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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 March 31, 1998
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 May 5, 1998; 5,368,738 shares of Monterey Homes Corporation common stock
were outstanding.
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MONTEREY HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997........................................ 3
Consolidated Statements of Earnings for the Three
Months ended March 31, 1998 and 1997..................... 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1998 and 1997............... 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10
PART II. OTHER INFORMATION
Items 1-5. Not Applicable........................................... 15
Item 6. Exhibits and Reports on Form 8-K......................... 15
SIGNATURES ......................................................... S.1
2
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
------------- -------------
ASSETS
Cash and cash equivalents $ 5,671,196 $ 8,245,392
Real estate under development 72,279,081 63,955,330
Option deposits 4,915,525 3,070,420
Other receivables 1,154,620 985,708
Residual interests 23,210 1,421,754
Deferred tax asset 10,404,000 10,404,000
Goodwill 7,176,542 5,970,773
Property and equipment, net 1,987,054 2,046,026
Other assets 608,014 534,101
------------- -------------
Total Assets $ 104,219,242 $ 96,633,504
============= =============
LIABILITIES
Accounts payable and accrued liabilities $ 11,945,772 $ 21,171,301
Home sale deposits 9,566,046 6,204,773
Notes payable 30,248,496 22,892,250
------------- -------------
Total Liabilities 51,760,314 50,268,324
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding - 5,368,738 shares at March 31,
1998, and 5,255,440 shares at December 31, 1997 53,687 52,554
Additional paid-in capital 98,460,501 97,819,584
Accumulated deficit (45,644,977) (51,096,675)
Treasury stock - 53,046 shares (410,283) (410,283)
------------- -------------
Total Stockholders' Equity 52,458,928 46,365,180
------------- -------------
Total Liabilities and Stockholders' Equity $ 104,219,242 $ 96,633,504
============= =============
See accompanying notes to consolidated financial statements.
3
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Home sales revenue $ 36,513,344 $ 12,572,837
Cost of home sales 29,625,935 10,880,285
------------ ------------
Gross profit 6,887,409 1,692,552
------------ ------------
Residual interest and real estate loan interest income 3,203,759 502,110
Mortgage company income, net 28,657 --
Selling, general and administrative expense (4,248,943) (1,912,951)
Interest expense (80,315) --
Other income, net 11,131 32,500
------------ ------------
Earnings before income taxes 5,801,698 314,211
Income taxes 350,000 25,873
------------ ------------
Net earnings $ 5,451,698 $ 288,338
============ ============
Basic earnings per share $ 1.03 $ 0.06
============ ============
Diluted earnings per share $ 0.90 $ 0.06
============ ============
See accompanying notes to consolidated financial statements
4
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 5,451,698 $ 288,338
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 264,691 104,698
Stock option compensation expense 345,442 173,363
Gain on sale of residual interest (3,156,610) --
Increase in real estate under development (8,323,751) (10,012,708)
Increase in option deposits (1,845,105) (1,144,991)
(Increase) decrease in other receivables and other assets (277,755) 248,836
Amortization of residual interests 5,144 91,680
Increase in home sale deposits 3,361,273 1,945,186
Decrease in accounts payable and accrued
liabilities (10,488,721) (3,907,375)
------------ ------------
Net cash provided by operating activities (14,663,694) (12,212,973)
------------ ------------
Cash flows from investing activities:
Increase in property and equipment (113,114) (82,498)
Proceeds from sale of residual interest 4,550,000 --
Principal payments received on real estate loans -- 384,000
Real estate loans funded -- (178,272)
Decrease in short term investments -- 4,376,763
------------ ------------
Net cash provided by investing activities 4,436,886 4,499,993
------------ ------------
Cash flows from financing activities:
Borrowings 25,082,125 4,797,651
Repayment of borrowings (17,725,879) (5,493,679)
Stock options exercised 296,366 --
Dividends paid -- (194,330)
------------ ------------
Net cash provided by (used in) financing activities 7,652,612 (890,358)
------------ ------------
Net decrease in cash and cash equivalents (2,574,196) (8,603,338)
Cash and cash equivalents at beginning of period 8,245,392 15,567,918
------------ ------------
Cash and cash equivalents at end of period $ 5,671,196 $ 6,964,580
============ ============
See accompanying notes to consolidated financial statements
5
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
.
