-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SOOHj6Q8Xmc4O/tUYvBzF3AW/YBdu/LvO4y0h1Zki8pD+L98n061n/mDAZLIstCt t171Udc65K9XAPcv9EGylA== 0000950147-97-000560.txt : 19970912 0000950147-97-000560.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950147-97-000560 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970815 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL HOMES HOLDING CORP CENTRAL INDEX KEY: 0000796122 STANDARD INDUSTRIAL CLASSIFICATION: 1531 IRS NUMBER: 860554624 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10700 FILM NUMBER: 97664803 BUSINESS ADDRESS: STREET 1: 7001 N SCOTTSDALE RD STE 2050 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 BUSINESS PHONE: 6024830006 MAIL ADDRESS: STREET 1: 7001 N SCOTTSDALE ROAD STREET 2: SUITE 2050 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-14830 CONTINENTAL HOMES HOLDING CORP. (Exact name of registrant as specified in its charter) ------------------ Delaware State or other jurisdiction of 86-0554624 incorporation or organization) (I.R.S. Employer Identification Number) 7001 North Scottsdale Road, Suite 2050 Scottsdale, Arizona 85253 (Address of principal executive offices) Registrant's telephone number, including area code: (602) 483-0006 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 11, 1997 was $130,192,282. (This calculation assumes that all officers and directors of the Company are affiliates.) The number of shares of Common Stock outstanding as of August 11, 1997 was 6,855,680. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Stockholders for the year ended May 31, 1997 are incorporated herein by reference into Part II and portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held August 28, 1997 are incorporated herein by reference into Part III. CONTINENTAL HOMES HOLDING CORP. FORM 10-K ANNUAL REPORT For the Fiscal Year Ended May 31, 1997 TABLE OF CONTENTS PART I Item 1. Business Page General............................................................................ 1 Land Acquisition and Development................................................... 1 Product Lines...................................................................... 2 Contract Backlog................................................................... 3 Marketing.......................................................................... 3 Construction and Customer Service.................................................. 4 Mortgage Banking................................................................... 4 Competition........................................................................ 5 Regulation......................................................................... 5 Employees.......................................................................... 5 Item 2. Properties......................................................................... 6 Item 3. Legal Proceedings.................................................................. 6 Item 4. Submission of Matters to a Vote of Security Holders................................ 6 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................................ 6 Item 6. Selected Financial Data............................................................ 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 7 Item 8. Financial Statements and Supplementary Data........................................ 7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 7 PART III Item 10. Directors and Executive Officers of the Registrant................................. 7 Item 11. Executive Compensation............................................................. 7 Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 7 Item 13. Certain Relationships and Related Transactions..................................... 7 PART IV Item 14. Exhibits and Reports on Form 8-K................................................... 7
PART I Item 1. BUSINESS GENERAL Continental Homes Holding Corp. (the "Company"), a Delaware corporation, was formed in June 1986. The Company designs, constructs and sells high quality single-family homes targeted primarily to entry-level and first-time move-up homebuyers. The Company is geographically diversified, currently operating in Phoenix, Arizona; Austin, San Antonio and Dallas, Texas; Denver, Colorado; South Florida and Southern California. The Company entered the Austin, San Antonio, South Florida and Dallas markets in July 1993, January 1994, November 1994 and June 1996, respectively, through acquisitions of existing homebuilders. In July 1996, the Company began selling homes at "Arizona Traditions", its first active adult community. The community has approximately 1,800 home sites, a golf course, community center and many other amenities. The Company complements its homebuilding activities by providing mortgage banking services to its homebuyers and to third parties in all locations. LAND ACQUISITION AND DEVELOPMENT As of May 31, 1997, the Company operated 20 subdivisions in Phoenix, 17 subdivisions in Austin, 9 subdivisions in San Antonio, 8 subdivisions in Dallas, 8 subdivisions in Denver, 7 subdivisions in Miami and 7 subdivisions in Southern California. The following table summarizes the Company's available lot inventory at May 31, 1997 by location: AVAILABLE LOT INVENTORY
Sites Available Homes Under for Future Construction Construction Total Lots ------------ ------------ Available Sold Specs(1) Models Unsold Sold --------- ---- -------- ------ ------ ---- Phoenix .............. 5,088 719 239 70 3,948 112 Texas(2) ............. 6,905 714 260 55 5,822 54 Denver ............... 1,090 164 40 17 850 19 South Florida ........ 1,051 91 18 18 843 81 Southern California(3) 1,939 54 101 16 1,765 3 ------ ------ ------ ------ ------ ------ Total .. 16,073 1,742 658 176 13,228 269 ====== ====== ====== ====== ====== ======
- - ----------------- (1) Speculative units are unsold homes under construction. (2) Includes operations in Austin, San Antonio and Dallas. (3) Includes approximately 1,600 home sites at Continental Ranch, Inc. The Company's objective is to maintain a supply of land to meet anticipated homebuilding requirements for approximately two to three years. At May 31, 1997 and 1996, the Company had an aggregate of 13,228 and 11,047 unsold lots, respectively, which represents approximately 32 and 30 months of inventory, respectively, based on actual deliveries in each of fiscal 1997 and 1996. The Company believes that an adequate supply of undeveloped land is available in its markets to maintain current levels of homebuilding. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." In November 1996, the Company started development on its 670 acres of property in Carlsbad, California, located in San Diego County. When completed this community will have approximately 1,600 homesites. The Company is actively marketing a portion of the lots and will develop and sell the remainder as finished homes. 1 PRODUCT LINES The product line constructed by the Company in a particular subdivision is dependent upon many factors, including the housing generally available in the area, the needs of the particular market and the Company's cost of lots in the subdivision. The Company typically offers between 3 and 19 floorplans within the same product line in each subdivision and often offers the same models in similar subdivisions. Models are periodically reviewed and updated to reflect changing homebuyer preferences. Both new models and design modifications are generally developed by Company employees. Homes sold by the Company typically have three to five bedrooms, two or more bathrooms and a two car garage. The Company offers a variety of options and upgrades, including the placement of certain walls, the style of kitchen and bathroom cabinetry, a selection of floor coverings and light fixtures, patios, decks, french doors and fireplaces, which allow homebuyers to customize their homes. Options and upgrades are generally priced to have a positive effect on profit margins. PRODUCT LINES Living Area Base Price Range (Square Feet) at May 31, 1997 ------------- --------------- Phoenix Move-up single-family ......... 1,233 - 3,761 $ 94,450 - $234,800 Entry-level single-family ..... 1,054 - 2,484 $ 91,900 - $161,600 Texas Move-up single-family ......... 1,622 - 3,626 $110,750 - $194,000 Entry-level single-family ..... 924 - 3,024 $ 58,950 - $132,900 Denver Move-up single-family ......... 1,820 - 3,096 $161,900 - $243,900 Entry-level single -family .... 1,358 - 1,834 $137,500 - $153,500 South Florida Move-up single-family ......... 1,615 - 2,647 $138,900 - $185,900 Entry-level single-family/ Townhomes ................... 1,152 - 1,669 $ 99,900 - $133,900 Southern California Move-up single-family ......... 2,525 - 4,093 $269,000 - $435,000 Entry-level single-family ..... 1,705 - 3,270 $138,900 - $272,900 HOMES DELIVERED Years ended May 31, ------------------- 1997 1996 1995 ---- ---- ---- Move-up single-family Revenues (000's) .......... $311,254 $222,918 $208,026 Units ..................... 1,701 1,281 1,281 Average sales price ....... $183,000 $174,000 $162,400 Entry-level single-family Revenues (000's) .......... $356,329 $352,839 $206,692 Units ..................... 3,068 3,073 1,921 Average sales price ....... $116,100 $114,800 $107,600 Townhomes and duplex homes Revenues (000's) .......... $ 14,255 $ 1,316 $ -- Units ..................... 135 13 -- Average sales price ....... $105,600 $101,200 $ -- Total Revenues (000's) .......... $681,838 $577,073 $414,718 Units ..................... 4,904 4,367 3,202 Average sales price ....... $139,000 $132,100 $129,500 Fluctuations in the number of homes delivered by product type are generally related to product availability, market conditions or the introduction of a new product. CONTRACT BACKLOG Sales of the Company's homes are made pursuant to standard sales contracts which typically require a $500 to $2,500 deposit upon signing. The contract is generally cancelable if the customer is unable to obtain a mortgage commitment, usually within 60 days. A sale becomes part of backlog only upon receipt of a signed contract and a deposit. See "Business -- Construction and Customer Service." As of May 31, 1997, the Company's contract backlog had an aggregate sales value of $271,131,000 consisting of 2,015 homes. The contract backlog as of May 31, 1996 had an aggregate sales value of $295,484,000 and consisted of 2,070 homes. The Company anticipates that substantially all of the homes in backlog at May 31, 1997 will be delivered during the calendar year ending December 31, 1997. MARKETING The Company markets its homes to first-time and move-up buyers. Although the Company utilizes the services of independent brokers, approximately 40% of its homes sold in fiscal 1997 were sold by Company commissioned personnel (without the assistance of independent brokers) from sales offices located in furnished model homes in the subdivisions. Sales personnel are trained by the Company and attend weekly meetings to be updated on financing availability, construction schedules and marketing and advertising plans. Company sales personnel and independent brokers are generally paid a commission at the time of closing of between 1% and 2% (depending on the market) and 3%, respectively, of the sales price of the home. The Company uses radio, newspaper, magazine, billboard displays, special promotional events and, occasionally, television in its marketing program. The Company builds its homes under the guidelines and specifications of the Federal Housing Administration ("FHA") and the Veterans Administration ("VA"), thereby providing prospective buyers the added benefits of FHA-insured and VA-guaranteed mortgages. 