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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 June 30, 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 August 14, 1998; 5,317,192 shares of Monterey Homes Corporation common
stock were outstanding.
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MONTEREY HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997.......................................... 3
Consolidated Statements of Earnings for the Three and Six
Months ended June 30, 1998 and 1997........................ 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1998 and 1997.................... 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........ 14
Item 6. Exhibits and Reports on Form 8-K........................... 14
SIGNATURES ........................................................... S.1
2
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1998 1997
------------- -------------
ASSETS
Cash and cash equivalents $ 5,219,267 $ 8,245,392
Real estate under development 87,925,508 63,955,330
Option deposits 4,810,371 3,070,420
Other receivables 1,153,491 985,708
Residual interests -- 1,421,754
Deferred tax asset 10,404,000 10,404,000
Goodwill 8,871,520 5,970,773
Property and equipment, net 1,920,394 2,046,026
Other assets 633,041 534,101
------------- -------------
Total Assets $ 120,937,592 $ 96,633,504
============= =============
LIABILITIES
Accounts payable and accrued liabilities $ 17,984,868 $ 21,171,301
Home sale deposits 10,127,163 6,204,773
Notes payable 33,316,533 22,892,250
------------- -------------
Total Liabilities 61,428,564 50,268,324
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding - 5,370,238 shares at June 30,
1998, and 5,255,440 shares at December 31, 1997 53,702 52,554
Additional paid-in capital 98,814,117 97,819,584
Accumulated deficit (38,948,508) (51,096,675)
Treasury stock - 53,046 shares (410,283) (410,283)
------------- -------------
Total Stockholders' Equity 59,509,028 46,365,180
------------- -------------
Total Liabilities and Stockholders' Equity $ 120,937,592 $ 96,633,504
============= =============
See accompanying notes to consolidated financial statements.
3
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Home sales revenues $ 55,608,159 $ 24,544,107 $ 92,121,503 $ 37,116,944
Cost of home sales 45,698,437 20,882,044 75,324,372 31,828,546
------------ ------------ ------------ ------------
Gross Profit 9,909,722 3,662,063 16,797,131 5,288,398
Residual and real estate loan interest income 2,028,908 790,818 5,232,667 1,150,112
Mortgage company income, net 44,133 -- 72,790 --
Commissions and other sales costs (2,553,903) (1,243,662) (4,894,388) (1,998,710)
General and administrative expense (2,273,598) (1,183,783) (4,182,056) (2,275,469)
Interest expense (115,279) -- (195,594) --
Other income, net 202,486 130,432 213,617 305,748
------------ ------------ ------------ ------------
Earnings before income taxes 7,242,469 2,155,868 13,044,167 2,470,079
Income taxes 546,000 197,800 896,000 223,673
------------ ------------ ------------ ------------
Net earnings $ 6,696,469 $ 1,958,068 $ 12,148,167 $ 2,246,406
============ ============ ============ ============
Basic earnings per share $ 1.26 $ 0.43 $ 2.29 $ 0.50
Diluted earnings per share $ 1.10 $ 0.42 $ 1.99 $ 0.48
See accompanying notes to consolidated financial statements.
