================================================================================
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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9977
MONTEREY HOMES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 86-0611231
(State or Other Jurisdiction) (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6613 North Scottsdale Road, Suite 200 85250
Scottsdale, Arizona (Zip Code)
(Address of Principal Executive Offices)
(602) 998-8700
(Registrant's Telephone Number, Including Area Code)
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 .
--- ---
As of August 13, 1997; 5,247,278 shares of Monterey Homes Corporation common
stock were outstanding.
================================================================================
<PAGE>
MONTEREY HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996.......................................... 3
Consolidated Statements of Earnings for the Three and Six
Months ended June 30, 1997 and 1996........................ 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1997 and 1996.................... 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities...................................... 16
Item 6. Exhibits and Reports on Form 8-K........................... 16
SIGNATURES ........................................................... S.1
2
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 7,262,648 $ 15,567,918
Short-term investments .............................................. 0 4,696,495
Real estate loans and other receiveables ............................ 1,571,530 2,623,502
Real estate under development (Notes 2 & 4) ......................... 45,106,664 35,991,142
Option deposits ..................................................... 1,319,241 546,000
Residual interests .................................................. 3,855,755 3,909,090
Other assets ........................................................ 799,947 940,095
Deferred tax asset .................................................. 6,783,000 6,783,000
Goodwill (Note 5) ................................................... 1,719,581 1,763,488
------------ ------------
$ 68,418,366 $ 72,820,730
============ ============
LIABILITIES
Accounts payable and accrued liabilities ............................ $ 7,344,153 $ 10,569,872
Home sale deposits .................................................. 7,697,170 4,763,518
Notes payable (Note 3) .............................................. 23,838,847 30,542,276
------------ ------------
Total liabilities ................................................... 38,880,170 45,875,666
------------ ------------
STOCKHOLDERS' EQUITY (Note 5)
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding - 4,580,611 shares ........... 45,806 45,806
Additional paid-in capital .......................................... 92,990,384 92,643,658
Accumulated deficit
(63,087,711) (65,334,117)
Treasury stock - 53,046 shares ...................................... (410,283) (410,283)
------------ ------------
Total Stockholder's Equity .......................................... 29,538,196 26,945,064
------------ ------------
$ 68,418,366 $ 72,820,730
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
REVENUES 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Home sales (Notes 1 and 5) ................ $ 24,544,107 $ -- $ 37,116,944 $ --
Residual interest and real estate loan
interest income .................. 790,818 452,868 1,150,112 890,950
Other income .............................. 130,432 182,637 305,748 379,250
------------ ------------ ------------ ------------
25,465,357 635,505 38,572,804 1,270,200
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of home sales (Notes 1 and 5) ........ 20,882,044 -- 31,828,546 --
Commissions and other sales costs (Notes 1
and 5) ............................... 1,243,662 -- 1,998,710 --
General, administrative and other ......... 1,183,783 262,761 2,275,469 650,834
Interest .................................. -- 75,656 -- 237,945
------------ ------------ ------------ ------------
23,309,489 338,417 36,102,725 888,779
------------ ------------ ------------ ------------
Income before income tax expense and
extraordinary loss from early ........ 2,155,868 297,088 2,470,079 381,421
extinguishment of debt
Income tax expense ........................ 197,800 -- 223,673 --
------------ ------------ ------------ ------------
Income before extraordinary loss from early
extinguishment of debt ............... 1,958,068 297,088 2,246,406 381,421
Extraordinary loss from early
extinguishment of debt ............... -- (148,433) -- (148,433)
------------ ------------ ------------ ------------
Net income ................................ $ 1,958,068 $ 148,655 $ 2,246,406 $ 232,988
============ ============ ============ ============
EARNINGS PER SHARE
Income before extraordinary loss from early
extinguishment of debt ............... $ .42 $ .09 $ .48 $ .12
Extraordinary loss from early
extinguishment of debt ............... -- (.05) -- $ (.05)
------------ ------------ ------------ ------------
Net income ................................ $ .42 $ .04 $ .48 $ .07
============ ============ ============ ============
Weighted average common shares