3 CONSTRUCTION AND CUSTOMER SERVICE The Company designs and supervises the development and building of its projects. The construction period for the Company's homes during fiscal 1997 ranged from 100 to 180 days in Phoenix, from 75 to 120 days in Texas, from 120 to 180 days in Denver, from 90 to 120 days in South Florida and from 100 to 150 days in Southern California. The actual construction is performed for a fixed price by independent subcontractors, who are generally selected on a competitive basis. All stages of construction are supervised by the Company's on-site superintendents who coordinate the activities of subcontractors, subject their work to quality and cost controls and monitor compliance with zoning and building codes. The Company's management information systems also assist the Company in controlling the costs of construction by making information available which allows the Company to monitor subcontractor performance and expenditures. The Company believes its relationships with its subcontractors are good. The Company is not, and does not anticipate, experiencing a significant shortage of either subcontractors or building materials. The Company provides homebuyers with a one-year warranty on its homes for non-structural defects and a two-year warranty with respect to structural defects. In addition, the Company purchases, in certain locations, builder's liability insurance protection for major structural defects in the third through tenth year. The Company constructs homes principally against orders which are evidenced by written contracts and modest escrow deposits. In fiscal 1997, approximately 19% of such contracts have been canceled, a majority of such cancellations being attributable to the inability of the prospective purchaser to qualify for financing. The Company attempts to limit cancellations by training its sales force to determine the qualification of potential homebuyers at the sales office. The Company classifies a unit as speculative when construction commences on a unit that does not have a written contract. The Company may construct speculative units in order to maintain an inventory for quick delivery or to continue the construction sequence. The majority of the Company's speculative units are less than 50% complete. As a result of such cancellations and construction procedures, at May 31, 1997 and 1996, the Company had respectively, 658 and 559 speculative units under construction. MORTGAGE BANKING The Company conducts mortgage banking operations through its wholly-owned subsidiary, CH Mortgage Company ("CHMC"). For the year ended May 31, 1997, CHMC provided mortgage financing to 65% of the Company's customers or 72% in Arizona, 48% in Colorado, 17% in Florida and 80% in Texas. The Company is currently licensed to do business in Arizona, Colorado, Texas, Florida and California. As a mortgage banker, CHMC completes the processing of loan applications, performs credit checks, submits applications to mortgage lenders for approval, and originates and sells mortgage loans. CHMC has a $25,000,000 warehouse line of credit to fund the mortgage loans on an interim basis. CHMC bears the interest expense and receives the interest income while mortgages are warehoused. Accordingly, depending upon the relative interest rates of such loans and the related mortgages and the extent to which mortgages are financed, CHMC may have net interest income or expense during the warehouse period. CHMC establishes its interest rates and terms to facilitate the sale of the Company's homes through the origination of first mortgage loans utilizing programs established by the FHA, VA, GNMA and FNMA. Interest rates are generally established by prevailing market rates, although lower rates may be offered from time to time to remain competitive in certain markets. Each mortgage originated by CHMC contains the provision for a servicing fee (which is included as a part of the monthly payment made by the mortgagor) to be paid for the collection of, and accounting for, mortgage payments. This servicing fee provision is a separate interest in the mortgage that may be sold independently of, or together with, the mortgage itself. CHMC began retaining a portion of the servicing portfolio in fiscal 1991 and from time to time may continue to do so, although this is not expected to 4 become a material part of the Company's business. During fiscal 1996, the Company sold significantly all of the servicing rights it had previously retained. COMPETITION The single-family residential housing industry is highly competitive, and the Company competes in each of its markets with numerous other national, regional and local homebuilders, some of which have greater resources than the Company. The Company's homes compete on the basis of quality, price, design, mortgage financing terms and location. The Company also competes with developers of rental housing units and, to a lesser extent, condominiums. REGULATION The housing and mortgage banking industries are subject to extensive and complex regulations. The Company and its subcontractors must comply with various federal, state and local laws and regulations including zoning and density requirements, building, environmental, advertising and consumer credit rules and regulations as well as other rules and regulations in connection with its homebuilding and sales activities. These include requirements as to building materials to be used, building designs and minimum elevation of properties. The Company's homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA, respectively, are subject to inspection by the FHA or VA. The Company is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"), as well as effects of environmental factors. The particular environmental laws which apply to any given homebuilding site vary greatly according to the site's location, the site's environmental condition and the present and former uses of the site. These environmental laws may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. The Company's mortgage banking subsidiary must also comply with various federal and state laws and consumer credit rules and regulations as well as rules and regulations in connection with its mortgage lending activities. Additionally, mortgage loans originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by such agencies. EMPLOYEES At May 31, 1997, the Company and its subsidiaries employed approximately 646 persons, including corporate staff, sales personnel, construction personnel and mortgage and title staff. None of the Company's employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. 5 Item 2. PROPERTIES The Company's principal offices are located at 7001 North Scottsdale Road, Suite 2050, Scottsdale, Arizona 85253. The offices, which include approximately 22,000 square feet, are leased for a term expiring March 2001. Item 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings which it believes would have a material effect on the Company's financial position or operating results. A claim the Company filed against William O. Milburn and Ernst & Young seeking reimbursement for the payments made to the Internal Revenue Service in excess of the tax liability recorded at the time Milburn was acquired was settled in the Company's favor. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Since December 15, 1993 the Company's Common Stock has traded on the New York Stock Exchange (Symbol: CON). The following table sets forth for each period indicated the high and low closing sales prices of the Company's Common Stock and cash dividends paid: Dividends High Low Per Share ---- --- --------- Year Ended May 31, 1997: First Quarter .............. $ 24.25 $ 18.75 $ .05 Second Quarter ............. 20.50 16.25 .05 Third Quarter .............. 22.13 19.63 .05 Fourth Quarter ............. 21.13 15.50 .05 Year Ended May 31, 1996: First Quarter .............. $ 21.00 $ 15.13 $ .05 Second Quarter ............. 22.50 18.13 .05 Third Quarter .............. 24.63 18.88 .05 Fourth Quarter ............. 25.25 20.00 .05 DIVIDEND POLICY Declarations of dividends are within the discretion of the Board of Directors and are dependent upon various factors, including the earnings, cash flow, capital requirements and operating and financial condition of the Company. In addition, the company's ability to pay dividends in excess of current levels is restricted by its 10% Senior Notes. See Note E of "Notes to Consolidated Financial Statements" of the Company. As of August 11, 1997, there were 119 holders of record of the Company's Common Stock. Item 6. SELECTED FINANCIAL DATA Information relating to this item appears under the caption "Twelve-Year Financial Summary" on pages 8 and 9 of the Annual Report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. This information should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Company's Consolidated Financial Statements and the Notes thereto. 6 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information relating to this item appears under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 12 through 16 of the Annual Report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. Other financial statements and schedules required under Regulation S-X promulgated under the Securities Act of 1933 are identified in Item 14 hereof and are incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information relating to this item appears on pages 17 through 31 of the Annual Report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. There are no other financial statements and schedules required under Regulations S-X promulgated under the Securities Act of 1933. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to this item appears in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held on August 28, 1997, and such information is incorporated herein by reference in accordance with General Instruction G(3) of Form 10-K. Item 11. EXECUTIVE COMPENSATION Information relating to this item is contained in the definitive Proxy Statement referred to above in "Item 10. Directors and Executive Officers of the Registrant," and such information is incorporated herein by reference in accordance with General Instruction G(3) of Form 10-K. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to this item is contained in the definitive Proxy Statement referred to above in "Item 10. Directors and Executive Officers of the Registrant," and such information is incorporated herein by reference in accordance with General Instruction G(3) of From 10-K. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to this item is contained in the definitive Proxy Statement referred to above in "Item 10. Directors and Officers of the Registrant, " and such information is incorporated herein by reference in accordance with General Instruction G(3) of Form 10-K. