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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 September 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 November 3, 1997; 5,255,440 shares of Monterey Homes Corporation common
stock were outstanding.
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<PAGE>
MONTEREY HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 ...................................... 3
Consolidated Statements of Earnings for the Three and
Nine Months ended September 30, 1997 and 1996 .............. 4
Consolidated Statements of Cash Flows for the Nine
Months ended September 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 4. Submission of Matters to a Vote of Security Holders ........ 17
Item 6. Exhibits and Reports on Form 8-K ........................... 17
SIGNATURES ................................................................ S.1
2
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................................ $ 4,843,807 $ 15,567,918
Real estate under development (Notes 2, 3 & 4) ........................... 70,921,632 35,991,142
Short-term investments ................................................... -- 4,696,495
Real estate loans and other receivables .................................. 1,187,049 2,623,502
Option deposits .......................................................... 3,232,526 546,000
Residual interests ....................................................... 3,468,736 3,909,090
Other assets ............................................................. 1,646,879 940,095
Deferred tax asset (Note 6) .............................................. 10,404,000 6,783,000
Goodwill (Note 5) ........................................................ 4,058,971 1,763,488
------------ ------------
Total Assets ................................................... $ 99,763,600 $ 72,820,730
============ ============
LIABILITIES
Accounts payable and accrued liabilities ................................. $ 14,608,468 $ 10,569,872
Home sale deposits ....................................................... 10,762,622 4,763,518
Notes payable (Note 3) ................................................... 35,510,121 30,542,276
------------ ------------
Total Liabilities .............................................. 60,881,211 45,875,666
------------ ------------
STOCKHOLDERS' EQUITY (Note 5)
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding - 5,255,440 shares at September 30,
1997, and 4,580,611 shares at December 31, 1996 ..................... 52,554 45,806
Additional paid-in capital ............................................... 97,248,854 92,643,658
Accumulated deficit ...................................................... (58,008,736) (65,334,117)
Treasury stock - 53,046 shares ........................................... (410,283) (410,283)
------------ ------------
Total Stockholders' Equity ..................................... 38,882,389 26,945,064
------------ ------------
$ 99,763,600 $ 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 Nine Months Ended
September 30, September 30,
REVENUES 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Home sales revenue .................... $42,685,170 -- $79,802,114 --
Residual interest and real estate loan
interest income .................. 3,388,410 $ 417,868 4,538,522 $ 1,308,818
Other income .......................... 119,000 111,688 424,748 490,938
----------- ----------- ----------- -----------
46,192,580 529,556 84,765,384 1,799,756
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of home sales .................... 36,005,313 -- 67,833,859 --
Commissions and other sales costs ..... 2,191,576 -- 4,190,286 --
General, administrative and other ..... 2,450,862 216,099 4,726,331 866,933
Interest .............................. 109,372 -- 109,372 237,945
----------- ----------- ----------- -----------
40,757,123 216,099 76,859,848 1,104,878
----------- ----------- ----------- -----------
Earnings before income tax expense and
extraordinary loss from early
extinguishment of debt ........... 5,435,457 313,457 7,905,536 694,878
Income tax expense .................... 356,482 -- 580,155 --
----------- ----------- ----------- -----------
Earnings before extraordinary loss .... 5,078,975 313,457 7,325,381 694,878
Extraordinary loss from early
extinguishment of debt ........... -- -- -- (148,433)
----------- ----------- ----------- -----------
Net earnings .......................... $ 5,078,975 $ 313,457 $ 7,325,381 $ 546,445
=========== =========== =========== ===========
EARNINGS PER SHARE
Earnings before extraordinary loss from
early extinguishment of debt ..... $ .85 $ .09 $ 1.43 $ .21
Extraordinary loss from early
extinguishment of debt ........... -- -- -- $ (.05)
----------- ----------- ----------- -----------
Net earnings .......................... $ .85 $ .09 $ 1.43 $ .16
=========== =========== =========== ===========
Weighted average common shares
outstanding ...................... 5,978,800 3,362,667 5,132,334 3,317,667
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .............................................. $ 7,325,381 $ 546,445
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Increase in real estate under development ............ (16,202,716) --
Depreciation and amortization ........................ 1,243,086 221,218
Amortization of residual interests ................... 54,161 1,231,965
Increase in buyer deposits ........................... 5,023,258 --
Decrease in other receivables ........................ 1,780,055 --