outstanding .......................... 4,657,723 3,317,298 4,644,448 3,295,208
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 2,246,406 $ 232,988
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Increase in real estate under development .......... (9,115,522) --
Depreciation and amortization ...................... 431,224 89,020
Amortization of residual interests ................. 53,335 832,605
Increase in other assets ........................... (669,440) (154,704)
Decrease in accounts payable and accrued liabilities (97,737) (186,705)
------------ ------------
Net cash provided by (used in) operating activities ......... (7,151,734) 813,204
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on real estate loans ............ 1,476,000 498,402
Real estate loans funded .................................... (428,272) (302,275)
(Increase) decrease in short-term investments ............... 4,696,495 (18,900)
Decrease in funds held by Trustee ........................... -- 5,637,948
------------ ------------
Net cash provided by investing activities ................... 5,744,223 5,815,175
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings .................................................. 20,940,662 --
Repayment of borrowings ..................................... (27,644,091) (7,818,824)
Distributions to stockholders ............................... (194,330) (291,496)
------------ ------------
Net cash used in financing activities ....................... (6,897,759) (8,110,320)
------------ ------------
Net decrease in cash and cash equivalents ................... (8,305,270) (1,481,941)
Cash and cash equivalents at beginning of period ............ 15,567,918 3,347,243
------------ ------------
Cash and cash equivalents at end of period .................. $ 7,262,648 $ 1,865,302
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Monterey Homes Corporation (previously Homeplex Mortgage Investments
Corporation), the Company, commenced operations in July 1988. Prior to the
Merger (see Note 5), the Company's main line of business was investing in
mortgage certificates securing collateralized mortgage obligations (CMOs),
interests relating to mortgage participation certificates (MPCs) (collectively
residual interests) and loans secured by real estate.
Since January 1, 1997, the operation of the Company has focused on
homebuilding, and the combined entities intend to continue with Monterey Homes'
building operations as its main line of business. These operations are currently
conducted primarily in the Phoenix, Scottsdale and Tucson, Arizona markets.
Basis of Presentation
The consolidated financial statements include the accounts of
Monterey Homes Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to be consistent with
current financial statement presentation. In the opinion of Management, the
unaudited consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the Company's
financial position and results of operations for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results to be expected for a full fiscal year.
Upon consummation of the Merger a one-for-three reverse stock split
of the Company's issued and outstanding common stock, $.01 par value per share,
was effected. Except as otherwise indicated, the share information contained
herein reflects the one-for-three reverse stock split.
NOTE 2 - REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development at June 30, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Homes in production.............................. $27,095,194 $22,839,500
Finished lots and lots under development......... 18,011,470 13,151,642
----------- -----------
$45,106,664 $35,991,142
=========== ===========
</TABLE>
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following at June 30, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Construction line of credit to bank, interest payable
monthly approximating prime (8.5% at June
30, 1997) plus .25%, payable at the earlier of close
of escrow or maturity date of individual homes
within the line or June 19, 2000....................... $11,576,606 $ 7,251,958
</TABLE>
6
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 And 1996
<TABLE>
<S> <C> <C>
Guidance line of credit to bank for acquisition and
development, interest payable monthly approximating
prime plus .5%, payable at the earlier of funding of
construction financing, the maturity date of indivi-
dual projects within the line or June 19, 2000............ 3,791,295 9,628,993
Short-term credit facility to bank, paid in full, June 1997.. 0 5,552,500
Senior subordinated notes payable, maturing October
15, 2001, annual interest of 13%, payable semi-
annually, principal payable at maturity date with
a put to the Company at June 30, 1998, unsecured.......... 8,000,000 8,000,000
Other........................................................ 470,946 108,825
----------- ------------
Total................................................... $23,838,847 $30,542,276
=========== ===========
</TABLE>
A provision of the senior subordinated bond indenture provides the
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value. Approximately $2,700,000 of the bonds were
held equally by the Chairman and President of the Company at June 30, 1997.