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements of Continental Homes Holding Corp. and Subsidiaries, included in the Annual Report to Shareholders for the year ended May 31, 1997, are incorporated by reference in Item 8: 7 (a) 1. Financial Statements (continued) Report of Independent Public Accountants Consolidated Balance Sheets - May 31, 1997 and 1996. Consolidated Statements of Income - Years ended May 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity - Years ended May 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows - Years ended May 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules Not applicable. (a) 3. Exhibits 3.1(a) Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1(a) to Registration Statement No. 33-6797, as filed on June 25, 1986. 3.1(b) Amendment to Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1(b) to Amendment No. 2 to Registration Statement No. 33-6797, as filed on January 30, 1987. 3.1(c) Certificate of Second Amendment of the Certificate of Incorporation. Incorporated by reference to Exhibit 3 to the Company's report on Form 10-Q for the quarter ended August 31, 1993. 3.2 By-laws of the Company. Incorporated by reference to Exhibit 3.2 to registration Statement No. 33-6797, as filed on June 25, 1986. 4.1 Indenture dated as of April 15, 1996 between the Company and First Union National Bank, as Trustee. 4.2 Indenture dated as of November 1, 1995 between the Company and Manufacturer's and Traders Trust Company, as Trustee. Incorporated by reference to Exhibit 4.1 to the Company's report on form 10-Q for the quarter ended November 30, 1995. 10.1(a) Lease Agreement dated August 1, 1990, as amended, for the Company's principal office located at 7001 N. Scottsdale Road, Suite 2050, Scottsdale, Arizona. Incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-K for the year ended May 31, 1991. 10.1(b) Third Amendment to Lease Agreement dated June 27, 1994 for the Company's principal office located at 7001 N. Scottsdale Road, Suite 2050, Scottsdale, Arizona. Incorporated by reference to Exhibit 10.1(b) to the Company's report on Form 10-K for the year ended May 31, 1994. 10.2(a)+ The Company's Restated 1986 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 to Amendment No. 2 to Registration Statement No. 33-6797, as filed on January 30, 1987. 10.2(b)+ The Company's 1988 Stock Incentive Plan (As amended and restated July 23, 1992). Incorporated by reference to Exhibit A to the Company's Notice of Annual Meeting and Proxy Statement dated August 3, 1992. 8 (a) 3. Exhibits (continued) 10.3 Amended and Restated Mortgage Warehousing Credit and Security Agreement dated as of July 1, 1995 between Bank One, Arizona, NA ("BOAZ") and CHMC. Incorporated by reference to Exhibit 10.3 to the Company's report on Form 10-K for the year ended May 31, 1995. 10.3(a) Modification Agreement dated as of December 1, 1995 between BOAZ and CHMC. Incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Q for the quarter ended November 30, 1995. 10.4 Amended and Restated Replacement Revolving Line of Credit Promissory Note dated December 1, 1995 between BOAZ and CHMC in favor of BOAZ in the amount of $25,000,000. Incorporated by reference to Exhibit 10.2 to the Company's report on Form 10-Q for the quarter ended November 30, 1995. 10.5 Credit Agreement dated as of June 27, 1996 between BOAZ, Norwest, The First National Bank of Boston and CHHC. 10.6 Promissory Note dated June 27, 1996 between BOAZ and CHHC in the principal amount of up to $65,000,000. 10.7 Promissory Note dated June 27, 1996 between The First National Bank of Boston and CHHC in the principal amount of up to $25,000,000. 10.8 Promissory Note dated June 27, 1996 between Norwest Bank Arizona and CHHC in the principal amount of up to $20,000,000. 10.9* First Modification Agreement dated as of April 11, 1997 between BOAZ, The First National Bank of Boston, Norwest, Guaranty Federal Bank and CHHC. 10.10* Promissory note dated April 11, 1997 between Guaranty Federal Bank and CHHC in the principal amount of up to $30,000,000. 11.* Statement Re Computation of Per Share Earnings. 13.* Pages 8 through 31 of the Annual Report to Stockholders for the year ended May 31, 1997. 21.* Subsidiaries of the Company. 23.* Consent of Independent Public Accountants. 27.* Financial Data Schedule. - - -------------------------- + Denotes a compensatory plan or agreement. * Filed herewith. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the last quarter of the year ended May 31, 1997. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 14, 1997 CONTINENTAL HOMES HOLDING CORP. By: /s/ Donald R. Loback ------------------------------- Donald R. Loback Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Donald R. Loback August 14, 1997 - - ------------------------------------ --------------- Donald R. Loback Date Chief Executive Officer /s/ W. Thomas Hickcox August 14, 1997 - - ------------------------------------ --------------- W. Thomas Hickcox Date Chief Operating Officer/President and Director /s/ Julie E. Collins August 14, 1997 - - ------------------------------------ --------------- Julie E. Collins Date Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/ Timothy C. Westfall August 14, 1997 - - ------------------------------------ --------------- Timothy C. Westfall Date General Counsel and Director /s/ Robert B. Ryan August 14, 1997 - - ------------------------------------ --------------- Robert B. Ryan Date Vice President of Management Information Systems and Director /s/ Bradley S. Anderson August 14, 1997 - - ------------------------------------ --------------- Bradley S. Anderson Date Director /s/ Jo Ann Rudd August 14, 1997 - - ------------------------------------ --------------- Jo Ann Rudd Date Director /s/ William Steinberg August 14, 1997 - - ------------------------------------ --------------- William Steinberg Date Director /s/ Peter D. O'Connor August 14, 1997 - - ------------------------------------ --------------- Peter D. O'Connor Date Director 10 INDEX OF EXHIBITS 10.9 First Modification Agreement dated as of April 11, 1997 between BOAZ, The First National Bank of Boston, Norwest, Guaranty Federal Bank and CHHC. 10.10 Promissory note dated April 11, 1997 between Guaranty Federal Bank and CHHC in the principal amount of up to $30,000,000. 11. Statement Re: Computation of Per Share Earnings 13. Pages 8 through 31 of the Annual Report to Stockholders for the year ended May 31, 1997. 21. Subsidiaries of the Company. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. EX-10.9 2 FIRST MODIFICATION AGREEMENT FIRST MODIFICATION AGREEMENT THIS FIRST MODIFICATION AGREEMENT ("Agreement") is entered into as of April 11, 1997, among CONTINENTAL HOMES HOLDING CORP., a Delaware corporation ("Borrower"), the Banks listed on the signature pages of this Agreement, and BANK ONE, ARIZONA, NA, a national banking association, as Agent. The parties hereto agree as follows: RECITALS: - - --------- A. Agent, Banks and Borrower entered into a Credit Agreement dated as of June 27, 1996 (the "Credit Agreement") pursuant to which the banks named therein (the "Original Banks"), among other things, established a credit facility ("Credit Facility") for Borrower, which is evidenced by the Notes. Capitalized terms not otherwise defined herein shall have the same meanings ascribed to such terms in the Credit Agreement. B. Borrower has requested that Original Banks increase the amount of the Credit Facility and add an additional bank as a party to the Credit Agreement. Original Banks have agreed to so modify the Credit Facility and to amend the Credit Agreement and other Loan Documents on the terms and subject to the conditions set forth in this Agreement. AGREEMENTS: - - ----------- For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, Banks (as hereinafter defined) and Agent agree as follows: SECTION 1. ACCURACY OF RECITALS. --------------------- The parties acknowledge the accuracy of the Recitals. SECTION 2. MODIFICATION OF CREDIT AGREEMENT. --------------------------------- Effective as of the Effective Date (as hereafter defined), the Credit Agreement shall be modified as follows: 2.1. The definition of "Aggregate Commitment", as set forth in Article I of the Credit Agreement, is modified in its entirety to read as follows: "Aggregate Commitment" means the aggregate of the Commitments of all Banks, as reduced from time to time pursuant to the terms hereof. As of April 11, 1997, the Aggregate Commitment is $140,000,000.00. 2.2. The word "monthly" is hereby inserted into the second sentence of Section 2.15 of the Credit Agreement, immediately after the word "payable." 2.3. The proviso in the third sentence of Section 2.22(f) of the Credit Agreement is hereby modified in its entirety to read as follows: provided, however, that the Conversion Period shall be a Modified Secured Conversion Period if a Significant Event has occurred. 2.4. Section 9.3 of the Credit Agreement is hereby modified in its entirety to read as follows: 9.3 Spec and Model Unit Inventory. Borrower will not at any time permit the aggregate number of all Spec Units and Model Units owned by Guarantors to exceed the greater of (i) fifty percent (50%) of the number of Housing Unit Closings during the preceding twelve (12) months, or (ii) one hundred ten percent (110%) of the number of Housing Unit Closings during the preceding six (6) months. Borrower will not at any time permit any Guarantor to own any Spec Units except those Spec Units where the certificate of occupancy was issued during the preceding six (6) months. A failure to satisfy the requirements of this Section 9.3 shall not constitute an Event of Default or an Unmatured Event of Default, but the Housing Unit Costs of any Spec Units and Model Units owned by Guarantors in excess of the foregoing requirements shall not be included in the Borrowing Base. 2.5. The following sentence is hereby added to the end of Section 9.4 of the Credit Agreement: A failure to satisfy the requirements of this Section 9.4 shall not constitute an Event of Default or an Unmatured Event of Default, but the book value of Finished Lots and the book value of Land Under Development owned by Guarantors in excess of the foregoing requirements shall not be included in the Borrowing Base. 2.6. The reference to "Section 2.22(c)", as it appears in Section 10.16(b) of the Credit Agreement, is hereby amended to be Section 2.22(d). 2.7. The last sentence of Section 11.4 of the Credit Agreement is hereby amended in its entirety to read as follows: Any Person released from its obligations as a Guarantor under the Indenture shall be released from its obligations under the Guaranty so long as (i) no Event of Default has occurred and is continuing, (ii) the value of such Person's assets, as determined in accordance with GAAP, is less than $1,000,000.00, and (iii) Borrower pays all amounts due under Section 2.2 of this Agreement. 2.8. The last sentence of Section 13.11 of the Credit Agreement is hereby amended in its entirety to read as follows: Upon the effectiveness of the resignation or removal of Agent, the resigning or removed Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Agent, the provisions of this Article XIII shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the Loan Documents. 2.9. Subparagraph 15.1(i) of the Credit Agreement is hereby modified in its entirety to read as follows: "(i) Borrower shall not have the right to assign its rights or obligations under the Loan Documents (except as otherwise permitted under Section 8.3), and." 2.10. The reference to "public information", as it appears in Section 15.4 of the Credit Agreement, is hereby amended to be "non-public information." 