UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K/A Amendment No. 1 to CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 1, 1997 -------------------------------- MONTEREY HOMES CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 1-9977 86-0611231 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85250 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (602) 998-8700 ------------------------------ NONE - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) The Current Report on Form 8-K/A1 amends the Current Report on Form 8-K filed by Monterey Homes Corporation on July 1, 1997 solely to add the financial statements of the business acquired by Item 7(a) and the pro forma financial information required by Item 7(b).
Page ---- Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of the business acquired. 3 The required financial statements of the business acquired are attached. (b) Pro Forma Financial Information The required pro forma financial information of the business is attached. 12 (c) Exhibit 23.1 Consent of Ernst & Young LLP
2 Report of Independent Auditors The Board of Directors Legacy Homes, Ltd. We have audited the accompanying balance sheets of Legacy Homes, Ltd., as of December 31, 1995 and 1996, and the related statements of income, changes in partner's capital and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Legacy Homes, Ltd. at December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Dallas, Texas April 15,1997, except for Note 6, as to which the date is July 1, 1997 3 Legacy Homes, Ltd. Balance Sheets
December 31 1995 1996 ---- ---- ASSETS Cash and cash equivalents ........................................... $ 3,710,690 $ 3,201,007 Due from title companies ............................................ 285,527 27,400 Note receivable ..................................................... -- 503,825 Other receivables ................................................... 199,962 453,938 Inventories: Finished homes and construction in progress..................... 9,657,959 13,991,188 Developed residential lots ..................................... 1,306,216 3,169,411 Land under development ......................................... 1,650,702 469,467 Model homes .................................................... 2,051,640 2,273,000 ------------- ------------- 14,666,517 19,903,066 Prepaid expenses and other .......................................... 15,307 18,460 Furniture and equipment, net ........................................ 301,860 486,683 ------------- ------------- Total assets ........................................................ $ 19,179,863 $ 24,594,379 ============= ============= Liabilities and partners' capital Trade payables ...................................................... $ 2,621,098 $ 2,969,136 Due to affiliate for land under development ......................... 1,277,647 -- Accrued expenses .................................................... 1,626,987 1,673,224 Customer deposits ................................................... 659,409 720,546 Notes payable ....................................................... -- 4,458,378 Notes payable - related parties ..................................... 3,459,350 3,380,000 Partners' capital ................................................... 9,535,372 11,393,095 ------------- ------------- Total liabilities and partners' capital ............................. $ 19,179,863 $ 24,594,379 ============= =============
See accompanying notes 4 Legacy Homes, Ltd. Statements of Income
Year ended December 31 1994 1995 1996 ----------------------------------------------- Revenues............................................. $ 55,982,719 $ 61,554,098 $ 85,114,000 Cost of sales........................................ 45,153,087 49,219,011 67,715,026 -------------- -------------- -------------- 10,829,632 12,335,087 17,398,974 Selling, general and administrative expenses......... 5,814,800 6,592,151 8,550,038 -------------- -------------- -------------- 5,014,832 5,742,936 8,848,936 Other: Interest income.................................. 207,189 201,513 106,722 Interest expense................................. (167,377) (241,519) (354,952) -------------- -------------- -------------- 39,812 (40,006) (248,230) -------------- -------------- -------------- Net income........................................... $ 5,054,644 $ 5,702,930 $ 8,600,706 ============== ============== ==============
Statements of Changes in Partners' Capital Balance at December 31, 1993.......................................... $ 7,621,438 Net income................................................... 5,054,644 Partners' distribution....................................... (2,699,504) -------------- Balance at December 31, 1994.......................................... 9,976,578 Net income................................................... 5,702,930 Partners' distributions...................................... (6,144,136) -------------- Balance at December 31, 1995.......................................... 9,535,372 Net income................................................... 8,600,706 Partners' distributions...................................... (6,742,983) -------------- Balance at December 31, 1996.......................................... $ 11,393,095 ==============