NOTE 4 - CAPITALIZED INTEREST
The Company capitalizes interest costs incurred on homes in production
and lots under development. This capitalized interest is allocated to unsold
lots, and included in cost of home sales in the accompanying statements of
earnings when the units are delivered. The following tables summarize interest
capitalized and interest expensed (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning unamortized capitalized interest......... $ 599 $ N/A $ - $ N/A
Interest capitalized............................... 894 N/A 1,586 N/A
Amortized - cost of home sales..................... (327) N/A (420) N/A
---------- ---------- ---------- ----------
Ending unamortized capitalized interest............ $ 1,166 $ N/A $ 1,166 $ N/A
========== ========== ========== ==========
Interest incurred.................................. $ 894 $ 76 $ 1,586 $ 238
Interest capitalized............................... 894 N/A 1,586 N/A
---------- ---------- ---------- ----------
Interest expense................................... $ - $ 76 $ - $ 238
========= ========== ========= ==========
</TABLE>
Had the Merger not occurred, interest capitalized by the Monterey
Entities (See Note 5) would have been $894,000 and $746,000 for the three months
ended June 30, 1997 and 1996, respectively. Interest amortized through cost of
home sales would have been $972,000 and $530,000 for the same periods,
respectively. For the six months ended June 30,1997 and 1996, interest
capitalized would have been $1,586,0000 and $1,567,000, respectively, while
interest amortized through cost of home sales would have been $1,506,000 and
$960,000, respectively.
7
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 And 1996
NOTE 5 - HOMEPLEX / MONTEREY MERGER
On December 23, 1996, the stockholders of Homeplex Mortgage Investments
Corporation, now known as Monterey Homes Corporation (the "Company"), approved
the Merger (the "Merger") of Monterey Homes Construction II, Inc. and Monterey
Homes Arizona II, Inc., both Arizona corporations (collectively, the "Monterey
Entities" or "Monterey"), with and into the Company. The Merger was effective on
December 31, 1996, and the Company will focus on homebuilding as its primary
business. Also, ongoing operations of the Company will be managed by the two
previous stockholders of Monterey, who at the time of the Merger became Co-Chief
Executive Officers, with one serving as Chairman and the other as President. At
consummation of the Merger, 1,288,726 new shares of common stock, $.01 par value
per share, were issued equally to the Chairman and President.
Monterey, in connection with an $8,000,000 subordinated debt private
placement that occurred during October 1994, issued warrants to the bondholders
to purchase approximately 16.48% of Monterey. Accordingly, of the 1,288,726
shares issued in the Merger, 212,398 are held by the Company on behalf of the
Chairman and President, to be delivered to the warrantholders upon payment of
the warrant exercise price to the Chairman and President. Upon expiration of the
warrants, any of the remaining 212,398 will be delivered to the Chairman and
President.
In addition, up to 266,667 shares of contingent stock will be issued
equally to the Chairman and President provided that certain stock trading price
thresholds are met and that the Officer is still an employee of the Company at
the time of issuance. The price thresholds are $5.25, $7.50 and $10.50 for dates
after the first, second and third anniversaries of the Merger, respectively, and
the prices must be maintained for 20 consecutive trading days. The number of
contingent shares issued would be 44,943, 88,889 and 88,889, respectively, and
as of August 14, 1997, the first two price thresholds have been met. Included in
the above mentioned 266,667 contingent shares are 43,947 shares (approximately
16.48%) issuable to the Company's warrantholders, upon exercise of the warrants.
Such shares are not subject to meeting certain stock trading price thresholds or
employment of the Chairman and President. Upon expiration of unexercised
warrants, any of the remaining 43,947 contingent shares will be issued to the
Chairman and President.
The total consideration paid by the Company for the net assets of
Monterey Homes was $9,323,353. This amount included 1,288,726 shares of the
Company's common stock valued at $8,544,256 and $779,097 of transaction costs.
The purchase method of accounting was used by the Company, and the purchase
price was allocated among the Monterey net assets based on their estimated fair
market value at the date of acquisition, resulting in goodwill of $1,763,488
which will be amortized over 20 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the Merger had occurred
at January 1, 1996, with pro forma adjustments together with related income tax
effects. The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that would
actually have resulted had the combination been in effect on the date indicated.
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Actual Pro forma Actual Pro forma
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Total revenues............................ $ 25,465,357 $ 18,308,709 $ 38,572,804 $ 33,714,234
Net income................................ $ 1,958,068 $ 1,331,704 $ 2,246,406 $ 1,600,097
Net earnings per share.................... $ .42 $ .29 $ .48 $ .34
</TABLE>
8
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 And 1996
NOTE 6 - INCOME TAXES
Deferred tax assets of approximately $6.8 million have been recorded in
the June 30,1997 and December 31, 1996 balance sheet due to temporary
differences and carryforwards. For federal and state income tax purposes at June
30, 1997 and at December 31, 1996, the Company had a net operating loss
carryforward of approximately $53 million that expires beginning in 2007.