2.11. All of the references to twenty-four (24) months that appear in Schedule "2.21" of the Credit Agreement are hereby amended to be twelve (12) months. 2.12. As of the Effective Date, Guaranty Federal Bank, FSB shall be deemed to be a Bank under the Credit Agreement, and the definition of "Banks" in the Credit Agreement is hereby amended to include Guaranty Federal Bank, FSB and its successors and assigns. The Commitment of Guaranty Federal Bank, FSB, shall be $30,000,000.00. The Commitments of the remaining Banks shall remain as set forth in the Credit Agreement. Guaranty Federal Bank, FSB (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements requested by it and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement, (ii) agrees that it will, independently and without reliance upon Agent or any Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, (iii) appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto, (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Bank, (v) agrees that its payment instructions and notice instructions are as set forth on Schedule 1 hereto; and (vi) confirms that none of the funds, monies, assets or other consideration being used to make the purchase of its interest in Advances and Facility Letters of Credit are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Loan documents will not be "plan assets" under ERISA. SECTION 3. OTHER MODIFICATIONS; RATIFICATION OF LOAN DOCUMENTS. ---------------------------------------------------- 3.1. As of the Effective Date, each reference in the Loan Documents to any of the Loan Documents is hereby amended to be a reference to such document as modified herein. 3.2. The Loan Documents are ratified and affirmed by Borrower and shall remain in full force and effect as modified herein. SECTION 4. BORROWER REPRESENTATIONS AND WARRANTIES. ---------------------------------------- Borrower represents and warrants to Banks and Agent: 4.1. As of April 10, 1997, the outstanding principal balance of the Notes is $0; interest has been paid through the due date. 4.2. No default or event of default under any of the Loan Documents as modified herein, nor any event, that, with the giving of notice or the passage of time or both, would be a default or an event of default under the Loan Documents as modified herein has occurred and is continuing. 4.3. There has been no material adverse change in the financial condition of Borrower or any Guarantor or any other person whose financial statement has been delivered to Agent in connection with the Credit Facility from the most recent financial statement received by Agent. 4.4. Each and all representations and warranties of Borrower in the Loan Documents are accurate on the date hereof. 4.5. Borrower has no claims, counterclaims, defenses, or set-offs with respect to the Credit Facility or the Loan Documents as modified herein. 4.6. The Loan Documents as modified herein are the legal, valid, and binding obligation of Borrower, enforceable against Borrower in accordance with their terms. 4.7. Borrower is validly existing under the laws of the State of its formation or organization and has the requisite power and authority to execute and deliver this Agreement and to perform the Loan Documents as modified herein. The execution and delivery of this Agreement and the performance of the Loan Documents as modified herein have been duly authorized by all requisite action by or on behalf of Borrower. This Agreement has been duly executed and delivered on behalf of Borrower. SECTION 5. BORROWER COVENANTS. ------------------- Borrower covenants with Agent and Banks: 5.1. Borrower shall execute, deliver, and provide to Agent such additional agreements, documents, and instruments as reasonably required by Agent to effectuate the intent of this Agreement. 5.2. Borrower fully, finally, and absolutely and forever releases and discharges Agent and Banks and their present and former directors, shareholders, officers, employees, agents, representatives, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns, from any and all actions, causes of action, claims, debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity that Borrower has or in the future may have, (i) in respect of the Credit Facility, the Loan Documents, or the actions or omissions of Agent or any Bank in respect of the Credit Facility or the Loan Documents and (ii) arising from events occurring prior to the date of this Agreement, and which are known to Borrower. SECTION 6. CONDITIONS PRECEDENT. --------------------- The agreements of Banks and Agent and the modifications contained herein shall not be binding upon Banks and Agent until Borrower has executed and delivered this Agreement and Agent has received, at Borrower's expense, all of the following on or before April 11, 1997 (the "Effective Date"), and each of which shall be in form and content satisfactory to Agent and Banks and shall be subject to approval by Agent and Banks: 6.1. An original of this Agreement fully executed by Borrower and Guarantors; 6.2. A Promissory Note payable to the order of Guaranty Federal Bank, FSB in the amount of $30,000,000.00, in the form attached hereto as Exhibit A, fully executed by Borrower, which shall be deemed to be a Note for all purposes under the Credit Agreement; 6.3. A commitment fee, for the benefit of Guaranty Federal Bank, FSB for the increase in the Aggregate Commitment to $140,000,000.00, in the amount of $82,500.00; 6.4. The fees payable to Agent as set forth in the letter agreement of even date herewith between Agent and Borrower; 6.5. Such resolutions or authorizations and such other documents as Agent may require relating to the existence and good standing of Borrower and each Guarantor, and the authority of any person executing this Agreement or other documents on behalf of Borrower and each Guarantor; 6.6. A written opinion of Timothy C. Westfall, counsel to Borrower and Guarantors, addressed to Agent and Banks in substantially the form of Exhibit B hereto; and 6.7. Payment of all external costs and expenses incurred by Agent in connection with this Agreement (including, without limitation, inside and outside attorneys and processing costs, expenses, and fees). SECTION 7. ADJUSTMENT OF PRO RATA SHARES. ------------------------------ 7.1. Pursuant to the provisions of the Credit Agreement, Advances made by the Banks (excluding Swing Line Advances) consist of Loans made by the several Banks ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment. As a result of the increase in the Aggregate Commitment and the addition of Guaranty Federal Bank, FSB as a Bank, such ratio has been changed. As of the Effective Date, each Bank except Guaranty Federal Bank, FSB (an "Assignor Bank") hereby sells and assigns to Guaranty Federal Bank, FSB ("Assignee Bank"), and Assignee Bank hereby purchases and assumes, without recourse, from each Assignor Bank, all of Assignor Bank's rights and obligations in respect of the portion of all Advances owing to the Assignor Bank and all Facility Letters of Credit that are outstanding on the Effective Date, to the extent required in order to appropriately adjust the proportionate shares of the Advances and the Facility Letters of Credit. In connection with the foregoing assignment, on or before 11:00 a.m., Phoenix time, on the Effective Date, Assignee Bank shall wire transfer to Agent the amount necessary to make the foregoing adjustment, and Agent shall wire transfer the respective portion of such amount to each Assignor Bank on the Effective Date. SECTION 8. GENERAL. -------- 8.1. The Loan Documents as modified herein contain the complete understanding and agreement of Borrower, Banks and Agent in respect of the Credit Facility and supersede all prior representations, warranties, agreements, arrangements, understandings, and negotiations. No provision of the Loan Documents as modified herein may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the parties thereto. 8.2. The Loan Documents as modified herein shall be binding upon and shall inure to the benefit of Borrower, Banks and Agent and their successors and assigns; provided, however, Borrower may not assign any of its rights or delegate any of its obligations under the Loan Documents and any purported assignment or delegation shall be void. 8.3. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona, without giving effect to conflicts of law principles. 8.4. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Agreement to physically form one document. IN WITNESS WHEREOF, Borrower, Banks, and Agent have executed this Agreement as of the date set forth above. BORROWER: CONTINENTAL HOMES HOLDING CORP., a Delaware corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Chief Executive Officer BANKS AND AGENT: BANK ONE, ARIZONA, NA, a national banking association, Individually and as Agent By: /s/Rhonda R. Williams ------------------------------------- Name: Rhonda R. Williams Title: Vice President THE FIRST NATIONAL BANK OF BOSTON By: /s/Nicholas Whiting ------------------------------------- Name: Nicholas Whiting Title: Vice President NORWEST BANK ARIZONA, N.A., a national banking association By: /s/Kevin Kosan ------------------------------------- Name: Kevin Kosan Title: Vice President GUARANTY FEDERAL BANK, FSB By: /s/Robert Talkington ------------------------------------- Name: Robert Talkington Title: Senior Vice President CONSENT AND AGREEMENT OF GUARANTORS ----------------------------------- With respect to the First Modification Agreement, dated April 11, 1997 ("Agreement"), among CONTINENTAL HOMES HOLDING CORP., a Delaware corporation ("Borrower"), the Banks listed on the signature pages of the Agreement, and BANK ONE, ARIZONA, NA, a national banking association, as Agent, the undersigned (severally and collectively, "Guarantor") agree for the benefit of Agent and Banks as follows: 1. Guarantor acknowledges (i) receiving a copy of and reading the Agreement, (ii) the accuracy of the Recitals in the Agreement, and (iii) the effectiveness of (A) the Guaranty dated June 27, 1996 executed by the undersigned for the benefit of Agent and Banks, as modified herein (the "Guaranty"), and (B) any other agreements, documents, or instruments securing or otherwise relating to the Guaranty, as modified herein. The Guaranty and such other agreements, documents, and instruments, as modified herein, are referred to individually and collectively as the "Guarantor Documents." 2. Guarantor consents to the modification of the Loan Documents and all other matters in the Agreement. 3. Guarantor fully , finally, and absolutely and forever releases and discharges Agent and Banks and their present and former directors, shareholders, officers, employees, agents, representatives, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns, from any and all actions, causes of action, claims, debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity that Guarantor has or in the future may have, (i) in respect of the Credit Facility, the Loan Documents, the Guarantor Documents, or the actions or omissions of Agent or any Bank in respect of the Credit Facility, the Loan Documents, or the Guarantor Documents and (ii) arising from events occurring prior to the date hereof and which are known to Guarantor. 4. Guarantor agrees that all references, if any, to the Notes, the Credit Agreement, and any other Loan Documents in the Guarantor Documents shall be deemed to refer to such agreements, documents, and instruments as modified by the Agreement. 