14,248
======= =======
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest, net of amounts capitalized $ 1,643 $ 1,958
Income taxes 300 $ --
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these unaudited consolidated statements.
5
<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 (the
"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, 1996, filed with the
Securities and Exchange Commission.
The results of operations for the three months ended August 31,
1996 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
$4,479,000 and $4,081,000 and expensed as a component of cost home
sales $4,500,000 and $3,662,000 in the three months ended August
31, 1996 and 1995, respectively.
Note 3. Notes Payable, Senior and Convertible Subordinated Debt
Notes payable, senior and convertible subordinated debt for
homebuilding consist of:
August 31, May 31,
1996 1996
---- ----
(In thousands)
Notes payable $ 20,565 $ 19,108
10% Senior notes, due 2006, net of
discount of $1,920 and $1,972 128,080 128,028
12% Senior notes, due 1999, net of
premium of $101 and $113 11,601 11,613
6-7/8% convertible subordinated notes,
due 2002 86,250 86,250
-------- --------
$246,496 $244,999
======== ========
6
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4. Interest, net
The summary of the components of interest, net is as follows:
Three months ended
August 31,
----------
1996 1995
---- ----
(In thousands)
Interest expense, homebuilding $ 1,466 $ 1,234
Interest income, homebuilding (81) (85)
------- -------
$ 1,385 $ 1,149
======= =======
Interest expense, mortgage banking 177 $ 724
Interest income, mortgage banking (378) (669)
------- -------
$ (201) $ 55
======= =======
7
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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,
----------
1996 1995
---- ----
Units delivered 1,368 1,029
Average sales price $ 134,300 $ 129,200
Revenue from home sales (000's) $ 183,664 $ 132,946
Percentage increase from prior year 38.1% 26.5%
Change due to volume 32.9% 24.6%
Change due to average sales price 5.2% 1.9%
The volume increase in the quarter ended August 31, 1996 compared to
the quarter ended August 31, 1995 resulted from improved sales in Denver, South
Florida and Texas during the fourth quarter of fiscal 1996, and the Company's
expansion into the Dallas, Texas market.
The following table summarizes information related to the Company's
backlog at the dates indicated:
August 31,
----------
1996 1995
---- ----
Units Dollars Units Dollars
----- ------- ----- -------
(Dollars in thousands)
Phoenix 789 $104,450 1,003 $126,424
Texas 518 58,117 420 46,733
Florida 196 24,460 118 16,731
Denver 275 53,974 118 23,901
California 79 28,279 89 20,388
-------- -------- -------- --------
Total backlog 1,857 $269,280 1,748 $234,177
======== ======== ======== ========
Average price per unit $ 145 $ 134
======== ========
The increase in backlog at August 31, 1996 resulted from record sales
in Denver, South Florida and Texas during the fourth quarter of fiscal 1996 and
the Company's expansion into the Dallas, Texas market. The aggregate sales value
of new contracts signed decreased 14% in the three months ended August 31, 1996
compared to the first quarter last year. Most of the decline was a result of
decreased order activity in the Phoenix market during the first quarter of
fiscal 1997 compared to the first quarter last year. This decline was the result
of a very difficult comparison and not due to a significant deterioration in the
market. The Company recorded 1,076 net new orders
8
<PAGE>
with an aggregate sales value of approximately $143,661,000 for the first three
months ended August 31, 1996 compared to 1,284 net new orders with an aggregate
sales value of approximately $166,183,000 during the first quarter of last year.
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,
-------------------------
1996 1995
---- ----
Dollars % Dollars %
------- - ------- -
(Dollars in thousands)
Revenue from home sales $183,664 100.0 % $132,946 100.0 %
Cost of home sales 149,674 81.5 108,426 81.6
-------- ----- -------- -----
Gross profit from home sales 33,990 18.5 24,520 18.4
SG&A expenses 18,640 10.1 14,956 11.2
-------- ----- -------- -----
Operating income from homebuilding 15,350 8.4 9,564 7.2
Interest, net 1,385 .8 1,149 .9
-------- ----- -------- -----
Pre-tax profit from homebuilding $ 13,965 7.6 % $ 8,415 6.3 %
======== ===== ======== =====
The increase in total SG&A expenses for the quarter ended August 31,
1996 compared to the quarter ended August 31, 1995 was principally due to the
increased volume which increased variable marketing costs (sales commissions,
advertising and model furniture amortization). Additionally, SG&A increased with
the addition of the Dallas operation during the first quarter of fiscal 1997.