Income tax expense for the three months ended June 30, 1997 was $197,800
and $223,673 for the six months ended June 30, 1997. No income tax was recorded
in the first two quarters of 1996, due to the Company's status as a real estate
investment trust in that year.
NOTE 7 - SUBSEQUENT EVENTS
Legacy Homes Acquisition
On May 29, 1997, the Company signed a definitive agreement with Legacy
Homes, Ltd., Legacy Enterprises, Inc., and John and Eleanor Landon (together,
"Legacy Homes"), to acquire the homebuilding and related mortgage service
business of Legacy Homes, Ltd. and its affiliates. This transaction was
effective on July 1, 1997. Legacy Homes is a builder of entry-level and move-up
homes headquartered in the Dallas/Fort Worth metropolitan area and was founded
in 1988 by its current President, John Landon. In 1996 Legacy Homes had pre-tax
income of $8.8 million on sales of $84 million, compared to pre-tax income of
$5.7 million on sales of $62 million in 1995. Legacy Homes closed escrow on 623
homes in 1996, a 32% increase over 1995, a year in which Legacy was recognized
as one of the top ten homebuilders in the Dallas/Fort Worth area.
The consideration for the approximately $23 million in assets and stock
acquired consisted of approximately $1.6 million in cash, 666,667 shares of the
Company's Common Stock and deferred contingent payments for the four years
following the close of the transaction. The deferred contingent payments will be
equal to 12% of the pre-tax income of the Company and 20% of the pre-tax income
of the Texas division of the Company. In no event will the total deferred
contingent payments exceed $15 million. In addition, the Company assumed
substantially all of the liabilities of Legacy Homes, including indebtedness
that was incurred prior to the closing of the transaction to fund distributions
to the stockholders of Legacy Homes that reduced its book value to less than
$200,000.
In connection with the transactions, John Landon entered into a
four-year employment agreement with the Company. He was appointed Chief
Operating Officer and Co-Chief Executive Officer of the Company and President
and Chief Executive Officer of the Company's Texas division. Mr. Landon was also
granted an option to purchase 166,667 shares of the Company's common stock. In
addition, the Company has agreed to use reasonable best efforts to cause Mr.
Landon to be elected to its Board of Directors.
Sale of Residual Interests
On July 31, 1997, the Company sold one of its Mortgage Securities for
$3.1 million, creating a gain of $2.7 million. The security sold was a Series I
- - Collateralized Bond issued by Westam Mortgage Financial Corporation, and was
one of eight mortgage assets obtained by the Company in its December 31, 1996
merger with Homeplex Mortgage Corporation. The cash proceeds from the sale will
be reinvested in the Company's homebuilding business.
9
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTE 8 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
(Statement 128), which establishes standards for computing and presenting
earnings per share (EPS). It replaces the presentation of primary and fully
diluted EPS with a presentation of basic and diluted EPS. Statement 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. After adoption,
all prior period EPS dates should be restated to conform to Statement 128.
The Company will adopt Statement 128 in the fourth quarter of 1997. The
pro forma impact of Statement 128 on the three months ended June 30, 1997 would
have been basic and diluted EPS of $.43 and $.40 respectively. The pro forma
impact on the six months ended June 30, 1997, would have been basic and diluted
EPS of $.50 and $.47, respectively.
10
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
-----------------------------------------------------------------------
Of Operations
-------------
This Quarterly Report on Form 10-Q contains forward-looking
statements. The words "believe," "expect," "anticipate," and "project" and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1993, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements may include, but are not limited to, projections of revenues, income
or loss, capital expenditures, plans for future operations, financing needs or
plans, the impact of inflation, the impact of changes in interest rates, plans
relating to products or services of the Company, potential real property
acquisitions, and new or planned development projects, as well as assumptions
relating to the foregoing.
Statements in Exhibit 99 to this Quarterly Report on Form 10-Q and in
the Company's Annual Report on Form 10-K, including the Notes to the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," describe factors, among others,
that could contribute to or cause such differences. Additional factors that
could cause actual results to differ materially from those expressed in such
forward-looking statements are set forth in "Business" and "Market for the
Registrant's Common Stock and Related Stockholder Matters" in the Company's
Annual Report on Form 10-K.