Increase in other assets ............................. (2,561,612) (435,327)
Decrease in accounts payable and accrued liabilities . (1,599,814) (221,438)
Gain on sale of residual interest .................... (2,713,808) --
------------ ------------
Net cash provided by (used in) operating activities ....... (7,652,009) 1,342,863
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in Legacy Acquisition (Notes 1 and 5) ....... 1,306,998 --
Cash paid for Legacy Acquisition costs (Notes 1 and 5) .... (1,418,346) --
Principal payments received on real estate loans .......... 2,124,544 3,338,402
Real estate loans funded .................................. (428,272) (705,644)
(Increase) decrease in short-term investments ............. 4,696,495 (1,325,270)
Proceeds from sale of residual interest ................... 3,100,000 --
Decrease in funds held by Trustee ......................... -- 5,637,948
------------ ------------
Net cash provided by investing activities ................. 9,381,419 6,945,436
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ................................................ 45,753,834 --
Repayment of borrowings ................................... (58,131,617) (7,818,824)
Exercise of stock options ................................. 118,592 --
Distributions to stockholders ............................. (194,330) (291,496)
------------ ------------
Net cash used in financing activities ..................... (12,453,521) (8,110,320)
------------ ------------
Net increase (decrease) in cash and cash equivalents ...... (10,724,111) 177,979
Cash and cash equivalents at beginning of period .......... 15,567,918 3,347,243
------------ ------------
Cash and cash equivalents at end of period ................ $ 4,843,807 $ 3,525,222
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Monterey Homes Corporation, (previously Homeplex Mortgage Investments
Corporation), designs, builds and sells single family homes in Arizona and
Texas. The Company builds move-up and semi-custom, luxury homes in the Phoenix
and Tucson, Arizona metropolitan areas, and entry-level and move-up homes in the
Dallas/Fort Worth, Austin and Houston, Texas metropolitan areas. The Company has
undergone significant growth in recent periods and is pursuing a strategy of
diversifying the product mix and geographic scope of its operations.
The Company was originally formed as a real estate investment trust
("REIT"), investing in mortgage-related assets, and to a lesser extent, selected
real estate loans. On December 31, 1996, the Company acquired by merger (the
"Merger") the homebuilding operations of various entities operating under the
Monterey Homes name ("Monterey"), and is phasing out the Company's
mortgage-related operations. Monterey has been building homes in Arizona for
over 11 years, specializing in semi-custom, luxury homes and move-up homes. In
connection with the acquisition by the Company, the management of Monterey
assumed effective control of the Company.
As part of a strategy to diversify its operations, on July 1, 1997, the
Company acquired (the "Legacy Acquisition") the homebuilding operations of
several entities operating under the name Legacy Homes ("Legacy"). Legacy has
been operating in the Texas market since 1988, and designs, builds and sells
entry-level and move-up homes. In connection with the acquisition, John R.
Landon, the founder and Chief Executive Officer of Legacy, joined senior
management and the Board of Directors of the Company, and continues to oversee
the operations of Legacy (See Note 5).
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 and
certain prior period amounts have been reclassified to be consistent with
current financial statement presentation. Results include the operations of
Legacy from July 1, 1997, the acquisition date to September 30, 1997. 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.
NOTE 2 - REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development are as follows:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Homes in production .................... $45,516,509 $22,839,500
Finished lots and lots under development 25,405,123 13,151,642
----------- -----------
$70,921,632 $35,991,142
=========== ===========
</TABLE>
6
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Construction lines of credit with banks, interest payable
monthly approximating prime (8.5% at September
30, 1997) to prime plus .25%, payable at the earlier of close
of escrow or maturity date of individual homes
within the line or June 19, 2000 ............................ $26,355,630 $ 7,251,958
Acquisition and development credit facility with bank,
interest payable monthly approximating prime
plus .5%, payable at the earlier of funding
of construction financing, the maturity date of
individual projects within the line or June 19, 2000 ........ 3,083,223 9,628,993
Short-term credit facility to bank, paid in full, June 1997 .... -- 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 ............ 6,000,000 8,000,000
Other .......................................................... 71,268 108,825
----------- -----------
Total ..................................................... $35,510,121 $30,542,276
=========== ===========
</TABLE>
A provision of the senior subordinated notes payable provides the
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value. In August 1997, $2,000,000 of the bonds
were repurchased by the Company. Approximately $3,000,000 of the bonds were held
by the three Co-Chief Executive Officers of the Company at September 30, 1997.