SG&A expenses for each home delivered decreased to $13,626 in the first quarter
of fiscal 1997 compared to $14,534 in the first quarter of last year. The
Company capitalizes certain SG&A expenses for homebuilding. Accordingly, total
SG&A costs incurred for homebuilding were $21,325,000 for the three months ended
August 31, 1996 compared to $16,980,000 for the corresponding fiscal 1996
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 $5,945,000 for the three months ended August 31, 1996 compared to $5,315,000
for the three months ended August 31, 1995. Interest, net for homebuilding was
$1,385,000 and $1,149,000 for the three months ended August 31, 1996 and 1995,
respectively.
The Company's pre-tax profit from homebuilding for the three months
ended August 31, 1996 was $13,965,000 compared to $8,415,000 for the
corresponding quarter ended August 31, 1995. Pre-tax profit increased in the
first quarter of fiscal 1997 due primarily to increased volume and improved
results in all markets.
9
<PAGE>
Mortgage Banking
- - ----------------
The Company's mortgage banking operations are conducted through its
wholly-owned subsidiary CH Mortgage Company ("CHMC"). The following table
summarizes operating information for the Company's mortgage banking operations:
Quarters ended
August 31,
----------
1996 1995
---- ----
(Dollars in thousands)
Number of loans originated 877 676
Loan origination fees $ 844 $ 645
Sale of servicing rights and marketing gains 1,504 1,253
Other revenue 280 161
------ ------
Total revenues 2,628 2,059
General and administrative expenses 1,721 1,435
------ ------
Operating income from mortgage banking 907 624
Interest, net (201) 59
------ ------
Pre-tax profit from mortgage banking $1,108 $ 565
====== ======
Revenues and general and administrative expenses from mortgage banking
increased in the quarter ended August 31, 1996 primarily as a result of an
increase in originations and expansion into the Denver, Miami and Southern
California markets.
Consolidated Operations
As a result of the aforementioned items, net income was $9,236,000
($1.32 per share, $.95 fully diluted) for the three months ended August 31, 1996
compared to $5,224,000 ($.75 per share, $.66 fully diluted) for the period ended
August 31, 1995.
10
<PAGE>
Liquidity and Capital Resources
- - -------------------------------
The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisitions 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 Company's loan
agreements. On June 27, 1996, the Company entered into a credit agreement
("Credit Agreement") with a group of banks which provides for a $110 million
unsecured revolving line of credit. Borrowings under the Credit Agreement bear
interest at LIBOR plus 1.75% or prime plus .125% at the Company's election and
subject to the rating on its senior debt. Available borrowings under the Credit
Agreement are limited to certain percentages of housing unit costs, finished
lots, land under development and receivables as defined in the Credit Agreement.
As a result of this formula, the borrowing base at August 31, 1996 was
$93,648,000 and $20,000,000 was outstanding. 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 current commitments for capital
expenditures.
CHMC has a warehouse line of credit for $25,000,000 which is guaranteed
by the Company. Pursuant to the warehouse line 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, 1996, the amount outstanding under the warehouse line of credit and the
amount of funding drafts that had not been presented for payment was
$14,569,000. The Company believes that this line is sufficient for its mortgage
banking operations.
On November 10, 1995, the Company completed the sale of $75,000,000
principal amount of its 6-7/8% Convertible Subordinated Notes due November 2002.
On December 5, 1995, the Company sold an additional $11,250,000 of such notes.
The net proceeds were used to redeem the Company's 6-7/8% Convertible
Subordinated Notes due March 2002 and to reduce temporarily outstanding amounts
under certain of the Company's revolving lines of credit (including the
warehouse line of credit). In connection with the redemption of the notes, the
Company recorded, in the third quarter of fiscal 1996, an extraordinary loss,
net of taxes, of approximately $859,000 due to the write-off of unamortized
discount and debt issuance costs. The Convertible Notes are immediately
convertible into shares of the Company's common stock at a rate of 42.105 shares
for each $1,000 principal amount of Convertible Notes.