See accompanying notes 5 Legacy Homes, Ltd. Statements of Cash Flows
Year ended December 31 1994 1995 1996 ---- ---- ---- Operating activities Net income.......................................... $ 5,054,644 $ 5,702,930 $ 8,600,706 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................ 152,128 195,064 246,998 Loss on disposal of fixed assets............ - - 8,633 Changes in operating assets and liabilities: Due from title companies............ (446,387) 160,860 258,127 Other receivables................... 192,775 (138,929) (253,976) Inventories......................... 1,049,300 (3,536,577) (5,236,549) Prepaid expenses and other.......... (152,460) 181,122 (3,153) Trade payables...................... (259,626) 907,103 348,038 Due to affiliate.................... - 1,277,647 (1,277,647) Accrued expenses.................... 92,055 863,195 46,237 Customer deposits................... (157,761) 38,687 61,137 --------------- -------------- -------------- Net cash provided by operating activities........... 5,524,668 5,651,102 2,798,551 Investing activities Purchase of furniture and equipment................. (96,597) (191,124) (440,454) Advanced on note receivable......................... - - (605,000) Payments received on note receivable................ - - 101,175 --------------- -------------- -------------- Net cash used in investing activities............... (96,597) (191,124) (944,279) Financing activities Proceeds from notes payable......................... 30,917,209 30,829,124 54,939,532 Payments on notes payable........................... (32,021,429) (37,468,213) (50,481,154) Proceeds from notes payable - related parties....... 1,360,140 3,380,000 - Payments on notes payable - related parties......... (1,254,668) (255,040) (79,350) Partners' distributions............................. (2,699,504) (6,144,136) (6,742,983) ---------------- --------------- --------------- Net cash used in financing activities............... (3,698,252) (9,658,265) (2,363,955) ---------------- --------------- --------------- Decrease in cash and cash equivalents............... 1,729,819 (4,198,287) (509,683) Cash and cash equivalents at beginning of year...... 6,179,158 7,908,977 3,710,690 --------------- -------------- -------------- Cash and cash equivalents at end of year............ $ 7,908,977 $ 3,710,690 $ 3,201,007 =============== ============== ==============
See accompanying notes 6 Legacy Homes, Ltd. Notes to Financial Statements December 31, 1996 1. Summary of Significant Accounting Policies Organization The Partnership is primarily engaged in the construction and sale of residential housing in Dallas/Fort Worth and Austin. The Partnership designs, builds and sells single-family homes on finished lots which it purchases ready for home construction or which it develops. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenue is recognized at the time of the closing of a sale, when title to and possession of the property transfers to the buyer. Cash Equivalents The Partnership considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Inventories Inventories are stated at the lower of cost (specific identification method) or net realizable value. In addition to direct land acquisition and housing construction costs, inventory costs include interest and real estate taxes, which are capitalized in inventory during the development and construction periods. Furniture and Equipment Furniture and equipment are stated on the basis of cost. Depreciation is computed by the straight-line method based on estimated useful lives. Accumulated depreciation at December 31, 1995 and 1996 was $708,235 and $448,252, respectively. Income Taxes The Partnership is not subject to federal income taxes as its income is reported on the partners' income tax returns. Accordingly, no provision for federal income tax liability has been recorded in the financial statements. 7 Legacy Homes, Ltd. Notes to Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Advertising Advertising costs are expensed when incurred. Advertising expense was $419,092, $518,710 and $616,935 in 1994, 1995 and 1996, respectively. 