7
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - CAPITALIZED INTEREST
The Company capitalizes interest costs incurred on homes in production and
lots under development. Such 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 Sept. 30, Nine Months Ended Sept. 30,
----------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning unamortized capitalized interest.................. $ 1,166 $ N/A $ -- $ N/A
Interest capitalized........................................ 930 N/A 2,516 N/A
Amortized cost of home sales................................ (346) N/A (766) N/A
------------ ------------ ------------ ------------
Ending unamortized capitalized interest..................... $ 1,750 $ N/A $ 1,750 $ N/A
============ ============ ============ ============
Interest incurred........................................... $ 1,039 $ 0 $ 2,625 $ 238
Interest capitalized........................................ (930) N/A (2,516) N/A
------------ ------------ ------------ ------------
Interest expense............................................ $ 109 $ 0 $ 109 $ 238
============ ============ ============ ============
</TABLE>
Had capitalized interest maintained its character in purchase accounting
after the Merger and Legacy Acquisition, interest capitalized by the Monterey
Entities (See Note 5) would have been approximately $930,000 and $948,000 for
the three months ended September 30, 1997 and 1996, respectively. Interest
amortized through cost of home sales would have been approximately $1,073,000
and $524,000 for the same periods, respectively. For the nine months ended
September 30, 1997 and 1996, interest capitalized would have been approximately
$2,516,000 and $2,515,000, respectively, while interest amortized through cost
of home sales would have been approximately $2,579,000 and $1,484,000,
respectively.
NOTE 5 - HOMEPLEX / MONTEREY MERGER AND LEGACY HOMES ACQUISITION
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's focus is now on homebuilding as its primary
business. Ongoing operations of the Company are 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.
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, and in 1996, was recognized as one
of the top ten homebuilders in the Dallas/Fort Worth area.
In connection with the Legacy transaction, John Landon entered into a
four-year employment agreement with the Company and 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 and
was elected to the Company's Board of Directors.
8
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The following pro forma information does not reflect the Legacy Acquisition in
July 1997.
<TABLE>
<CAPTION>
Three Months ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Home sales revenue ... $42,685,170 $19,419,155 $79,802,114 $50,910,796
Net earnings ......... $ 5,078,975 $ 2,020,215 $ 7,325,381 $ 3,620,312
Net earnings per share $ .85 $ .42 $ 1.43 $ .75
</TABLE>
NOTE 6 - INCOME TAXES
Deferred tax assets of approximately $10.4 million and $6.8 million have
been recorded respectively in the September 30, 1997 and December 31, 1996
balance sheets due to temporary differences and carryforwards. For federal and
state income tax purposes at September 30, 1997 and at December 31, 1996, the
Company had a net operating loss carryforward of approximately $48 million and
$53 million, respectively, that expires beginning in 2007.
Income tax expense for the three months ended September 30, 1997 was
$356,482, and $580,155 for the nine months ended September 30, 1997. No income
tax was recorded in 1996 due to the Company's status as a real estate investment
trust in that year.
NOTE 7 - RESIDUAL INTEREST AND REAL ESTATE LOAN INTEREST INCOME
Sale of Residual Interests
On July 31, 1997, the Company sold one of its Mortgage Securities for
approximately $3.1 million, creating a gain of approximately $2.7 million. The
security sold was one of eight mortgage assets owned by the Company at the time
of the December 31, 1996 Merger.
NOTE 8 - SUBSEQUENT EVENTS
Sale of Residual Interests
On October 28, 1997, the Company sold another of its Mortgage Securities
for $2.4 million, creating a gain of approximately $350,000. The security sold
was one of eight mortgage assets owned by the Company at the time of its
December 31, 1996 Merger.
9
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 - 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 September 30, 1997 would
have been basic and diluted EPS of $.97 and $.85 respectively. The pro forma
impact on the nine months ended September 30, 1997, would have been basic and
diluted EPS of $1.54 and $1.41, 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 December 31, 1996 Annual
Report on Form 10-K.