4
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 12,148,167 $ 2,246,406
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 597,518 382,674
Stock option compensation expense 690,884 346,726
Gain on sale of residual interest (5,180,046) --
Increase in real estate under development (23,970,178) (9,361,063)
Increase in goodwill (3,103,346) --
Increase in option deposits (1,739,951) (773,241)
(Increase) decrease in other receivables and other assets (259,921) 261,694
Increase in home sale deposits 3,922,390 2,933,652
Decrease in accounts payable and accrued liabilities (3,186,433) (3,031,389)
------------ ------------
Net cash used in operating activities (20,080,916) (6,994,541)
------------ ------------
Cash flows from investing activities:
Increase in property and equipment (274,288) (157,193)
Proceeds from sale of residual interest 6,600,000 --
Principal payments received on real estate loans -- 1,476,000
Real estate loans funded -- (428,272)
Decrease in short term investments -- 4,696,495
------------ ------------
Net cash used in investing activities 6,325,712 5,587,030
------------ ------------
Cash flows from financing activities:
Borrowings 65,373,666 20,940,662
Repayment of borrowings (54,949,383) (27,644,091)
Stock options exercised 304,796 --
Dividends paid -- (194,330)
------------ ------------
Net cash provided by (used in) financing activities 10,729,079 (6,897,759)
------------ ------------
Net decrease in cash and cash equivalents (3,026,125) (8,305,270)
Cash and cash equivalents at beginning of period 8,245,392 15,567,918
------------ ------------
Cash and cash equivalents at end of period $ 5,219,267 $ 7,262,648
============ ============
See accompanying notes to consolidated financial statements
5
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Monterey Homes Corporation (the "Company") designs, builds and sells
distinctive single-family homes in Arizona, Texas and recently, through the
acquisition of Sterling Communities, in Northern California. (See Note 8.) 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
and six months ended June 30, 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)
June 30, 1998 December 31, 1997
------------- -----------------
Homes under contract, in production $ 45,228 $ 29,183
Finished lots and lots under development 34,046 28,471
Model homes and homes held for resale 8,652 6,301
----------- -----------
$ 87,926 $ 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):
Quarter Ended Six Months Ended
------------- ----------------
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
Beginning unamortized capitalized interest $ 2,074 $ 599 $ 1,890 $ --
Interest capitalized 856 894 1,484 1,586
Interest amortized in cost of home sales (800) (327) (1,244) (420)
------- ------- ------- -------
Ending unamortized capitalized interest $ 2,130 $ 1,166 $ 2,130 $ 1,166
======= ======= ======= =======
Interest incurred $ 971 $ 894 $ 1,679 $ 1,586
Interest capitalized (856) (894) (1,484) (1,586)
------- ------- ------- -------
Interest expense $ 115 $ -- $ 195 $ --
======= ======= ======= =======
6
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3 - NOTES PAYABLE
Notes payable consists of the following:
(Unaudited)
June 30, December 31,
1998 1997
---- ----
$30 million bank construction line of credit, interest
payable monthly approximating prime (8.5% at June
30, 1998), plus .25%, or LIBOR (30 day LIBOR 5.748%
at June 30, 1998) plus 2.5% 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 $ 10,015,098 $ 4,663,973
$50 million bank construction line of credit, interest payable
monthly approximating prime, or LIBOR plus 2.5%
payable at the earlier of close of escrow, maturity
date of individual homes within the line or June 1, 1999,
secured by first deeds of trust on land 14,764,554 9,769,567
$20 million bank acquisition and development credit facility,
interest payable monthly approximating prime plus .5%, or
LIBOR plus 3.0% 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 3,785,386 2,393,935
Senior subordinated unsecured notes payable, maturing October
15, 2001, annual interest of 13%, payable semi-annually,
principal payable at maturity date 4,700,000 6,000,000
Other 51,495 64,775
--------------- ---------------
Total $ 33,316,533 $ 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 except per share data).
Three Months ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
Home sales revenue $ 55,608 $ 44,642 $ 91,122 $ 76,845
Net earnings $ 6,696 $ 4,820 $ 12,148 $ 7,084
Diluted earnings per share $ 1.10 $ .91 $ 1.99 $ 1.32
NOTE 5 - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the three and six months ended June 30, 1998 and 1997
follows (in thousands, except for per share amounts):
Three Months Ended June 30 Six Months Ended June 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net earnings $ 6,696 $ 1,958 $ 12,148 $ 2,246
Basic EPS - Weighted average shares outstanding 5,316 4,528 5,311 4,528
----------- ----------- ----------- -----------
Basic earnings per share $ 1.26 $ .43 $ 2.29 $ .50
=========== ============ =========== ===========
Basic EPS - Weighted average shares outstanding 5,316 4,528 5,311 4,528
Effect of dilutive securities:
Contingent shares 132 65 141 58
Stock options 652 136 662 141
----------- ----------- ----------- -----------
Dilutive EPS - Weighted average shares 6,100 4,729 6,114 4,727
----------- ----------- ----------- -----------
outstanding
Diluted earnings per share $ 1.10 $ .42 $ 1.99 $ .48
=========== =========== =========== ============
NOTE 6 - INCOME TAXES
Income tax expense for the three and six months ended June 30, 1998 was
$546,000 and $896,000, respectively. Income tax expense for the three and six
months ended June 30, 1997 was $197,800 and $223,673, respectively. The Company
currently pays only state income tax and alternative minimum tax. Federal income
taxes are not paid due to the net operating loss (NOL) carryforward generated
when the Company operated as Homeplex Mortgage Investments Corporation prior to
December 31, 1996. The NOL will expire beginning in the year 2007.