2. Notes Payable Notes payable at December 31, 1996 consisted of interim construction loans payable to financial institutions under a master note agreement which was amended in 1996. The Partnership may borrow up to $30 million at prime, and the obligation is secured by inventory and guaranteed by the general partner. The master note agreement contains various covenants, including net worth requirements, debt to home completion values, liabilities to net worth ratios and restrictions on the payment of distributions. The master note agreement has a one year term, due on July 31, 1997, but is reviewed annually for renewal. Interest costs for the year ended December 31, 1994, 1995 and 1996 are: 1994 1995 1996 --------------- --------------- --------------- Capitalized $ 581,161 $ 518,577 $ 608,375 Not capitalized 167,377 241,519 354,952 --------------- --------------- --------------- Total incurred $ 748,538 $ 760,096 $ 963,327 =============== =============== =============== Paid $ 718,820 $ 817,275 $ 920,829 =============== =============== =============== 3. Related Party Transaction The Partnership has notes payable to related parties. These loans bear interest at prime and are due on demand or at various dates during 1997. Interest on these loans amounted to $55,716, $47,100 and $285,870 for 1994, 1995 and 1996, respectively. During 1995, the Partnership purchased land for approximately $1,600,000 from a related party. During 1996, the Partnership developed and sold 56 lots from this land. There were 58 lots in ending inventory at December 31, 1996 related to the land purchased in 1995. The Partnership leased its administrative office space from an affiliate under a short term rental agreement for approximately $20,000, $27,000 and $34,000 during 1994, 1995 and 1996, respectively. 8 Legacy Homes, Ltd. Notes to Financial Statements (continued) 4. Profit Sharing Plan The Partnership has a 401(k) savings plan for all eligible employees. Under the plan, the Partnership matches employees' voluntary contributions up to a maximum of 1.8% of each participant's earnings. The Partnership has the option to make discretionary contributions to the plan. Amounts charged to expense for the plan approximated $15,000, $24,000 and $34,000 during 1994, 1995 and 1996, respectively. 5. Lot Options To ensure the future availability of various developed lots in the ordinary course of business, the Partnership enters into option agreements to purchase developed lots. 6. Disposition of Assets On May 29, 1997, the Partnership signed a definitive agreement to sell substantially all of its assets to Monterey Homes Corporation. The transaction became effective as of July 1, 1997. 9 The following Unaudited Financial Data presents the results of operations of Legacy Homes, Ltd. for the six months ended June 30, 1997 and the financial position as of June 30, 1997. Legacy Homes, Ltd. Balance Sheet (Unaudited) June 30, 1997 Cash and cash equivalents....................................... $ 1,275,168 Due from title companies........................................ 1,088,645 Advances to partners............................................ 650,000 Other receivables............................................... 206,623 Real estate under development................................... 18,727,774 Option deposits................................................. 812,281 Other assets.................................................... 567,369 ------------------- $ 23,327,860 =================== Accounts payable and accrued liabilities........................ $ 4,950,103 Home sale deposits.............................................. 941,582 Notes payable................................................... 17,345,628 ------------------- Total liabilities...................................... 23,237,313 ------------------- Partners' capital............................................... 90,547 ------------------- $ 23,327,860 ===================
Legacy Homes, Ltd. Income Statement (Unaudited) Six Months Ended June 30, 1997 Revenues $ 39,727,991 Cost of Sales.................................................... 32,958,779 ------------------- Gross Profit............................................ 6,769,212 Selling, general and administrative.............................. 1,511,996 ------------------- Operating income........................................ 5,257,216 Other income..................................................... 332,836 ------------------- Net income $ 5,590,052 ===================
10 Legacy Homes, Ltd. Statement of Cash Flows (Unaudited) Six Months Ended June 30, 1997 Cash flows from operating activities: Net income.................................................... $ 5,590,052 Depreciation and amortization................................. 126,353 Increase in due from title companies.......................... (1,061,245) Decrease in other receivables................................. 247,315 Decrease in real estate under development..................... 1,175,292 Increase in option deposits................................... (812,281) Increase in other assets...................................... (188,579) Increase in accounts payable and accrued liabilities.......... 307,743 Increase in home sale deposits................................ 221,036 ---------------- Net cash provided by operating activities............ 5,605,686 ---------------- Cash flows from investing activities: Advances to partners.......................................... (650,000) Payment received on note receivable........................... 