Historical Results Of Operations For The Three and Six Months Ended
June 30, 1997 Compared To 1996
The Company had net income of $1,958,068 or $.42 per share and
$2,246,406 or $.48 per share, respectively, for the three and six months ended
June 30, 1997 compared to net income of $148,655, or $.04 per share and
$232,988, or $.07 per share for the comparable periods in 1996. The increases in
1997 for both periods were caused by the addition of the homebuilding operations
during 1997. Results for the three and six months ended June 30, 1996, include
an extraordinary loss from the early extinguishment of debt of $148,433, or a
$.05 per share. Home sales revenue, cost of home sales, commissions and other
sales costs all increased in 1997, as the Company had no homebuilding operations
prior to the Merger in December of 1996.
Residual and real estate loan income was higher in the three months
ended June 30, 1996 than in the same quarter of the previous year due to a
change in the estimated Bloomberg prepayment speed and a second quarter
correction of residual income booked in the first quarter of 1997. For the six
months ended June 30, 1997, residual income is higher in 1997 than in 1996,
again due to the prepayment speed.
General, administrative and other costs were $1,183,783 and $262,761
in the three months ended June 30, 1997 and 1996 respectively. These costs were
$2,275,469 for the first half of 1997 and $650,834 for the first half of 1996.
The increases for both periods are caused mainly by higher corporate costs,
including compensation expense relating to stock options and contingent stock.
All interest incurred was capitalized in 1997 with $420,000 amortized through
cost of home sales, and not expensed directly as in 1996.
Liquidity And Capital Resources
The Company uses a combination of borrowings and funds generated by
operations to meet its working capital requirements. At June 30, 1997, the
Company had a committed $30 million short-term, secured, revolving construction
loan facility and a $20 million acquisition and development guidance facility,
of which $11.6 million and $3.8 million were outstanding, respectively. The
Company also had outstanding $8.0 million at June 30, 1997 in unsecured, senior
subordinated notes due October 15, 2001 (the "Notes"), which were issued in
October 1994. The Company had available but unborrowed funds under its credit
facilities of $7.9 million at June 30, 1997.
11
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
The Indenture governing the Notes and the Company's various loan
agreements contain restrictions which could, depending on the circumstances,
affect the Company's ability to obtain additional financing in the future. If
the Company at any time is not successful in obtaining sufficient capital to
fund its then-planned development and expansion costs, some or all of its
projects may be significantly delayed or abandoned. Any such delay or
abandonment could result in cost increases or the loss of revenues and could
have a material adverse effect on the Company's results of operations and
ability to repay its indebtedness.
The cash flow for each of the Company's communities can differ
substantially from reported earnings, depending on the status of the development
cycle. The early stages of development or expansion require significant cash
outlays for, among other things, land acquisition, obtaining plat and other
approvals, construction of amenities which may include community tennis courts,
swimming pools and ramadas, model homes, roads, certain utilities and general
landscaping. Because these costs are capitalized, income reported for financial
statement purposes during a development's early stages may significantly exceed
cash flow. In later stages of development and expansion, cash flow can
significantly exceed income reported for financial statement purposes, as cost
of home sales includes charges for substantial amounts of previously expended
costs.
Pro Forma Results Of Operations For The Three and Six Months Ended
June 30, 1997 And 1996
As a result of the Homeplex Merger, the primary business of the
Company has shifted from the making of real estate loans and holding residual
interests to homebuilding. Due to this change, Management believes that
comparison of operations for quarters in a prior year with the current quarter
operations is not as meaningful as the pro forma results. Accordingly,
Management has prepared pro forma condensed combined operating results for the
three months ended June 30, 1996 and the six months ended June 30, 1996, which
reflect the impact of combining the pre-merger companies as though the Homeplex
acquisition had taken place on January 1, 1996.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Home sales revenue ............................ $ 24,544 $ 16,725 $ 37,117 $ 31,492
Cost of home sales ............................ 20,882 15,039 31,829 27,963
-------- -------- -------- --------
Gross profit ......................... 3,662 1,686 5,288 3,529
Selling, general and administrative ........... 2,427 1,774 4,274 3,954
-------- -------- -------- --------
Operating income(loss) ............... 1,235 (88) 1,014 (425)
Other income .................................. 921 1,585 1,456 2,223
-------- -------- -------- --------
Earnings before income taxes 2,156 1,497 2,470 1,798
Income tax expense ............................ 198 165 224 198
-------- -------- -------- --------
Net earnings .................................. $ 1,958 $ 1,332 $ 2,246 $ 1,600
======== ======== ======== ========
Earnings per share ............................ $ .42 $ .29 $ .48 $ .34
======== ======== ======== ========
</TABLE>
The key assumptions in the pro forma results of operations relate to
the following:
(1) The transaction was consummated on January 1, 1996.