Monterey Homes Corporation (the "Company") designs, builds and sells
distinctive 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 under the name Legacy Homes (See Note 4). The
Company has undergone significant growth in recent periods and is pursuing a
strategy of expanding the geographic scope of its operations.
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. Amounts for the three
months ended March 31, 1997 do not include the operations of Legacy Homes. 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 AND CAPITALIZED INTEREST
The components of real estate under development are as follows (in thousands):
(Unaudited)
-----------
March 31, 1998 December 31, 1997
-------------- -----------------
Homes under contract, in production $ 32,503 $ 29,183
Finished lots and lots under development 30,633 28,471
Model homes and homes held for resale 9,143 6,301
----------- -----------
$ 72,279 $ 63,955
=========== ===========
The Company capitalizes certain interest costs incurred on homes in
production and lots under development. Such capitalized interest is allocated to
inventory and included in cost of home sales when the units are delivered. The
following tables summarize interest capitalized and interest expensed (in
thousands):
(Unaudited) March 31,
---------------------
1998 1997
---- ----
Beginning unamortized capitalized interest $ 1,890 $ --
Interest capitalized 628 692
Interest amortized in cost of home sales (444) (93)
----------- ----------
Ending unamortized capitalized interest $ 2,074 $ 599
=========== ==========
Interest incurred $ 708 $ 692
Interest capitalized (628) (692)
----------- ----------
Interest expensed $ 80 $ --
=========== ==========
6
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following:
(Unaudited)
March 31, December 31,
1998 1997
---- ----
$30 million bank construction line of credit, interest
payable monthly approximating prime (8.5% at March
31, 1998), plus .25% payable at the earlier of close of
escrow, maturity date of individual homes within the line
or June 19, 2000, secured by first deeds of trust on land $ 7,725,289 $ 4,663,973
$40 million bank construction line of credit, interest payable
monthly approximating prime, payable at the earlier of close of
escrow, maturity date of individual homes within the line or
August 1, 1998, secured by first deeds of trust on land 14,895,610 9,769,567
$20 million bank acquisition and development credit facility,
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, secured by first deeds of trust on land 1,569,385 2,393,935
Senior subordinated unsecured 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, at 101% of face value 6,000,000 6,000,000
Other 58,212 64,775
------------ ------------
Total $ 30,248,496 $ 22,892,250
============ ============
NOTE 4 - LEGACY HOMES COMBINATION
On May 29, 1997, the Company signed a definitive agreement to combine with
Legacy Homes, Ltd., Legacy Enterprises, Inc. and John and Eleanor Landon
(together, "Legacy Homes"), which included the homebuilding and related mortgage
service business of Legacy Homes Ltd. and its affiliates. This transaction (the
"Legacy Combination" or "Combination") was effective on July 1, 1997. Legacy
Homes designs, builds and sells entry-level and move-up homes, is headquartered
in the Dallas/Forth Worth metropolitan area and was founded in 1988 by its
current President, John Landon.
In connection with the Legacy Combination, John Landon entered into a four-year
employment agreement with the Company and is currently a Managing Director 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.
7
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the Combination had
occurred at January 1, 1997, 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 (dollars in thousands).