On April 18, 1996 the Company completed the sale of $130,000,000
principal amount of its 10% Senior Notes due April 2006. The Company used
approximately $107,542,000 of the net proceeds to repurchase $98,500,000
aggregate principal amount of its 12% Senior Notes due 1999. The remaining
proceeds were used to reduce temporarily outstanding amounts under certain of
the Company's revolving lines of credit. In connection with the repurchase of
the 12% Senior Notes, the Company recorded, in the fourth quarter of fiscal
1996, an extraordinary loss, net of taxes, of approximately $6,059,000 related
primarily to a tender offer premium.
11
<PAGE>
On June 5, 1996, the Company acquired substantially all of the assets
of Westchester Homes located in the Dallas/Fort Worth, Texas metropolitan area
for approximately $1,300,000 in cash.
<PAGE>
CONTINENTAL HOMES HOLDING CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 3. Legal Proceedings
-----------------
The Company is not involved in any legal proceedings which it believes
would have a material effect on its financial position or operating results. The
suit filed against William O. Milburn and Ernst & Young seeking reimbursement
for the payments made to the Internal Revenue Service in excess of the tax
liability recorded at the time Milburn was acquired has been settled.
Item 4. Submission of matters to a vote of Security Holders
---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on August 29,
1996, the stockholders elected the following persons to the Board of Directors:
Nominee For Withheld
------- --- --------
Donald R. Loback 6,063,142 428,048
W. Thomas Hickcox 6,063,142 428,048
Robert B. Ryan 6,063,142 428,048
Timothy C. Westfall 6,062,717 428,473
Peter D. O'Connor 6,063,142 428,048
Jo Ann Rudd 6,063,042 428,148
William Steinberg 6,062,942 428,248
Bradley S. Anderson 6,063,042 428,148
The proposed amendment to the By-Laws was not approved. Of 5,591,054
total shares voted, 1,611,208 voted for the proposal, 3,928,096 voted against
the proposal and 51,750 abstained.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) 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, 1996.
13
<PAGE>
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 3, 1996 By: /s/ Julie E. Collins
-------------------------
JULIE E. COLLINS
Financial Vice President
Date: October 3, 1996 By: /s/ Donald R. Loback
-------------------------
DONALD R. LOBACK
Chief Executive Officer
14
Exhibit 11
Continental Homes Holding Corp.
Computation of Earnings Per Share
Three months ended
August 31,
----------
1996 1995
---- ----
Fully diluted:
Net income $ 9,236,000 $ 5,224,000
Interest expense on convertible subordinated
notes, net of income taxes 875,000 401,000
----------- -----------
$10,111,000 $ 5,625,000
=========== ===========
Weighted average number of shares outstanding 7,003,206 6,927,672
Conversion of convertible subordinated notes
(42.105 shares per $1,000 principal amount of notes) 3,631,556 1,489,250
Incremental shares relating to stock
options exercisable 60,315 94,248
----------- -----------
Weighted average number of shares outstanding
assuming full dilution 10,695,077 8,511,170
=========== ===========
Fully diluted net income per share $ .95 $ .66
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 24,557
<SECURITIES> 0
<RECEIVABLES> 34,462
<ALLOWANCES> 0
<INVENTORY> 371,519
<CURRENT-ASSETS> 0
<PP&E> 2,498
<DEPRECIATION> 0
<TOTAL-ASSETS> 467,143
<CURRENT-LIABILITIES> 0
<BONDS> 261,065
0
0
<COMMON> 71
<OTHER-SE> 137,909
<TOTAL-LIABILITY-AND-EQUITY> 467,143
<SALES> 183,664
<TOTAL-REVENUES> 187,646
<CGS> 149,674
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,184
<INCOME-PRETAX> 15,596
<INCOME-TAX> 6,360
<INCOME-CONTINUING> 9,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,236
<EPS-PRIMARY> 1.32
<EPS-DILUTED> .95
</TABLE>