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. 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.
8
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - SUBSEQUENT EVENTS
Sterling Communities Acquisition
On June 15, 1998, the Company signed a definitive agreement with
Sterling Communities, S.H. Capital, Inc., Sterling Financial Investments, Inc.,
Steve Hafener and W. Leon Pyle (together, the "Sterling Entities"), to acquire
substantially all of the assets of Sterling Communities ("Sterling"), a northern
California homebuilding business with operations in the San Francisco Bay and
Sacramento areas. The transaction was effective as of July 1, 1998.
The consideration for the assets and stock acquired consisted of $6.7
million in cash (paid out of working capital and subject to final accounting
adjustments) and deferred contingent payments for the four years following the
close of the transaction. The deferred contingent payments will be equal to 20%
of the pre-tax income of the Northern California division of the Company. In
addition, the Company assumed certain liabilities of Sterling approximating $7.4
million.
The assets purchased from the Sterling Entities principally consist of
real property and other residential homebuilding assets located in the San
Francisco Bay and Sacramento areas of California. The Company will continue the
operations of Sterling under the name Meritage Homes of Northern California.
In connection with the transactions, Steve Hafener has entered into a
four-year employment agreement with the Company, pursuant to which he has been
appointed Vice President and Division Manager of the Company's newly acquired
Northern California operations.
During the year ended December 31, 1997, Sterling closed 105 homes
generating revenues of approximately $31.0 million, and earned approximately
$2.7 million before taxes and distributions to its partners.
----------------------------------------------------------------------
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.
9
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
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
six months ended June 30, 1998 and June 30, 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 second quarter and first six months 1998 and 1997 housing
revenues for the total Company, and the Arizona and Texas divisions individually
(dollars in thousands):
Quarter Ended Six Months Ended
June 30, Dollar/Unit Percentage June 30, Dollar/Unit Percentage
-------- Increase Increase -------- Increase Increase
1998 1997 (Decrease) (Decrease) 1998 1997 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
Total
- -----
Dollars $ 55,608 $ 24,544 $ 31,064 126.6% $ 92,122 $ 37,117 $ 55,005 148.2%
Units Closed 323 65 258 396.9% 528 105 423 402.9%
Average Sales Price $ 172.2 $ 377.6 $ (205.4) (54.4%) $ 174.5 $ 353.5 $ (179.0) (50.1%)
Arizona
- -------
Dollars $ 19,437 $ 24,544 $ (5,107) (20.8%) $ 33,275 $ 37,117 $ (3,842) (10.4%)
Units Closed 57 65 (8) (12.3%) 102 105 (3) (2.9%)
Average Sales Price $ 341.0 $ 377.6 $ (36.6) (9.7%) $ 326.2 $ 353.5 $ (27.3) (7.7%)
Texas*
- ------
Dollars $ 36,171 $ 20,098 $ 16,073 80.7% $ 58,847 $ 39,728 $ 19,119 48.1%
Units Closed 266 140 126 90% 426 273 153 56.0%
Average Sales Price $ 136.0 $ 143.6 $ (7.6) (5.3%) $ 138.1 $ 145.5 $ (7.4) (5.1%)
*Prior year's Texas information is for comparative purposes only.
Total home sales revenue increased due to the addition of Texas
operations. 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. The decrease in Arizona closings for the second quarter and first
six months was caused primarily by construction delays due to unseasonably wet
weather in the first part of the year. The homes with delayed starts are
expected to be completed and close during the third and fourth quarters of 1998.