Three Months Ended
------------------
March 31,
---------
1998 1997
---- ----
Actual Pro Forma
------ ---------
Home sales revenue $ 36,513 $ 32,203
Net earnings $ 5,452 $ 2,264
Diluted earnings per share $ .90 $ .42
NOTE 5 - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the three months ended March 31, 1998 and 1997 follows
(in thousands, except for per share amounts):
1998 1997
---- ----
Net earnings $5,452 $ 288
Basic EPS - Weighted average shares outstanding 5,306 4,528
------ ------
Basic earnings per share $ 1.03 $ .06
====== ======
Basic EPS - Weighted average shares outstanding 5,306 4,528
Effect of dilutive securities:
Contingent shares and warrants 131 51
Stock options 641 90
------ ------
Dilutive EPS - Weighted average shares outstanding 6,078 4,669
------ ------
Diluted earnings per share $ .90 $ .06
====== ======
NOTE 6 - INCOME TAXES
Income tax expense for the three months ended March 31, 1998 was
$350,000, and was $25,900 for the three months ended March 31, 1997.
NOTE 7 - RESIDUAL INTEREST AND REAL ESTATE LOAN INTEREST INCOME
Sale of Residual Interests
On February 2, 1998, the Company sold five of its Mortgage Securities
for approximately $4.6 million, resulting in pre-tax earnings of approximately
$3.2 million.
8
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - SUBSEQUENT EVENTS
Sale of Residual Interests
On April 1, 1998, the Company sold the last of its Mortgage Securities
for $2 million, which resulted in pre-tax earnings of approximately $2 million.
9
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, 1997 Annual Report on Form 10-K.
Results Of Operations
The following discussion and analysis provides information regarding
the results of operations of the Company and its subsidiaries for the three
months ended March 31, 1998 and March 31, 1997. All material balances and
transactions between the Company and its subsidiaries have been eliminated. 1997
results do not include the operations of Legacy Homes. This discussion should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. In the opinion of management, the 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.
Home Sales Revenue
Home sales revenue is the product of the number of units closed
during the period and the average sales price per unit. The following table
presents comparative first quarter 1998 and 1997 housing revenues for the total
Company, and the Arizona and Texas divisions individually (dollars in
thousands):
Quarters Ended Dollar/Unit Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
---- ---- ---------- ----------
Total
Dollars $ 36,513 $ 12,573 $ 23,940 190.4%
Units closed 205 40 165 412.5%
Average sales price $ 178.1 $ 314.3 $ (136.2) (43.3%)
10
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Arizona
Dollars $13,837 $12,573 $ 1,264 10.1%
Units closed 45 40 5 12.5%
Average sales price $ 307.5 $ 314.3 $ (6.8) (2.2%)
Texas*
Dollars $22,676 $19,630 $ 3,046 15.5%
Units closed 160 133 27 20.3%
Average sales price $ 141.7 $ 147.6 $ 5.9 (4%)
*Prior year's Texas information is for comparative purposes only.
Home sales revenue increased mainly due to the addition of Texas
operations along with a 12.5% increase in Arizona closings. In total lower
average sales price in 1998 is due to closing lower priced homes in the Texas
market, where the Company's focus is on entry-level and move-up homes.
Gross Profit
Gross profit equals home and land sales revenue, net of cost of sales,
which includes 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 first quarter 1998
and 1997 housing gross profit (dollars in thousands):
Quarters Ended
March 31, Dollar/Unit Percentage
1998 1997 Increase Increase
---- ---- -------- --------
Dollars $ 6,887 $ 1,693 $ 5,194 306.8%
Percent of housing revenues 18.9% 13.5% 5.4% 40%
The dollar increase in gross profit for the three months ended March
31, 1998, is attributable to the number of units closed by the Legacy
operations. The gross profit margin increased in 1998 due to generally higher
margins generated in Texas and an improvement in overall margins in Arizona.
Residual Interest and Real Estate Interest Income
The increase in residual interest and real estate loan interest income
is primarily due to the 1998 sale of mortgage securities, which resulted in a
gain of approximately $3.2 million
Selling, General And Administrative Expenses
Selling, general and administrative expenses (SG&A), which include
advertising, model and sales office, sales administration, commissions,
depreciation, amortization and corporate overhead costs, were $4.2 million for
the first quarter of 1998, as compared to $1.9 million for the same period in
1997, an increase of 121%. This change was caused mainly by the inclusion of
Legacy operating costs in 1998.
11
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
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.