5. Guarantor reaffirms the Guarantor Documents and agrees that the Guarantor Documents continue in full force and effect and remain unchanged, except as specifically modified by this Consent and Agreement of Guarantors. Any property or rights to or interests in property granted as security in the Guarantor Documents shall remain as security for the Guaranty and the obligations of Guarantor in the Guaranty. 6. Guarantor agrees that the Loan Documents, as modified by the Agreement, and the Guarantor Documents, as modified by this Consent and Agreement of Guarantors, are the legal, valid, and binding obligations of Borrower and the undersigned, respectively, enforceable in accordance with their terms against Borrower and the undersigned, respectively. 7. Guarantor agrees that Guarantor has no claims, counterclaims, defenses, or offsets with respect to the enforcement against Guarantor of the Guarantor Documents. 8. Guarantor represents and warrants that there has been no material adverse change in the financial condition of any Guarantor from the most recent financial statement received by Agent. 9. Guarantor is validly existing under the laws of the State of its formation or organization and has the requisite power and authority to execute and deliver this Agreement and to perform the Guarantor Documents as modified herein. The execution and delivery of this Agreement and the performance of the Guarantor Documents as modified herein have been duly authorized by all requisite action by or on behalf of Guarantor. This Agreement has been duly executed and delivered on behalf of Guarantor. DATED as of the date of the Agreement. GUARANTORS: ----------- ACHETER, INC., a Texas corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: President CH MORTGAGE COMPANY, a Colorado corporation By: /s/Christina M. Monkewicz ------------------------------------- Name: Christina M. Monkewicz Title: Treasurer CHI CONSTRUCTION COMPANY, an Arizona corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President CHI FINANCE CORP., an Arizona corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: President CONTINENTAL HOMES, INC., a Delaware corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Chief Executive Officer CONTINENTAL HOMES OF FLORIDA, INC., a Florida corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President CONTINENTAL HOMES OF TEXAS, INC., a Texas corporation By: /s/W. Thomas Hickcox ------------------------------------- Name: W. Thomas Hickcox Title: Vice President CONTINENTAL RANCH, INC., a Delaware corporation formerly known as RANCHO CARILLO, INC. By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President KDB HOMES, INC., a Delaware corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President L & W INVESTMENTS INC., a California corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President MILBURN INVESTMENTS, INC., a Texas corporation By: /s/W. Thomas Hickcox ------------------------------------- Name: W. Thomas Hickcox Title: Vice President MILTEX MANAGEMENT, INC., a Texas corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President MILTEX MORTGAGE OF TEXAS LIMITED PARTNERSHIP, a Texas limited partnership BY: MILTEX MANAGEMENT, INC., a Texas corporation, General Partner By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President R.O.S. CORPORATION, a Texas corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President SETTLEMENT CORPORATION, a Texas corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President TRAVIS COUNTY TITLE COMPANY, a Texas corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Vice President Address: 7001 North Scottsdale Road, Suite 2050, Scottsdale, Arizona 85253 Attention: Julie E. Collins SCHEDULE 1 Payment and Notice Instructions ------------------------------- Payment Instructions: - - --------------------- Name of Bank: Guaranty Federal Bank, F.S.B. Bank Tax I.D.: 74-2511478 City: Austin ABA Number: 314-970-664 Account Name: 194070-80862 Residential Lending-Wire Suspense Reference: Continental Homes Notice Instructions: - - -------------------- A. Credit/Business Matters: Name: Randall S. Reid Address: 8333 Douglas Avenue, 10th Floor Dallas, TX 75225 Telephone: 214-360-2735 Fax: 214-360-1661 B. Operational/Administration: Name: Martha S. Fleming Address: 8333 Douglas Avenue, 2nd Floor Dallas, TX 75225 Telephone: 214-360-8905 Fax: 214-360-4854 C. Legal Matters: Name: Jim Markus - Winstead, Sechrest & Minick P.C. Address: 5400 Renaissance Tower, 1201 Elm Street Dallas, TX 75270-2199 Telephone: 214-745-5400 Fax: 214-745-5390 EX-10.10 3 PROMISSORY NOTE Exhibit A PROMISSORY NOTE --------------- $30,000,000.00 April 11, 1997 Phoenix, Arizona FOR VALUE RECEIVED, CONTINENTAL HOMES HOLDING CORP., a Delaware corporation ("Maker"), hereby promises and agrees to pay to the order of GUARANTY FEDERAL BANK, FSB ("Payee"), the principal sum of THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00) in lawful money of the United States of America, or, if less than such principal amount, the aggregate unpaid principal amount of all Advances made to Maker by the Payee pursuant to the Credit Agreement hereinafter referenced. Such payment shall be made on the Facility Termination Date, as defined in the Credit Agreement. Maker shall pay interest from the date hereof on the unpaid principal amount of this Note from time to time outstanding during the period from the date hereof until such principal amount is paid in full at the rates, determined in the manner, and on the dates or occurrences specified in the Credit Agreement (as hereinafter defined). This promissory note is one of the Notes referred to in the Credit Agreement dated as of June 27, 1996, among Maker, Bank One, Arizona, NA, as Agent, and the Banks named therein, and that First Modification Agreement of even date herewith (as the same may be amended, modified, replaced, or renewed from time to time, the "Credit Agreement") and is entitled to the benefits of the Credit Agreement and the Loan Documents. Capitalized terms used in this Note without definition shall have the same meanings as are ascribed to such terms in the Credit Agreement. Both principal and interest are payable to the Agent for the account of Payee pursuant to the terms of the Credit Agreement. All Advances made by Payee pursuant to the Credit Agreement and all payments of the principal amount of such Advances, shall be endorsed by the holder of this Note on the schedule attached hereto. Failure to record such Advances or payment shall not diminish any rights of Payee or relieve Maker of any liability hereunder or under the Credit Agreement. This Note is subject to prepayment and its maturity is subject to acceleration, in each case upon the terms provided in the Credit Agreement. This Note may not be modified or discharged orally, by course of dealing or otherwise, but only by a writing duly executed by the holder hereof. In the event that any action, suit or proceeding is brought by the holder hereof to collect this Note, Maker agrees to pay and shall be liable for all costs and expenses of collection, including without limitation, reasonable attorneys' fees and disbursements. Maker and all sureties, guarantors and/or endorsers hereof (or of any obligation hereunder) and accommodation parties hereon (all of which, including Maker, are severally each hereinafter called a "Surety") each: (a) agree that the liability under this Note of all parties hereto is joint and several; (b) severally waive any homestead or exemption laws and rights thereunder affecting the full collection of this Note; (c) severally waive any and all formalities in connection with this Note to the maximum extent allowed by law, including (but not limited to) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment of this Note; and (d) consent that holder may extend the time of payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any other person liable hereon, and such consent shall not alter nor diminish the liability of any person hereon. In addition, each Surety waives and agrees not to assert: (a) any right to require the holder hereof to proceed against any other Surety, to proceed against or exhaust any security for the Note, to pursue any other remedy available to the holder hereof, or to pursue any remedy in any particular order or manner; (b) the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof; (c) the benefits of any legal or equitable doctrine or principle of marshaling; (d) notice of the existence, creation or incurring of new or additional indebtedness of any Maker to the holder hereof; (e) the benefits of any statutory provision limiting the liability of a surety, including without limitation the provisions of Sections 12-1641, et seq., of the Arizona Revised Statutes; (f) any defense arising by reason of any disability or other defense of Maker or by reason of the cessation from any cause whatsoever (other than payment in full) of the liability of any Maker for payment of this Note; and (g) the benefits of any statutory provision limiting the right of the holder hereof to recover a deficiency judgment, or to otherwise proceed against any person or entity obligated for payment of this Note, after any foreclosure or trustee's sale of any security for this Note, including without limitation the benefits, if any, to a Surety of Arizona Revised Statutes Section 33-814. Until payment in full of this Note and the holder hereof has no obligation to make any further advances of the proceeds hereof, no Surety shall have any right of subrogation and each hereby waives any right to enforce any remedy which the holder hereof now has, or may hereafter have, against Maker or any other Surety, and waives any benefit of, and any right to participate in, any security now or hereafter held by the holder hereof. Maker agrees that to the extent any Surety makes any payment to the holder hereof in connection with the indebtedness evidenced by this Note, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Holder or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then the indebtedness of Maker under this Note shall continue or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by the holder hereof, the indebtedness evidenced by this Note or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. This Note has been delivered in the City of Phoenix and State of Arizona, and shall be enforced under and governed by the laws of the State of Arizona applicable to contracts made and to be performed entirely within said state, without references to any choice or conflicts of law principles. CONTINENTAL HOMES HOLDING CORP., a Delaware corporation By: /s/Donald R. Loback ------------------------------------- Name: Donald R. Loback Title: Chief Executive Officer April 11, 1997 Bank One, Arizona, NA, in its capacity as Agent and in its individual capacity Western Region Real Estate 241 North Central Avenue Phoenix, Arizona 85004 Attention: Rhonda R. Williams, Vice President Norwest Bank Arizona, NA 3300 North Central Avenue, MS-9008 Phoenix, Arizona 85012-2501 Attention: Vicki Slade, Vice President The First National Bank of Boston 115 Perimeter Center Place, N.E., Suite. 