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):
10
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
Percentage Percentage
1998 1997 Increase Increase 1998 1997 Increase Increase
---- ---- -------- -------- ---- ---- -------- --------
Total
- -----
Dollars $ 9,910 $ 3,662 $ 6,248 170.6% $ 16,797 $ 5,288 $ 11,509 271.6%
Percentage of housing
revenues 17.8% 14.9% 2.9% 19.5% 18.2% 14.2% 4.0% 28.2%
The dollar increase in gross profit for the three and six months ended
June 30, 1998, is attributable to the number of units closed by the Legacy
operations. The total 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 $2 million in the second quarter of 1998, and a gain of
approximately $5 million for the six months ended June 30, 1998.
Selling, General And Administrative Expenses
Selling, general and administrative (SG&A) expenses as a percentage of
homebuilding revenues were 8.7% for the three months ended June 30, 1998
compared to 9.9% for the same period in the prior year. For the six month period
ended June 30, 1998, SG&A expenses were 9.9% of homebuilding revenues compared
to 11.5% in the prior year. The percentage decreases are principally due to the
inclusion of revenues from the Legacy Combination, without a corresponding
increase in Corporate overhead. In addition, Legacy Homes has traditionally
operated at a somewhat lower overhead burden as a percent of sales than the
Arizona division.
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 June 30, 1998, the Company had available short-term secured
revolving construction loan facilities totaling $80 million and a $20 million
acquisition and development facility, of which approximately $24.8 and $3.8
million were outstanding, respectively. An additional $15.2 million of
unborrowed funds supported by approved collateral were available under its
credit facilities at such date. The Company also had outstanding $4.7 million in
unsecured, senior subordinated notes due October 15, 2001, which were issued in
October 1994. A provision of the senior subordinated bond indenture provided
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value. $1,300,000 of the bonds were repurchased
from the bondholders by the Company at June 30, 1998.
Management believes that the Company's current borrowing capacity, cash
on hand at June 30, 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.
11
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
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):
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
Dollar/Unit Percentage Dollar/Unit Percentage
Increase Increase Increase Increase
1998 1997 (Decrease) (Decrease) 1998 1997 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
Total
- -----
Dollars $ 74,069 $ 26,073 $ 47,996 184.1% $ 160,042 $ 53,941 $ 106,101 196.7%
Units ordered 382 88 294 334.1% 887 169 718 424.9%
Average sales price $ 193.9 $ 296.3 $ (102.4) (34.6%) 180.4 $ 319.2 $ (138.8) (43.5%)
Arizona
- -------
Dollars $ 34,472 $ 26,073 $ 8,699 33.3% $ 61,685 $ 53,941 $ 7,744 14.4%
Units ordered 107 88 19 21.6% 187 169 18 10.7%
Average sales price $ 325.0 $ 296.3 $ 28.7 9.7% 329.9 $ 319.2 $ 10.7 3.4%
Texas*
- ------
Dollars $ 39,597 $ 26,112 $ 13,485 51.6% $ 98,357 $ 53,349 $ 45,008 84.4%
Units ordered 275 192 83 43.2% 700 379 321 84.7%
Average sales price $ 143.0 $ 136.0 $ 7.0 5.1% $ 140.5 $ 140.8 $ (.3) **1%
*Prior year's Texas information is for comparative purposes only.
**Less than 1%
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.
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 June 30,
-----------
1998 1997 Dollar/Unit Percentage
---- ---- Increase Increase
Total (Decrease) (Decrease)
- ----- ---------- ----------
Dollars $166,982 $ 67,177 $ 99,805 149%
Units in backlog 831 184 647 352%
Average sales price $ 200.9 $ 365.1 $ (164.2) (50%)
Arizona
- -------
Dollars $ 85,365 $ 67,177 $ 18,188 27%
Units in backlog 253 184 69 38%
Average sales price $ 337.4 $ 365.1 $ (27.7) (8%)
Texas*
- ------
Dollars $ 81,617 $ 42,678 $ 38,939 91%
Units in backlog 578 303 275 91%
Average sales price $ 141.2 $ 140.9 $ .3 **1%
*Prior year's Texas information is included for comparative purposes only.