Historical Results Of Operations For The Three and Nine Months Ended September
30, 1997 Compared To 1996
The Company had net earnings of $5,078,975 or $.85 per share and $7,325,381
or $1.43 per share, respectively, for the three and nine months ended September
30, 1997 compared to net earnings of $313,457, or $.09 per share and $546,445,
or $.16 per share for the comparable periods in 1996. The increases in the
current year were caused by the addition of the homebuilding operations during
1997. Sales revenue, cost of sales, commissions and other sales costs all
increased in 1997, reflecting the addition of homebuilding operations in
December 1996 and the Legacy Acquisition in July 1997. Results for the nine
months ended September 30, 1996, include an extraordinary loss from the early
extinguishment of debt of $148,433, or $.05 per share.
Residual interest and real estate loan interest income was higher in the
three and nine months ended September 30, 1997 than in the same periods of the
previous year mainly due to the sale of one of the Company's mortgage
securities, which resulted in a gain of approximately $2.7 million.
General, administrative and other costs were $4,642,438 and $216,099 in the
three months ended September 30, 1997 and 1996 respectively. These costs were
$8,916,617 for the first nine months of 1997 and $866,933 for the first nine
months of 1996. The increases for both periods were caused by higher corporate
costs, including compensation expense related to stock options and contingent
stock, expenses resulting from the Legacy Acquisition and approximately half of
the 1997 costs are related directly to commissions and other home-selling
expenses, which the Company did not have in 1996.
The increases in income taxes of $356,482 and $580,155 for the three and
nine months ended September 30, 1997 over the same periods in the prior year
resulted from the Company recording no income tax in 1996 due to its status as a
REIT at that time.
Liquidity And Capital Resources
The Company's principal uses of working capital are land purchases, lot
development and home construction. The Company uses a combination of borrowings
and funds generated by operations to meet its working capital requirements.
11
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
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 acquisitions, obtaining plat and other approvals, and
construction of model homes, roads, certain utilities, general landscaping and
other amenities. Since these costs are capitalized, this can result in income
reported for financial statement purposes during those early stages
significantly exceeding cash flow. After the early stages of development and
expansion when these expenditures are made, cash flow can significantly exceed
earnings reported for financial statement purposes, as cost of sales includes
charges for substantial amounts of previously expended costs.
At September 30, 1997, the Company had available short-term secured,
revolving construction loan facilities totaling $60 million and a $20 million
acquisition and development facility, of which approximately $26.4 million and
$3.1 million were outstanding, respectively. An additional $12.5 million of
unborrowed funds were available under its credit facilities at such date.
Borrowings under the credit facilities are subject to the inventory collateral
position of the Company and a number of other conditions, including the
Company's minimum net worth, maximum debt to equity ratio and debt coverage. The
Company also has outstanding $6 million in unsecured, senior subordinated notes
due October 15, 2001 (the "Notes"), which were issued in October 1994.
In the third quarter of 1997, the Company used $5.5 million in cash to
purchase land for future development at two sites in the Scottsdale area. The
Company added a portion of one of the properties to its acquisition and
development guidance facility, generating $1.7 million in available funds under
its revolving construction loan facility. Cash spent for land purchases in the
first nine months of 1997 was approximately $13.7 million, generating
approximately $6 million in available funds.
The Indenture relating to 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 it 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 operation and ability
to repay its indebtedness.
12
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Pro Forma Results Of Operations For The Three and Nine Months Ended September
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
September 30, 1996, and the nine months ended September 30, 1996, which reflect
the impact of combining the pre-merger companies as though the Merger had taken
place on January 1, 1996. The following pro forma information does not reflect
the Legacy Acquisition in July 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 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 ................ $42,685 $19,419 $79,802 $50,911
Cost of home sales ................ 36,005 16,144 67,834 43,688
------- ------- ------- -------
Gross profit ................. 6,680 3,275 11,968 7,223
Selling, general and administrative 4,752 1,575 9,026 5,291
Other income ...................... 3,507 570 4,963 2,136
------- ------- ------- -------
Earnings before income taxes . 5,435 2,270 7,905 4,068
Income tax expense ................ 356 250 580 448
------- ------- ------- -------
Net earnings ...................... $ 5,079 $ 2,020 $ 7,325 $ 3,620
======= ======= ======= =======
Earnings per share ................ $ .85 $ .42 $ 1.43 $ .75
======= ======= ======= =======
</TABLE>
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.
Results Of Operations
The following discussion and analysis provides information regarding the
results of operations of the Company and its subsidiaries for the three and nine
months ended September 30, 1997 and pro forma operations for the three and nine
months ended September 30, 1996. All material balances and transactions between
the Company and its subsidiaries have been eliminated. Results include the
operations of Legacy from July 1, 1997, the acquisition date, to September 30,
1997. 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 reflects 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.