1500 Atlanta, Georgia 30346 Attention: Nick Whiting, Vice President Guaranty Federal Bank, FSB Re: Unsecured Revolving Line of Credit in the amount of $140,000,000.00 ("Loan") made by Bank One, Arizona, NA, a national banking association, Norwest Bank Arizona, NA, The First National Bank of Boston, and Guaranty Federal Bank, FSB (collectively, the "Banks"), to Continental Homes Holding Corp., a Delaware corporation ("Borrower"), and guaranteed by the guarantors listed on Schedule "1" hereto ("Guarantors"), with Bank One, Arizona, NA acting as agent for the Banks ("Agent") Ladies & Gentlemen: I am general counsel of Borrower and Guarantors. Each capitalized term used and not otherwise defined in this letter shall have the meaning ascribed to such term in the documents listed on Schedule 2 attached hereto (collectively, the "Documents"). In addition, as used in this letter, the phrase "consummation of the modification", means the closing of the loan modification contemplated in the Modification Agreement and the performance of the obligations to be performed by Borrower and Guarantors prior to the closing of the loan modification but does not include performance of obligations or compliance with terms and conditions of the Documents after the closing of the loan modification. For purposes of this letter, I have examined such questions of law and fact and such documentation as I have determined to be necessary or appropriate. Based on the foregoing and subject to the assumptions, qualifications, and limitations set forth below, it is my opinion that: 1. Borrower has the requisite corporate power and corporate authority to carry out the terms and conditions applicable to it under the Documents. The execution, delivery and performance of the Documents by Borrower has been duly authorized by all requisite corporate action on the part of Borrower and the consent or approval of shareholders of Borrower is not required. The Documents have been duly executed and delivered on behalf of Borrower. 2. Each Guarantor has the requisite corporate power and corporate authority to carry out the terms and conditions applicable to it under the Documents. The execution, delivery, and performance of the Documents by each Guarantor has been duly authorized by all requisite corporate action on the part of each such Guarantor and the consent or approval of shareholders of such Guarantor is not required. The Documents have been duly executed and delivered on behalf of each such Guarantor. 3. The execution and delivery of the Documents and consummation of the modification by Borrower will not conflict with, or result in violation of, any applicable law, ordinance, regulation or rule (federal, state or local) affecting Borrower of which I am aware, except for such conflicts or violations which would not be reasonably likely to result in a Material Adverse Effect. By the foregoing opinion, I do not intend to express, and you agree that I do not express, any opinion concerning any securities law, regulation or rule or any law, regulation, or rule regulating the making of secured loans by banks or non-banking subsidiaries of bank holding companies. 4. The execution and delivery of the Documents and consummation of the modification by each Guarantor will not conflict with, or result in a violation of, any applicable law, ordinance, regulation or rule (federal, state or local) affecting any Guarantor of which I am aware, except for such conflicts or violations which would not be reasonably likely to result in a Material Adverse Effect. By the foregoing opinion, I do not intend to express, and you agree that I do not express, any opinion concerning any securities law, regulation, or rule or any law, regulation, or rule regulating the making of secured loans by banks or non-banking subsidiaries of bank holding companies. 5. No consent, approval, authorization, or other action by, or filing with, any federal, state, or local governmental authority is required in connection with the execution and delivery by Borrower of the Documents and the consummation of the modification, other than those which have been obtained prior to the consummation of the modification. 6. No consent, approval, authorization, or other action by, or filing with, any federal, state, or local governmental authority is required in connection with the execution and delivery by any Guarantor of the Documents and the consummation of the modification other than those which have been obtained prior to the consummation of the modification. 7. The execution and delivery of the Documents and consummation of the modification by Borrower will not conflict with or result in a violation of the Articles of Incorporation and Bylaws of Borrower. 8. The execution and delivery of the Documents and consummation of the modification by each Guarantor will not conflict with or result in a violation of the Articles of Incorporation and Bylaws of any such Guarantor. 9. The Documents constitute legal, valid, and binding obligations of Borrower, enforceable in accordance with their terms against Borrower. 10. The Documents constitutes legal, valid, and binding obligations of each Guarantor, enforceable in accordance with their terms against each Guarantor. 11. The execution and delivery of the Documents and consummation of the modification by Borrower will not conflict with, or result in a violation of, any such judgments, orders, or decrees of any arbitrator, other private adjudicator, court, or governmental authority (federal, state, or local) to which Borrower is a party or by which Borrower or the property of Borrower is bound, except for such conflicts or violations which, in the aggregate, would not be reasonably likely to result in a Material Adverse Effect. 12. The execution and delivery of the Documents by each Guarantor and consummation of the modification by each Guarantor will not conflict with, or result in a violation of, any such judgments, orders, or decrees of any arbitrator, other private adjudicator, court, or governmental authority (federal, state, or local) to which any such Guarantor is a party or by which such Guarantor or the property of such Guarantor is bound, except for such conflicts or violations which, in the aggregate, would not be reasonably likely to result in a Material Adverse Effect. 13. The execution and delivery of the Documents and consummation of the modification by Borrower will not conflict with, or result in a violation of, any contract, or any other agreement to which Borrower is currently a party or by which it is currently bound (except for the Indenture, the Old Indenture and the Convertible Notes Indenture as to which I express no opinion). 14. The execution and delivery of the Documents and consummation of the modification by each Guarantor will not conflict with, or result in a violation of, any contract, or any other agreement to which such Guarantor is currently a party or by which it is currently bound (except for the Indenture, the Old Indenture and the Convertible Notes Indenture as to which I express no opinion). 15. I have no actual knowledge of any pending or overtly threatened litigation or other proceeding before any arbitrator, other private adjudicator, court, or governmental agency (federal, state or local) against Borrower which, in the aggregate, would be reasonably likely to result in a Material Adverse Effect. 16. I have no actual knowledge of any pending or overtly threatened litigation or other proceeding before any arbitrator, other private adjudicator, court, or governmental agency (federal, state or local) against any Guarantor which, in the aggregate, would be reasonably likely to result in a Material Adverse Effect. In rendering the foregoing opinions I have assumed with your permission and without investigation: (i) The genuineness of the signatures not witnessed, the authenticity of documents submitted as originals, and the conformity to originals of documents submitted as copies; (ii) The legal capacity of all natural persons executing the Documents; (iii) The Documents accurately describe and contain your understanding, and there are no oral or written statements or agreements by you, that modify, amend, or vary, or purport to modify, amend, or vary, any of the terms of the Documents; (iv) Borrower owns all property, interests in property, and rights purported to be owned by it; (v) Each Bank is a national banking association or a federal savings bank validly existing under the law of the United States of America; (vi) Agent and each Bank have the requisite corporate power and corporate authority to carry out the terms and conditions applicable to them under the Documents, (vii) The execution, delivery and performance of the Documents by Agent and each Bank have been duly authorized by all requisite corporate action on their part; and (viii) The Documents executed by any person or entity other than Borrower or Guarantors or containing obligations of any person or entity other than Borrower or Guarantors, are the legal, valid and binding obligations of such person or entity, enforceable in accordance with their terms against such person or entity. The opinions set forth above are subject to the following qualifications and limitations: (a) The validity and enforceability of the Documents may be subject to, or limited by, (i) any applicable bankruptcy, insolvency, reorganization, arrangement, moratorium, or fraudulent transfer laws (including without limitation, Section 548 of the Federal Bankruptcy Code) or any other laws or judicial decisions affecting creditors' rights and remedies generally; (ii) general principles of equity; (iii) forfeiture or similar laws (including court decisions) of the State of Arizona or of the United States; and (iv) the rights and remedies of the Pension Benefits Guaranty Corporation under the Employee Retirement Income Security Act of 1974, or of the United States under the Federal Tax Lien Act of 1966. (b) The enforceability of the Documents is further subject to the qualification that certain waivers, procedures, remedies and other provisions of the Documents may be unenforceable under, or limited by, the law of the State of Arizona. However, such limitations do not, in my opinion, interfere (i) with practical enforcement by you of the obligation of Borrower under the Documents to pay to you the principal amount of the Loan and interest thereon as provided in the Notes, or (ii) with practical enforcement by you of the obligation of each Guarantor under the Guaranty to pay to you the unpaid principal amount of the Loan and interest thereon as provided in the Notes upon failure by Borrower to pay such principal amount and interest when due, except (A) with respect to (i) and (ii) for the economic consequences of any procedural delays that may result from such limitations, and (B) with respect to (ii), on the basis of events, actions, or circumstances that may occur or arise after consummation of the Loan, the law of guaranty and suretyship may prevent the enforcement of the Guaranty. (c) I express no opinion with respect to your ability to enforce the Documents against Borrower or any Guarantor if the Loan fails to comply with any statutory, regulatory or other loan limits applicable to you, or if the Loan fails to comply with any other state or federal law (including court decisions), rule or regulation which prescribes permissible and lawful investments for you (either as to type, amount, percentage of total investments, or otherwise). I am qualified to practice law in the State of Arizona. The