503,825 ---------------- Net cash used in investing activities................ (146,175) ---------------- Cash flows from financing activities: Borrowings.................................................... 30,769,151 Repayment of borrowings....................................... (21,261,901) Partner capital distributions................................. (16,892,600) ---------------- Net cash used in financing activities.............. (7,385,350) ---------------- Net decrease in cash and cash equivalents.............................. (1,925,839) Cash and cash equivalents at beginning of period....................... 3,201,007 ---------------- Cash and cash equivalents at end of period............................. $ 1,275,168 ================
11 Unaudited Pro Forma Condensed Combined Balance Sheet June 30, 1997 (In Thousands, Except Share Data)
Legacy -------------------------------- Legacy Mortgage Monterey Pro Forma ------ -------- -------- --------- Ltd Co. Combined Historical Combined Adjustments Combined --- --- -------- ---------- -------- ----------- -------- Assets: Cash and cash equivalents ....... $ 1,275 $ 32 $ 1,307 $ 7,263 $ 8,570 $ (1,553) (a) $ 7,017 Real estate under development ... 1,946 94 2,040 45,107 47,147 -- 47,147 Real estate loan & other ........ receivables ............... 18,728 -- 18,728 1,571 20,299 -- 20,299 Option deposits ................. 812 -- 812 1,319 2,131 -- 2,131 Residual interests .............. -- 1 -- 3,856 3,856 -- 3,856 Other assets .................... 567 -- 568 800 1,368 (350) (a) 1,018 Deferred tax asset .............. -- -- -- 6,783 6,783 3,621 10,404 Goodwill ........................ -- -- -- 1,719 1,719 1,519 (b) 3,238 -------- -------- -------- -------- -------- -------- -------- Total Assets $ 23,328 127 $ 23,455 $ 68,418 $ 91,873 $ 3,237 $ 95,110 ======== ======== ======== ======== ======== ======== ======== Liabilities and Stockholders' Equity Accounts payable & accruals ..... $ 4,950 $ 20 $ 4,970 $ 7,344 $ 12,314 $ -- $ 12,314 Home sale deposits .............. 942 34 976 7,697 8,673 -- 8,673 Notes payable ................... 17,346 -- 17,346 23,839 41,185 -- 41,185 -------- -------- -------- -------- -------- -------- -------- Total Liabilities 23,238 54 23,292 38,880 62,172 -- 62,172 -------- -------- -------- -------- -------- -------- -------- Stockholders Equity Common stock .................... -- -- -- 46 46 7 (c) 53 Additional paid-in capital ...... 90 73 163 92,990 93,153 3,230 (c) 96,383 Retained earnings (loss) ........ -- -- -- (63,088) (63,088) -- (63,088) Treasury stock .................. -- -- -- (410) (410) -- (410) -------- -------- -------- -------- -------- -------- -------- Total Equity 90 73 163 29,538 29,701 3,237 32,938 -------- -------- -------- -------- -------- -------- -------- Total Liabilities & Stockholders Equity $ 23,328 $ 127 $ 23,455 $ 68,418 $ 91,873 $ 3,237 $ 95,110 ======== ======== ======== ======== ======== ======== ========
See Notes to Unaudited Pro Forma Condensed Combined Financial Data 12 Unaudited Pro Forma Condensed Combined Income Statement For the Year Ended December 31, 1996 (In Thousands, Except Share Data)
Pro Forma Historical Pro Forma Pro Forma Monterey Legacy Combined Adjustments Combined -------- ------ -------- ----------- -------- Home and land sales........... $ 87,754 $ 85,114 $ 172,868 $ -- $ 172,868 Cost of home and land sales... 75,099 67,715 142,814 1,513 (d) 144,327 ----------- ----------- ----------- ------------ ----------- Gross margin.................. 12,655 17,399 30,054 (1,513) 28,541 Selling, general and admin. expense.................... 7,777 8,550 16,327 191 (e) 16,895 275 (g) 102 (f) Operating income 4,878 8,849 13,727 (2,081) 11,646 Other income, net............. 1,998 (248) 1,750 -- 1,750 ----------- ----------- ----------- ----------- ----------- Income before income taxes.... 6,876 8,601 15,477 (2,081) 13,396 Income tax expense............ 756 756 115 (h) 871 ----------- ----------- ----------- ----------- ----------- Net Income ................. $ 6,120 $ 8,601 $ 14,721 $ (2,196) $ 12,525 =========== =========== =========== =========== =========== Net income per share: $ 2.27 =========== Weighted average common shares outstanding 5,520,000 ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Data 13 Unaudited Pro Forma Condensed Combined Income Statement For the Six Months Ended June 30,1997 (In Thousands, Except Share Data)