(2) Compensation expense was adjusted to add the new employees' cost
and to deduct the terminated employees' cost.
(3) The net operating loss was utilized to reduce the maximum amount of
taxable income possible.
12
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Results Of Operations
The following discussion and analysis provides information regarding
the combined financial position of the Company and its subsidiaries as of June
30, 1997 and December 31, 1996 and their results of operations for the three and
six months ended June 30, 1997 and pro forma operations for the three and six
months ended June 30, 1996. All material balances and transactions between
Monterey Homes Corporation and its subsidiaries have been eliminated. This
discussion should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. In the opinion of Management,
the unaudited interim data reflect all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the Company's financial
position and results of operations for the periods presented. The results of
operations for any interim period are not necessarily indicative of results to
be expected for a full fiscal year.
Home Sales Revenue
Home sales revenue for any period is the product of the number of
units closed during the period and the average sales price per unit. The
following table presents comparative second quarter and first six months 1997
and 1996 housing revenues (dollars in thousands):
<TABLE>
<CAPTION>
Dollar/Unit Percentage Dollar/Unit Percentage
Quarter Ended June 30, Increase Increase Six Months Ended June 30, Increase Increase
1997 1996 (Decrease) (Decrease) 1997 1996 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars .............. $24,544 $ 16,725 $ 7,819 46.8% $ 37,117 $ 31,492 $ 5,625 17.9%
Units closed ......... 65 72 (7) (9.7%) 105 125 (20) (16%)
Average Sales Price .. $ 377.6 232.3 $ 145.3 62.6% $ 353.5 $ 251.9 $ 101.6 40.3%
</TABLE>
The increase in revenues of $7.8 million during the second quarter of
1997 over the previous year's second quarter was caused primarily by a
substantial increase in the average sales price, offset in part by fewer units
closed. The lower average sales price and higher unit number in 1996 was due to
sales of lower priced condominiums. There were no condominium closings in 1997,
as this project was sold out in 1996.
The revenue increase of $5.6 million during the first half of 1997 over
the previous years' first half was again caused primarily by an average sales
price that was approximately 40% higher than that of the previous year offset in
part by fewer units sold.
Gross Profit
Gross profit equals home sales revenue, net of housing cost of sales,
which include developed lot costs, units construction costs, amortization of
common community costs (such as the cost of model complex and architectural,
legal and zoning costs), interest, sales tax, warranty, construction overhead
and closing costs. The following table presents comparative second quarter and
first half 1997 and 1996 housing gross profit (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended June 30, Percentage Six Months Ended June 30, Increase Increase
1997 1996 Increase Increase 1997 1996 (Decrease) (Decrease)
---- ---- -------- -------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars ............. $ 3,662 $ 1,686 $ 1,976 117.3% $ 5,288 $ 3,529 $ 1,759 49.9%
Percent of housing
revenues ......... 14.9% 10.1% 4.8% 48.1% 14.2% 10.0% 4.2% 42.3%
</TABLE>
The increase in gross profit in the quarter ended June 30, 1997 over
the same quarter of the previous year is primarily attributable to a 46.8%
increase in home sales dollar revenue and a corresponding increase in the gross
profit margin. The gross profit margin increased mainly due to a larger number
of home closings occurring in more profitable subdivisions.
For the first half of 1997, the increase in gross profit over 1996
is primarily due to a 17.9% increase in revenues along with a 42.3% increase in
gross profit margin.