**Less than 1%
12
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
Total dollar backlog at June 30, 1998 increased 149% over the previous
year due to a substantial increase in units ordered 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 27% over the prior year's due to
increased sales, offset slightly by a decrease in average sales price,
reflecting the lower prices of homes in currently active communities. Texas
dollar and unit backlog at June 30, 1998 is up 91% over the prior year due to
increased orders, expansion into the Houston market and the successful
introduction of new product offerings in the Austin market designed to meet the
demand for less expensive homes.
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.
Year 2000 Issue
The year 2000 issue is the result of computer programs written using
two digits (rather than four) to define the applicable year. Computer programs
that have time-sensitive software may not recognize dates beginning in the year
2000, which could result in miscalculations or system failures. The Company
believes the large majority of the computer software it uses is already year
2000 compliant. The Company is currently working to resolve any remaining
potential impact of the year 2000 on the processing of date-sensitive
information by the Company's computerized information systems. Based on current
information, the costs of addressing potential problems are not expected to have
a material adverse impact on the Company's financial position, results of
operations or cash flows in future periods. However, the failure of the Company,
its contractors, suppliers or financial institutions to resolve the year 2000
issue in a timely manner could result in a material financial risk. The Company
is assessing the effect of a failure of its contractors, suppliers or financial
institutions to adequately address the year 2000 issue.
13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) On June 11, 1998, the Company held its Annual Meeting of
Shareholders, at which William W. Cleverly, Steven J.
Hilton, Alan D. Hamberlin and Raymond Oppel were elected
as Class I Directors to serve for a two year term which
expires at the Annual Meeting in 2000. Voting results for
these nominees are summarized as follows:
For Against
--- -------
William W. Cleverly 3,364,201 8,062
Steven J. Hilton 3,363,868 8,395
Alan D. Hamberlin 3,361,101 11,162
Raymond Oppel 3,362,660 9,603
Additionally, the Shareholders approved an amendment to
Monterey Homes Corporation Stock Option Plan which increases the number of
shares of common stock authorized for issuance thereunder from 225,000 to
475,000 shares. Voting results are as follows:
Approval of Amendment to
------------------------
Stock Option Plan
-----------------
Shares For 2,953,076
Shares Against 410,070
Shares Abstained 9,117
Shares Not Voted By Brokers 0
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
Exhibit
Number Description Page or Method of Filing
------ ----------- ------------------------
2.1 Agreement of Purchase and Sale of Assets, dated as of May 20, Incorporated by reference to
1997, by and among the Company, Legacy Homes, Exhibit 2 of the Form 8-K/A
Ltd., Legacy Enterprises, Inc., and John and Eleanor dated June 18, 1997.
Landon
2.2 Agreement of Purchase and Sale of Assets, dated as of June Filed herewith.
15, 1998, by and among the Company, Sterling
Communities, S.H. Capital, Inc., Sterling Financial
Investments, Inc., Steve Hafener, and W. Leon Pyle
3.1 Restated Articles of Incorporation of the Company Incorporated by reference to
Exhibit 3.1 of the Post-Effective
Amendment No. 1 to the Form S-1
Statement No. 333-29737 ("S-1
#333-29737 Amendment No. 1").
14
3.2 Amended and Restated Bylaws of the Company Incorporated by reference to
Exhibit 3.3 to the Form S-3
Registration Statement No.
333-58793 ("S-3 #333-58793").
10.1 Amendment to Guaranty Federal Bank Loan Filed herewith.
10.2 Employment Agreement between the Company and Larry W. Seay Filed herewith.
10.3 Employment Agreement between the Company and Anthony C. Dinnell Filed herewith.
27 Financial Data Schedule Filed herewith.
99 Private Securities Reform Act of 1995 Safe Harbor Compliance Filed herewith
Statement for Forward-Looking Statements
(b) Reports filed on Form 8-K
A Current Report on Form 8-K, dated July 15, 1998 was filed
with the Securities and Exchange Commission.
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
August 14, 1998 By: \ LARRY W. SEAY
------------------
Larry W. Seay
Vice President of Finance &
Chief Financial Officer
S-1