Actual Historical Pro Forma Pro Forma Monterey Legacy Combined Adjustments Combined -------- ------ -------- ----------- -------- Home and land sales........... $ 37,117 $ 39,728 $ 76,845 $ -- $ 76,845 Cost of home and land sales... 31,829 32,959 64,788 757 (d) 65,545 ----------- ----------- ----------- ------------ ----------- Gross margin.................. 5,288 6,769 12,057 (757) 11,300 Selling, general and admin. expense.................... 4,274 1,512 5,786 70 (e) 6,017 138 (g) 23 (g) Operating income 1,014 5,257 6,271 (988) 5,283 Other income, net............. 1,456 333 1,789 0 1,789 ----------- ----------- ----------- ----------- ----------- Income before income taxes.... 2,470 5,590 8,060 (988) 7,072 Income tax expense............ 224 224 236 (h) 460 ----------- ----------- ----------- ----------- ----------- Net Income ................. $ 2,246 $ 5,590 $ 7,836 $ (1,224) $ 6,612 =========== ============ =========== ============ =========== Net income per share: $ $1.20 =========== Weighted average common shares outstanding 5,520,000 ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Data 14 Notes to Unaudited Pro Forma Condensed Combined Financial Data 1. Overview. The Unaudited Pro Forma Condensed Combined Income Statements are presented as if the acquisition of the assets of Legacy Homes, Ltd. and Legacy Enterprises, Inc. by a subsidiary of Monterey Homes Corporation (the "Legacy Acquisition") and the merger of Monterey Mortgage Acquisition Corp. into Texas Home Mortgage Corporation (the "Merger") occurred on January 1, 1996. The Legacy Acquisition and the Merger shall be collectively referred to as the "Legacy Transaction". The Unaudited Pro Forma Condensed Combined Balance Sheet is presented assuming the combination occurred on June 30, 1997. The combination is recorded as a purchase in accordance with generally accepted accounting principles and, accordingly, the assets and liabilities of the acquired entity (Legacy) are presented at their estimated fair values as of that date. Pursuant to the Employment Agreement with John Landon, he will be granted options to purchase 166,667 shares of Monterey Homes Common Stock at an exercise price of $5.25, which will vest over the three years following the acquisition and expire June 30, 2001. The value of the options are considered compensation expense for the combined entity which will be recognized over the three-year vesting period. The historical financial information for Monterey Homes Corporation ("Monterey") is derived from the audited consolidated financial statements of Monterey as of and for the year ended December 31, 1996, and the unaudited consolidated financial statements of Monterey as of and for the six months ended June 30, 1997. The historical financial information for Legacy is derived from the audited financial statements of Legacy Homes, Ltd. and Texas Home Mortgage Corporation, as of and for the year ended December 31, 1996, and the unaudited financial statements of the respective entities as of and for the six months ended June 30,1997. Legacy Enterprises, Inc., had no assets, liabilities or operations for the relevant time period. The pro forma information does not purport to present the financial position or results of operations of Monterey and Legacy had the Legacy Transaction, the distribution to the partners of Legacy Homes, Ltd. that reduced its book value, and other events assumed therein occurred on the dates specified, nor is it necessarily indicative of the results of operations of Monterey and Legacy, as they may be in the future or as they may have been had the Legacy Transaction and other such events been consummated on the dates shown. The Unaudited Pro Forma Condensed Combined Financial Data should be read in conjunction with the Agreement of Purchase and Sale of Assets dated May 29, 1997 between Monterey, Legacy and John and Eleanor Landon, and the audited and unaudited historical financial statements and notes thereto of Monterey and Legacy included elsewhere in this Form 8-K/A. 2). Pro Forma Condensed Combined Balance Sheet Adjustments at June 30, 1997. a) To record payment for Legacy Homes, transfer of cash and $350,000 in transaction costs. b) To record goodwill and the increase in the deferred tax asset associated with the Legacy Transaction. 15 c) To record the effects of issuance of Monterey Common Stock to Legacy and additional paid-in capital resulting from the Legacy Transaction. 3). Pro Forma Condensed Combined Income Statement Adjustments for the Year Ended December 31, 1996 and the Six Month Period Ended June 30, 1997. d) To record interest expense related to an additional $17.8M borrowing incurred in connection with the Legacy Transaction. e) To record amortization of goodwill, which is being amortized over 20 years. f) To record compensation expense incurred in connection with the issuance of options to purchase 166,667 shares of Monterey Common Stock, to John Landon. Compensation expense is recognized over the three year graded vesting period. g) To adjust for additional compensation expense expected to be incurred as specified in the Employment Agreement with Mr. Landon. h) To record the amount of income taxes, which has been estimated at 6.5% of income before income taxes. 16 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, hereunto duly authorized. MONTEREY HOMES CORPORATION September 11, 1997 By: /s/ Larry W. Seay ------------------------------- Larry W. Seay Vice President of Finance & Chief Financial Officer 18