opinions expressed in this letter are based upon the presently effective laws of the State of Arizona only, and I assume no obligation to revise or supplement this opinion should such law be changed by legislative action, judicial decision, or otherwise. I express no opinion with respect to the laws of any other jurisdiction. The opinions expressed herein are limited to the matters stated herein and no opinion is implied or may be inferred beyond the matters expressly stated. This opinion is rendered solely to you and solely in connection with the Loan and may not be relied upon by you or by any other person for any other purpose, provided, however, that this opinion may be relied upon by any person to which all or a part of the Loan, or a participation therein, may be transferred, provided that such reliance is only in connection with the Loan and that this opinion remains effective only as of the date hereof and will not be considered to be effective or restated as of any other date. This opinion is not to be referred to, or quoted, in any document, report, or financial statement or filed with, or delivered to, any governmental agency or other person or entity without my prior written consent, provided, however, this opinion may be delivered to your auditors, governmental regulators, transferees and participants of any person entitled to rely on this opinion. Very truly yours, /s/Timothy C. Westfall ---------------------- Timothy C. Westfall SCHEDULE 1 ---------- ("Guarantors") Acheter, Inc. CH Mortgage Company CHI Construction Company CHI Finance Corp. Continental Homes, Inc. Continental Homes of Florida, Inc. Continental Homes of Texas, Inc. Continental Ranch, Inc., formerly known as Rancho Carillo, Inc. KDB Homes, Inc. L & W Investments Inc. Milburn Investments, Inc. Miltex Management, Inc. Miltex Mortgage of Texas Limited Partnership R.O.S. Corporation Settlement Corporation Travis County Title Company SCHEDULE 2 ---------- List of Documents I. First Modification Agreement, dated April 11, 1997, between Borrower, Banks and Agent, with Consent and Agreement of Guarantors, dated April 11, 1997, by Guarantors for the benefit of Banks and Agent ("Modification Agreement"). II. Promissory Note, dated April 11, 1997, in the principal amount of $30,000,000 executed by Borrower payable to Guaranty Federal Bank, FSB. III. Letter Agreement dated April 11, 1997 between Borrower and Bank One, Arizona, NA. (The documents identified above are hereinafter collectively referred to as the "Documents".) EX-11 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS CONTINENTAL HOMES HOLDING CORP. COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data) Years ended May 31, ------------------- Fully diluted: 1997 1996 ---- ---- Income from operations $29,445 $25,787 Interest expense on convertible subordinated notes, net of income taxes 3,499 2,778 ------- ------- $32,944 $28,565 ======= ======= Net income $29,445 $18,869 Interest expense on convertible subordinated notes, net of income taxes 3,499 2,778 ------- ------- $32,944 $21,647 ======= ======= Weighted average number of shares outstanding 6,938 6,960 Conversion of convertible subordinated notes (42.105 shares per $1,000 principal amount of notes) 3,632 2,490 Incremental shares relating to stock options exercisable 51 85 ------- ------- Weighted average number of shares outstanding assuming full dilution 10,621 9,535 ======= ======= Fully diluted income from operations per share $ 3.10 $ 3.00 ======= ======= Fully diluted net income per share $ 3.10 $ 2.27 ======= ======= EX-13 5 FINANCIAL STATEMENTS Continental Homes Twelve Year Financial Summary
Consolidated Income Statement Data (amounts in thousands, except per share amounts) 1997 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------------------ Revenues $ 725,970 $ 600,608 $ 432,452 $ 348,620 $ 207,033 $ 170,424 Gross profit from home sales $ 120,835 $ 107,975 $ 75,430 $ 62,153 $ 38,052 $ 29,674 Net income $ 29,445 $ 18,869 $ 13,821 $ 13,083 $ 7,100 $ 6,591 Earnings per share: Primary $ 4.24 $ 2.71 $ 1.99 $ 2.11 $ 1.38 $ 1.39 Fully diluted $ 3.10 $ 2.27 $ 1.82 $ 1.88 $ 1.30 $ 1.34 Cash dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 Weighted average number of shares outstanding 6,938 6,960 6,948 6,203 5,144 4,747 Consolidated Balance Sheet (amounts in thousands, except per share amounts) 1997 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------------------ Inventory $ 392,540 $ 344,880 $ 291,331 $ 205,369 $ 142,589 $ 116,450 Total assets $ 508,256 $ 438,434 $ 386,833 $ 305,490 $ 187,525 $ 162,774 Debt: Notes payable $ 24,547 $ 19,108 $ 54,729 $ 0 $ 0 $ 32,907 Senior debt 159,966 139,641 111,430 111,753 74,248 16,811 Convertible Sub. debt 86,250 86,250 32,655 32,295 31,935 31,575 Mortgage debt 15,662 5,359 34,011 24,271 8,604 20,448 ------ ----- ------ ------ ----- ------ Total debt $ 286,425 $ 250,358 $ 232,825 $ 168,319 $ 114,787 $ 101,741 Stockholders' equity $ 154,899 $ 128,949 $ 110,479 $ 98,560 $ 51,550 $ 44,428 Number of shares outstanding 6,853 6,993 6,925 6,963 5,189 5,101 Book value per share $ 22.60 $ 18.44 $ 15.95 $ 14.15 $ 9.93 $ 8.71 Return on beginning stockholders' equity 22.8% 17.1% 14.0% 25.4% 16.0% 23.1% Housing Data (amounts in thousands, except per share amounts) 1997 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------------------ Number of homes closed 4,904 4,367 3,202 2,831 1,769 1,470 Sales value of homes closed $ 681,838 $ 577,073 $ 414,718 $ 340,031 $ 200,012 $ 164,815 Number of homes in backlog 2,015 2,070 1,493 1,136 900 669 Sales value of homes in backlog $ 271,131 $ 295,484 $ 198,126 $ 147,242 $ 107,499 $ 76,215
Consolidated Income Statement Data (amounts in thousands, except per share amounts) 1991 1990 1989 1988 1987 1986 - - ------------------------------------------------------------------------------------------------------------------------ Revenues $ 138,615 $ 134,497 $ 123,088 $ 133,372 $ 128,486 $ 107,573 Gross profit from home sales $ 24,148 $ 20,970 $ 20,084 $ 19,082 $ 25,227 $ 22,279 Net income $ 116 $ 3,551 $ 2,015 $ 3,128 $ 4,501 $ 2,755 Earnings per share: Primary $ 0.03 $ 1.01 $ 0.57 $ 0.83 $ 1.58 $ 1.10 Fully diluted $ NA $ NA $ NA $ NA $ NA $ NA Cash dividends per share $ 0.20 $ NA $ NA $ NA $ NA $ NA Weighted average number of shares outstanding 3,515 3,515 3,564 3,757 2,859 2,500 Consolidated Balance Sheet Data (amounts in thousands, except per share amounts) 1991 1990 1989 1988 1987 1986 - - ------------------------------------------------------------------------------------------------------------------------ Inventory $ 93,739 $ 94,890 $ 76,009 $ 88,635 $ 88,928 $ 67,273 Total assets $ 142,712 $ 147,144 $ 127,682 $ 142,277 $ 153,710 $ 109,211 Debt: Notes payable $ 65,430 $ 63,887 $ 48,927 $ 49,990 $ 35,445 $ 63,550 Senior debt 16,805 16,799 17,616 22,745 29,928 0 Convertible Sub. debt 0 0 0 0 0 0 Mortgage debt 22,146 26,221 24,720 26,675 43,926 0 ------ ------ ------ ------ ------ ------ Total debt $ 104,381 $ 106,907 $ 91,263 $ 99,410 $ 109,299 $ 63,550 Stockholders' equity $ 28,562 $ 29,166 $ 25,615 $ 24,080 $ 22,067 $ 2,855 Number of shares outstanding 3,512 3,515 3,515 3,652 3,880 2,500 Book value per share $ 8.13 $ 8.30 $ 7.29 $ 6.59 $ 5.69 $ 1.14 Return on beginning stockholders' equity 0.4% 13.9% 8.4% 14.2% 157.7% 2755.0% Housing Data (amounts in thousands, except per share amounts) 1991 1990 1989 1988 1987 1986 - - ------------------------------------------------------------------------------------------------------------------------ Number of homes closed 1,249 1,280 1,151 1,161 1,369 1,210 Sales value of homes closed $ 130,611 $ 132,876 $ 117,912 $ 115,069 $ 126,142 $ 107,388 Number of homes in backlog 486 414 422 462 400 580 Sales value of homes in backlog $ 53,180 $ 42,808 $ 47,607 $ 47,504 $ 43,808 $ 52,895
Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS HOMEBUILDING The following table sets forth, for the periods indicated, unit activity, average sales price and revenue from home sales for the Company: Years ended May 31, 1997 1996 1995 Units delivered 4,904 4,367 3,202 Average sales price $ 139,037 $ 132,144 $ 129,518 Revenue from home sales (000s) $ 681,838 $ 577,073 $ 414,718 Percentage increase from prior year 18.2% 39.2% Change due to volume 12.3% 36.4% Change due to average sales price 5.9% 2.8% The increase in volume in fiscal 1997 compared to fiscal 1996 resulted from improved deliveries in Denver, Texas, South Florida and California and the Company's expansion into the Dallas, Texas market. The volume increase in fiscal 1996 was attributable to improved deliveries in each market. The increase in average sales price in fiscal 1997 was primarily due to an increase in volume in the Denver market where the average sales price is approximately $200,000 and an increase in the average sales price in the Phoenix and California markets. Revenues from land sales were $33,404,000 in fiscal 1997, $11,844,000 in fiscal 1996 and $10,658,000 in fiscal 1995. Land sale revenue in fiscal 1997 included sales of three separate parcels to other homebuilders in Phoenix, California and South Florida. A portion of fiscal 1997 land sales and substantially all of fiscal 1996 and 1995 land sales were transactions in which the Company sold lots to unrelated third parties and retained an option to buy the lots back at fixed prices within specified periods of time. The following table summarizes information related to the Company's backlog at the dates indicated: May 31, 1997 1996 1995 (Dollars in thousands) Units Dollars Units Dollars Units Dollars Phoenix 831 $109,079 832 $110,530 821 $102,503 Texas 772 85,431 652 71,791 396 43,140 Denver 183 36,556 292 57,746 98 18,185 South Florida 172 22,368 189 24,597 86 12,228 Southern California 57 17,697 105 30,820 92 22,070 ----- -------- ----- -------- ----- -------- 2,015 $271,131 2,070 $295,484 1,493 $198,126 ===== ======== ===== ======== ===== ======== The decrease in backlog at May 31, 1997 compared to the prior year resulted primarily from lower sales volume in the Austin, Denver, California and South Florida markets during the six months ended May 31, 1997 partially offset by the Company's expansion into the Dallas, Texas market. The increase in backlog in fiscal 1996 resulted from improved sales in each market during the six months ended May 31, 1996. The aggregate sales value of new contracts signed decreased 4% for fiscal 1997 to $640,576,000 representing 4,770 homes as compared with $669,205,000 representing 4,944 homes for fiscal 1996. The following table summarizes information related to the cost of home sales, selling, general and administrative ("SG&A") expenses and interest, net for homebuilding: Years ended May 31, 1997 1996 1995 Dollars % Dollars % Dollars % (Dollars in thousands) Revenue from home sales $681,838 100.0% $577,073 100.0% $414,718 100.0% Cost of home sales 561,003 82.3 469,098 81.3 339,288 81.8 -------- ----- -------- ----- -------- ----- Gross profit 120,835 17.7 107,975 18.7 75,430 18.2 SG&A expenses 71,590 10.5 62,247 10.8 46,308 11.2 -------- ----- -------- ----- -------- ----- Operating income from homebuilding 49,245 7.2 45,728 7.9 29,122 7.0 Interest, net 4,596 .7 5,510 .9 4,993 1.2 -------- ----- -------- ----- -------- ----- Pre-tax profit from homebuilding $ 44,649 6.5% $ 40,218 7.0% $ 24,129 5.8% ======== ===== ======== ===== ======== ===== Gross profit from home sales was 17.7% in fiscal 1997 compared