13
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Home Sales Revenue and Cost of Home Sales
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 third quarter and first nine months 1997
and 1996 housing revenues (dollars in thousands):
<TABLE>
<CAPTION>
Quarters Ended Dollar/Unit Percentage Nine Months Ended Dollar/Unit Percentage
September 30, Increase Increase September 30, Increase Increase
1997 1996 (Decrease) (Decrease) 1997 1996 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars ............. $ 42,685 $ 19,419 $ 23,266 120% $ 79,802 $ 50,911 $ 28,891 57%
Units closed ........ 202 61 141 231% 307 186 121 65%
Average sales price . $ 211.3 $ 318.3 $ (107.0) (34%) $ 259 $ 273.7 $ (13.8) (5%)
</TABLE>
The increase in revenues and number of units closed in the quarter and nine
months ended September 30, 1997, compared to the same periods in 1996, resulted
mainly from the Legacy Acquisition. The lower average sales price in 1997 is
also due to sales in the Texas market, where the focus of the Texas division is
on entry-level and move-up homes.
Gross Profit
Gross Profit equals home sales revenue, net of housing cost of sales, which
include developed lot costs, unit 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 third quarter and first nine
months of 1997 and 1996 housing gross profit (dollars in thousands):
<TABLE>
<CAPTION>
Quarters Ended Percentage Nine Months Ended Dollar/Unit Percentage
September 30, Increase Increase September 30, Increase Increase
1997 1996 (Decrease) (Decrease) 1997 1996 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars .......... $ 6,680 $ 3,275 $ 3,405 104% $11,968 $ 7,222 $ 4,746 66%
Percent of housing
revenues ......... 16% 17% (1%) (6%) 15% 14% 1% 7%
</TABLE>
Gross profit margins for the quarter and nine months ended September 30,
1997 over the same periods remained relatively unchanged due to stable market
conditions. The dollar increase in gross profit is attributable to the increase
in number of units closed, primarily due to the Legacy Acquisition.
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 $4.6 million for the third quarter of 1997, as
compared to $1.6 million for the same period in 1996, an increase of 200%. SG&A
expenses were $8.9 million for the first nine months of 1997, as compared to
1996 costs of $5.3 million for the same period, an increase of 70%. These
changes were caused mainly by increased advertising and model home expenses,
higher administrative, corporate and public company costs, and the inclusion of
Legacy operating costs in the third quarter of 1997.
14
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Development Projects
At September 30, 1997, the Company had 44 communities under various stages
of development. The Company was actively selling in 30 communities, was sold out
in five communities, and was in various stages of preparation to open for sales
in nine communities. The Company owns the underlying land in eight communities
subject to bank acquisition financing and the underlying land in seven
communities free from any acquisition financing. The lots in the remaining 29
communities are purchased from developers on a rolling option basis. The Company
purchased two new communities in the third quarter of 1997, and entered into
three new rolling lot option contracts. 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 third quarter and first
nine months of 1997 and 1996 net orders (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended Dollar/Unit Percentage Nine Months Ended Dollar/Unit Percentage
September 30, Increase Increase September 30, Increase Increase
1997 1996 (Decrease) (Decrease) 1997 1996 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars ............. $ 55,526 $ 28,100 $ 27,426 98% $109,467 $ 66,191 $ 43,276 65%
Units ordered ....... 270 86 184 214% 439 219 220 101%
Average sales price . $ 205.7 $ 326.7 $ (121.1) (37%) $ 249.4 $ 302.2 $ (52.8) (18%)
</TABLE>
Increases in the third quarter and first nine months are primarily due to
the Legacy Acquisition on July 1, 1997.
The Company does not include sales which are contingent on the sale of the
customer's existing home as orders until the contingency is removed.
Historically, the Company has experienced a cancellation rate of less than 16%
of gross sales.
Net Sales Backlog
Backlog represents net orders of the Company which have not closed. The
following tables present comparative September 30, 1997 and 1996 net sales
backlog for the total Company, and the Arizona and Texas divisions individually.
The Texas division was not a part of Monterey Homes at September 30, 1996 and
the backlog numbers for that period are shown for comparative purposes only.