At March 31, 1998, the Company had available short-term secured
revolving construction loan facilities totaling $70 million and a $20 million
acquisition and development facility, of which approximately $22.6 and $1.6
million were outstanding, respectively. An additional $13.6 million of
unborrowed funds supported by approved collateral were available under its
credit facilities at such date. The Company also had outstanding $6 million in
unsecured, senior subordinated notes due October 15, 2001, which were issued in
October 1994. A provision of the senior subordinated bond indenture provides
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value.
Management believes that the Company's current borrowing capacity,
cash on hand at March 31, 1998 and anticipated cash flows from operations are
sufficient to meet liquidity needs for the foreseeable future. There can be no
assurance, however, that amounts available in the future from the Company's
sources of liquidity will be sufficient to meet the Company's future capital
needs and the amount and types of indebtedness that the Company may incur may be
limited by the terms of the indenture governing its senior subordinated notes
and the credit agreements.
Net Orders
Net orders 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 first quarter 1998 and 1997 net orders
(dollars in thousands):
Quarters Ended Dollar/Unit Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
---- ---- ---------- ----------
Total
-----
Dollars $ 85,973 $ 31,136 $ 54,837 176.1%
Units ordered 505 81 424 523.5%
Average sales price $ 170.2 $ 384.4 $ (214.2) (55.7)%
Arizona
-------
Dollars $ 27,213 $ 31,136 $ (3,923) (12.5%)
Units ordered 80 81 (1) (1.2%)
Average sales price $ 340.2 $ 384.4 $ (44.2) (11.5%)
Texas*
------
Dollars $ 58,760 $ 27,237 $ 31,523 115.7%
Units ordered 425 187 238 127.3%
Average sales price $ 138.3 $ 145.7 $ (7.4) (5.1%)
*Prior year's Texas information is for comparative purposes only.
12
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Total net orders increased in the first quarter of 1998 compared to
1997 due to the expansion into Texas and the economic strengths of both the
Arizona and Texas markets. Unit orders remained relatively stable in Arizona
while dollar orders decreased due to the lower average sales prices in active
communities.
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 table presents comparative 1998 and 1997 net sales backlog for the
total Company, and the Arizona and Texas divisions individually (dollars in
thousands):
At March 31,
1998 1997 Dollar/Unit Percentage
---- ---- Increase Increase
Total (Decrease) (Decrease)
- ----- ---------- ----------
Dollars $ 148,435 $ 61,224 $ 87,211 142.4%
Units in backlog 772 161 611 379.5%
Average sales price $ 192.3 $ 380.3 $ (188.0) (49.4%)
Arizona
- -------
Dollars $ 70,321 $ 61,224 $ 9,097 14.9%
Units in backlog 203 161 42 26.1%
Average sales price $ 346.4 $ 380.3 $ (33.9) (8.9%)
Texas*
- ------
Dollars $ 78,114 $ 36,208 $ 41,906 115.7%
Units in backlog 569 250 319 127.6%
Average sales price $ 137.3 $ 144.8 $ (7.5) (5.2%)
*Prior year's Texas information is included for comparative purposes only.
Total dollar backlog increased 142% over the first quarter of the
previous year due to a substantial increase in units partially offset by a
decrease in average sales price. Average sales price as a whole has decreased
due to the Legacy Combination, where the focus is on entry-level and move-up
homes. Units in total backlog have increased mainly due to the Texas expansion.
Arizona dollar backlog increased 15% over the prior year's first
quarter due to increased sales, offset slightly by a decrease in average sales
price, reflecting the lower sales prices of homes in currently active
communities. Texas dollar and unit backlog is up over 1997's first quarter due
to increased orders, expansion into the Houston market and the retooling of
product offerings in the Austin market to meet the demand of less expensive
homes.
13
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
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.
14
PART II. OTHER INFORMATION
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
No reports on Form 8-K were filed during the first
quarter of 1998.
15
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
May 14, 1998 By: \ LARRY W. SEAY
---------------------------
Larry W. Seay
Vice President of Finance & Chief
Financial Officer
S-1