13
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Selling, General And Administrative Expenses
Selling, general and administrative expenses (SG&A), which include
advertising, model and sales office, sales administration, commissions and
corporate overhead costs, were $2.4 million for the second quarter of 1997, as
compared to $1.8 million for the same period in 1996, an increase of 33%. SG&A
expenses were 4.3 million for the first six months of 1996, as compared to 1996
costs of $4.0 million for the same period, an increase of 7.5%. These changes
were caused mainly by increased advertising and model home expenses, and higher
administrative, corporate and public company costs paid in 1997 than in 1996.
Development Projects
At June 30, 1997, the Company had 14 subdivisions under various stages
of development. The Company was actively selling in 11 subdivisions, was sold
out in one subdivision, and was in various stages of preparation to open for
sales in one subdivision. The Company owns the underlying land in seven
subdivisions subject to bank acquisition financing and the underlying land in
two subdivisions free from any acquisition financing. The lots in the remaining
five subdivisions are purchased from developers on a rolling option basis. The
Company purchased one new subdivision in the first quarter of 1997, and entered
into one new rolling lot option contract to increase the lots available to the
Company in one existing subdivision. Depending on market conditions, Management
may elect to make additional selective property acquisitions throughout the
remainder of the current year.
Net Orders
Net orders for any period represent the number of units ordered by
customers (net of units canceled) multiplied by the average sales price per
units ordered. The following table presents comparative second quarter and first
half 1997 and 1996 net orders (dollars in thousands):
<TABLE>
<CAPTION>
Dollar/Unit
Quarter Ended June 30, Increase Percentage Six Months Ended June 30, Dollar/Unit Percentage
1997 1996 (Decrease) Increase 1997 1996 Increase Increase
---- ---- ---------- -------- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars ............. $ 26,073 $ 22,061 $ 4,012 18.2% $ 53,941 $ 38,091 $ 15,850 41.6%
Units ordered ....... 88 74 14 18.9% 169 133 36 27.1%
Average sales price . $ 296.3 $ 298.1 $ (1.8) *.1% $ 319.2 $ 286.4 $ 32.8 11.4%
* less than
</TABLE>
The second quarter dollar volume of net orders increased by 18.2% over
the 1996 second quarter due primarily to higher unit sales, slightly offset by a
decrease in the average sales price of units ordered.
The dollar volume of net orders for the first half of 1997 increased
by 41.6% over the first half of 1996 due to an increase in average sales prices
and also by a higher number of units ordered. The increase in average sales
price was due to activity in higher priced subdivisions than in 1996, which
included a condominium project.
Monterey does not include sales which are contingent on the sale of
the customer's existing home as orders until the contingency is removed.
Historically, Monterey has experienced a cancellation rate of less than 16% of
gross sales.
14
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Net Sales Backlog
Backlog represents net orders of Monterey which have not closed. The
following table presents comparative June 30, 1997 and 1996 net sales backlog
(dollars in thousands):
<TABLE>
<CAPTION>
June 30 Dollar/Unit Percentage
1997 1996 Increase Increase
---- ---- -------- --------
<S> <C> <C> <C> <C>
Dollars ......................................... $ 67,177 $ 45,985 $ 21,192 46.1%
Units in backlog ................................ 184 152 32 21.1%
Average sales price ............................. $ 365.1 $ 302.5 $ 62.6 20.7%
</TABLE>
Dollar backlog increased 46.1% over the prior year due to an increase
in units in backlog and by an increase in average sales price. Average sales
price has increased due to the 1996 sell out of the lower priced Vintage
Condominium subdivision and sales in a higher priced semi-custom subdivision,
Lincoln Place. Units in backlog have increased 21.1% over the prior year due to
the increase in net orders.
Seasonality
Monterey has historically closed more units in the second half of the
fiscal year than in the first half, due in part to the slightly seasonal nature
of the market for their semi-custom, luxury product homes. Management expects
that this seasonal trend will continue in the future, but may change slightly as
operations expand within the move-up segment of the market.