(dollars in thousands):
<TABLE>
<CAPTION>
September 30, Dollar/Unit Percentage
Total 1997 1996 Increase (Decrease) Increase (Decrease)
- ----- ---- ---- ------------------- -------------------
<S> <C> <C> <C> <C>
Dollars .............. $117,780 $ 54,820 $ 62,960 115%
Units in backlog ..... 555 177 378 214%
Average sales price .. $ 212.2 $ 309.7 $ (97.5) (32%)
Arizona
- -------
Dollars ........... $ 67,597 $ 54,820 $ 12,777 23%
Units in backlog .. 193 177 16 9%
Average sales price $ 350.2 $ 309.7 $ 40.5 13%
Texas
- -----
Dollars ........... $ 50,183 $ 44,464 $ 5,721 13%
Units in backlog .. 362 308 54 18%
Average sales price $ 138.6 $ 144.4 $ (5.8) (4%)
</TABLE>
15
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Total dollar backlog increased 115% over the prior year due to an increase
in units in backlog partially offset by a decrease in average sales price.
Average sales price as a whole has decreased due to the Legacy Acquisition,
where the focus is on entry-level and move-up homes. Units in backlog have
increased 214% over the prior year due to the increase in net orders caused by
the Texas expansion.
Arizona dollar backlog increased 23% over the prior year due to the
increased number of units in backlog along with an increase in average sales
price.
Texas dollar and unit backlog is up over the prior year due to increased
orders in 1997. The average sales price is slightly lower due to the increase in
the product mix of entry level home sales.
Seasonality
The Company 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.
16
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) On September 25, 1997, Monterey Homes held its Annual Meeting of
Shareholders, at which John R. Landon, Robert G. Sarver and C.
Timothy White were elected as Class II Directors to serve for a
two year term which expires at the 1999 Annual Meeting. Voting
results for these nominees are summarized as follows:
FOR WITHHELD
--- --------
John R. Landon 4,935,789 63,082
Robert G. Sarver 4,982,066 16,805
C. Timothy White 4,974,727 24,144
Additionally, the Shareholders adopted the Monterey Homes
Corporation Stock Option Plan and approved an amendment to the
Company's Bylaws to increase the number of authorized directors
of the Company from five to nine. Voting results are as follows:
Approval of Approval to Increase
Stock Option Plan Board of Directors
----------------- ------------------
Shares FOR 4,880,734 4,541,556
Shares AGAINST 88,433 72,924
Shares ABSTAINED 29,704 35,105
Shares NOT VOTED BY BROKERS 0 349,286
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 - An Amendment No. 1 to Current Report on
Form 8-K, dated July 1, 1997, was filed with the Securities and
Exchange Commission on September 12, 1997, and an Amendment No. 2
to Current Report on Form 8-K, dated July 1, 1997, was filed with
the Securities and Exchange Commission on October 29, 1997. Both
of these amendments filed the financial statements, pro forma
financial information and exhibits related to the Legacy
Acquisition.
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 4843807
<SECURITIES> 0
<RECEIVABLES> 1187049
<ALLOWANCES> 0
<INVENTORY> 70921632
<CURRENT-ASSETS> 81831893
<PP&E> 1829948
<DEPRECIATION> (1096870)
<TOTAL-ASSETS> 99763600
<CURRENT-LIABILITIES> 25442358
<BONDS> 35438853
52554
0
<COMMON> 0
<OTHER-SE> 38829835
<TOTAL-LIABILITY-AND-EQUITY> 99763600
<SALES> 79802114
<TOTAL-REVENUES> 84765384
<CGS> 67833859
<TOTAL-COSTS> 4299658
<OTHER-EXPENSES> 4726331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7905536
<INCOME-TAX> 580155
<INCOME-CONTINUING> 7325381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7325381
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
</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) a relative 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 may 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) the
inability of the Company to obtain sufficient capital on terms acceptable to the
Company to fund its planned capital and other expenditures; (ix) 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; (x) expansion by the Company into new markets in which the Company
has no operating experience, such as Texas; (xi) the inability of the Company to
identify acquisition candidates that will result in successful combinations;
(xii) the failure of the Company to make acquisitions on terms acceptable to the
Company; (xiii) the loss of key employees of the Company, including William W.
Cleverly, Steven J. Hilton and John R. Landon; and (xiv) 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.
<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
November 14, 1997 By: /s/ LARRY W. SEAY
------------------------------------
Larry W. Seay
Vice President of Finance & Chief Financial Officer
S.1