15
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) On July 1, 1997, in connection with the Legacy Homes acquisition
described in Note 7 to the Unaudited Financial Statements included
in this Report, the Company issued 466,667 shares of Monterey
Homes Corporation (MHC) common stock to Legacy Homes, Ltd., and
200,000 shares of MHC common stock to John R. Landon and Eleanor
D. Landon as Tenants-in-Common. Exemption from registration for
the issuance of the MHC common stock is claimed pursuant to
Section 4(2) of the Securities Act of 1933, as amended, regarding
transactions by an issuer not involving any public offering. Also
in connection with the transaction, Mr. Landon was granted an
option to purchase 166,667 shares of MHC common stock at an
exercise price of $5.25 per share, exercisable in equal annual
increments over three years commencing July 1, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
Exhibit 99 - Private Securities Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K - A Current Report on Form 8-K, dated May 29,
1997 was filed with the Securities and Exchange Commission on June
9, 1997, and a Current Report on Form 8-K, dated July 1, 1997, was
filed with the Securities and Exchange Commission on July 14,
1997. Both of these Form 8-K's relate to the Legacy Homes
acquisition.
16
<PAGE>
MONTEREY HOMES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
MONTEREY HOMES CORPORATION
A Maryland Corporation
August 14, 1997 By: \ LARRY W. SEAY
--------------------------------
Larry W. Seay
Vice President of Finance & Chief
Financial Officer
S.1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 7262648
<SECURITIES> 0
<RECEIVABLES> 1571530
<ALLOWANCES> 0
<INVENTORY> 45106664
<CURRENT-ASSETS> 55260083
<PP&E> 886956
<DEPRECIATION> (447787)
<TOTAL-ASSETS> 68418366
<CURRENT-LIABILITIES> 15512269
<BONDS> 23367901
0
0
<COMMON> 45806
<OTHER-SE> 29492390
<TOTAL-LIABILITY-AND-EQUITY> 68418366
<SALES> 37116944
<TOTAL-REVENUES> 38572804
<CGS> 31828546
<TOTAL-COSTS> 1998710
<OTHER-EXPENSES> 2275469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2470079
<INCOME-TAX> 223673
<INCOME-CONTINUING> 2246406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2246406
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
EXHIBIT 99
Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe-harbor to protect companies from securities law
liability in connection with forward-looking statements. Monterey Homes
Corporation (the "Company" or "Monterey") intends to qualify both its written
and oral forward-looking statements for protection under the PSLRA.
To qualify oral forward-looking statements for protection under the
PSLRA, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements. Monterey provides the following information in
connection with its continuing effort to qualify forward-looking statements for
the safe harbor protection of the PSLRA.
Important factors currently known to management that could cause actual
results to differ materially from those in forward-looking statements include,
but are not limited to, the following: (i) changes in national and local
economic and other conditions, such as employment levels, availability of
mortgage financing, interest rates, consumer confidence, and housing demand;
(ii) risks inherent in homebuilding activities, including delays in construction
schedules, cost overruns, changes in government regulation, increases in real
estate taxes and other local government fees; (iii) changes in costs or
availability of land, materials, and labor; (iv) fluctuations in real estate
values; (v) the timing of home closings and land sales; (vi) the Company's
ability to continue to acquire additional land or options to acquire additional
land on acceptable terms; (vii) lack of geographic diversification of the
Company's operation, especially when (A) real estate analysts are predicting
that new home sales in the Phoenix, Arizona metropolitan area will slow
significantly during 1997 and 1998 and (B) new home sales in the Tucson, Arizona
metropolitan area are expected to remain relatively flat during 1997; (viii)
limited product diversification in that the Company derives most of its revenue
from sales of semi-custom luxury homes; (ix) the inability of the Company to
obtain sufficient capital on terms acceptable to the Company to fund its planned
capital and other expenditures; (x) changes in local, state and federal rules
and regulations governing real estate developing and homebuilding activities and
environmental matters, including "no growth" or "slow growth" initiatives,
building permit allocation ordinances and building moratoriums; (xi) expansion
by the Company into new markets in which the Company has no operating
experience; (xii) the inability of the Company to identify acquisition
candidates that will result in successful combinations; (xiii) the failure of
the Company to make acquisitions on terms acceptable to the Company; (xiv) the
loss of key employees of the Company, including William W. Cleverly and Steven
J. Hilton; and (xv) factors that may affect the Company's mortgage assets,
including general conditions in the financial markets, changes in prepayment
rates and changes in interest rates.
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, Monterey undertakes no
obligations to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of anticipated events or changes to projections over
time.
(1) "Forward-looking statements" can be identified by use of words
such as "expect," "believe," "estimate," "project," "forecast,"
"anticipate," "plan," and similar expressions.