to 18.7% and 18.2% in fiscal 1996 and 1995, respectively. The decline in gross profits was primarily due to lower margins in the Austin and California markets where the Company has used sales incentives and lowered sales prices due to increased competition in those markets. In addition, the Company's highest margins are in Phoenix and Austin. As deliveries increase in other markets, the mix will continue to put downward pressure on margins. The increase in total SG&A expenses for fiscal 1997 was due primarily to higher variable marketing costs (sales commissions, advertising, sales expense and model furniture amortization) due to the increase in the number of homes delivered. In addition, fiscal 1997 included $3,549,000 of SG&A expenses from the Dallas division. The increase in total SG&A expenses for fiscal 1996 was also due primarily to higher variable marketing costs as a result of the increase in the number of homes delivered, higher salaries and higher customer service costs. Additionally, fiscal 1996 included $3,249,000 of SG&A expenses from South Florida compared with $2,227,000 during the period from November 1, 1994 (acquisition) through May 31, 1995. SG&A expenses for each home delivered were $14,598, $14,254 and $14,462 in fiscal 1997, 1996 and 1995, respectively. The Company capitalizes certain SG&A expenses for homebuilding. Accordingly, total SG&A expenses incurred for homebuilding were $83,218,000, $70,117,000 and $53,109,000 in fiscal 1997, 1996 and 1995, respectively. The Company capitalizes certain interest costs for its homebuilding operations and includes such capitalized interest in cost of home sales when the related units are delivered. Accordingly, total interest incurred by the Company was $25,702,000, $22,422,000 and $19,528,000 in fiscal Continental Homes 1997, 1996 and 1995, respectively. Interest, net for homebuilding was $4,596,000, $5,510,000 and $4,993,000 in fiscal 1997, 1996 and 1995, respectively. The increase in interest incurred during fiscal 1997 was primarily due to an increase in debt as a result of the 14% increase in inventory this year. The decrease in interest, net during fiscal 1997 was due to the capitalization of interest on the Company's Carlsbad, California project which began development in October 1996, as well as additional interest income earned during the year. The increase in interest, both incurred and expensed, during fiscal 1996 was due to higher debt levels which resulted primarily from the South Florida acquisition. The Company's pre-tax profit from homebuilding for fiscal 1997 was $44,649,000 compared to $40,218,000 for the year ended May 31, 1996 and $24,129,000 for the year ended May 31, 1995. The increase in pre-tax profit in fiscal 1997 was due primarily to improved operating results in Phoenix, Denver and South Florida partially offset by the negative impact from the inclusion of Dallas results. The increase in pre-tax profit in fiscal 1996 was due primarily to improved results in Texas, Southern California and Phoenix partially offset by the negative impact from the inclusion of South Florida results. South Florida's pre-tax loss in fiscal 1996 was primarily caused by weather related delays in the opening of a new subdivision and delays in the municipalities issuing permits. These delays resulted in fewer deliveries from South Florida through October 1995. MORTGAGE BANKING AND TITLE OPERATIONS The Company's mortgage banking operations are conducted through its wholly-owned subsidiary CH Mortgage Company ("CHMC"). The Company also conducts title operations in Austin, Texas through its wholly-owned subsidiary Travis County Title Company. The following table summarizes operating information for the Company's mortgage banking and title operations: Years ended May 31, 1997 1996 1995 (Dollars in thousands) Number of loans originated 2,965 2,916 1,949 Loan origination fees $ 2,904 $ 2,758 $ 1,845 Sale of servicing and marketing gains 4,688 6,177 2,744 Title policy premiums, net 1,572 1,541 1,180 Other revenues 1,454 1,005 938 ------- ------- ------- Total revenues 10,618 11,481 6,707 General and administrative expenses 8,185 7,028 5,639 ------- ------- ------- Operating income from mortgage banking and title 2,433 4,453 1,068 Interest, net 734 316 199 ------- ------- ------- Pre-tax profit from mortgage banking and title $ 3,167 $ 4,769 $ 1,267 ======= ======= ======= Revenues from mortgage banking and title operations decreased in fiscal 1997 primarily as a result of the sale of approximately $47,705,000 in servicing rights from the servicing portfolio resulting in approximately $932,000 of income recognized in fiscal 1996. Revenues increased in fiscal 1996 over fiscal 1995 primarily as a result of the aforementioned sale of servicing as well as an increase in the percentage of Phoenix and Texas homebuyers utilizing the Company's mortgage banking operations resulting in higher volume. General and administrative expenses increased in fiscal 1997 compared to fiscal 1996 primarily as a result of the expansion into the Denver, South Florida and Southern California markets during fiscal 1997. General and administrative expenses increased in fiscal 1996 compared to fiscal 1995 primarily as a result of increased volume. CONSOLIDATED OPERATIONS Net income was $29,445,000 ($4.24 per share, $3.10 fully diluted) in fiscal 1997 compared to $18,869,000 ($2.71 per share, $2.27 fully diluted) and $13,821,000 ($1.99 per share, $1.82 fully diluted) in fiscal 1996 and 1995, respectively. Net income for the fiscal year ended May 31, 1996 included a net extraordinary loss of $6,918,000 due to the extinguishment of debt. LIQUIDITY AND CAPITAL RESOURCES The Company's financing needs depend primarily upon sales volume, asset turnover, land acquisitions and inventory balances. The Company has financed, and expects to continue to finance, its working capital needs through funds generated by operations and borrowings. Funds for future land acquisitions and construction costs are expected to be provided primarily by cash flows from operations and future borrowings as permitted under the Company's loan agreements. The Company has a $140 million unsecured revolving credit facility ("Credit Agreement") with four banks. Borrowings under the Credit Agreement bear interest at LIBOR plus 1.75% or prime plus .125% at the Company's election and subject to the rating on its senior debt. Available borrowings under the Credit Agreement are limited to certain percentages of housing unit costs, finished lots, land under development and receivables as defined in the Credit Agreement. As a result of this formula, the borrowing base at May 31, 1997 was $92,657,000 and $12,000,000 was outstanding. In addition, the Company had borrowed $12,547,000 in other financing, which is secured by land, at various interest rates and maturities. The Company believes that amounts generated from operations and such additional borrowings will provide funds adequate to finance its homebuilding activities and meet its debt service requirements. The Company does not have any current commitments for capital expenditures. In order to provide funds for the origination of mortgage loans, CHMC has a warehouse line of credit for $25,000,000 which is guaranteed by the Company. Pursuant to the warehouse line of credit, the Company issues drafts to fund its mortgage loans. The amount represented by a draft is drawn on the warehouse line of credit when the draft is presented for payment. At May 31, 1997, the amount outstanding under the warehouse line of credit and the amount of funding drafts that had not been presented for payment was $15,662,000. The Company believes that this line is sufficient for its mortgage banking operations. On November 10, 1995, the Company completed the sale of $75,000,000 principal amount of its 6-7/8% Convertible Subordinated Notes due November 2002. On December 5, 1995, the Company sold an additional $11,250,000 of such notes. The net proceeds were used to redeem the Company's 6-7/8% Convertible Subordinated Notes due March 2002 and to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit (including Continental Homes the warehouse line of credit). In connection with the redemption of the notes, the Company recorded, in the third quarter of fiscal 1996, an extraordinary loss, net of taxes of approximately $859,000 due to the write-off of unamortized discount and debt issuance costs. The Convertible Notes are immediately convertible into shares of the Company's common stock at a rate of 42.105 shares for each $1,000 principal amount of Convertible Notes. On April 18, 1996 the Company completed the sale of $130,000,000 principal amount of its 10% Senior Notes due April 2006. The Company used approximately $107,542,000 of the net proceeds to repurchase $98,500,000 aggregate principal amount of its 12% Senior Notes due 1999. The remaining proceeds were used to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit. In connection with the repurchase of the 12% Senior Notes, the Company recorded, in the fourth quarter of fiscal 1996, an extraordinary loss, net of taxes of approximately $6,059,000 related primarily to the tender offer premium. On January 30, 1997, the Company issued an additional $20,000,000 principal amount of its 10% Senior Notes due April 2006. The net proceeds were used to reduce temporarily outstanding amounts under the Company's revolving line of credit. On August 1, 1997 the Company will redeem the remaining $11,500,000 principal amount outstanding of its 12% Senior Notes due August 1999, at a redemption price of 104%. Pursuant to a stock repurchase plan approved by the Board of Directors on December 22, 1994, the Company repurchased 162,000 shares of its common stock during the year at an average price of $16.22. INFLATION AND EFFECTS OF CHANGING PRICES Real estate and residential housing prices are affected by inflation, which can cause increases in the prices of land, raw materials and subcontracted labor. In the past three years, the Company has not experienced any significant inflationary pressure on land, raw materials or labor. Unless costs are recovered through higher sales prices, gross profit margins will decrease. As interest rates increase, construction and financing costs as well as the cost of borrowing funds also increase, which can result in lower gross profits. Relatively low interest rates during fiscal 1997 have made the Company's homes more affordable in each of its markets. High mortgage interest rates make it more difficult for the Company's customers to qualify for home mortgage loans. These factors have a much more significant effect on the Company's operations than does seasonality, in part because homes can be constructed year-round. CAUTIONARY DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this disclosure in order to do so. Certain statements in this report that are not historical facts are, or may be considered to be, forward-looking statements. Given the risks, uncertainties and contingencies of the Company's business, the actual results may differ materially from those expressed or implied by such forward-looking statements. Further, certain forward-looking statements are based on assumptions concerning future events which may not prove to be accurate. Forward-looking statements by the Company regarding results of operations and, ultimately, financial condition, are subject to numerous risks and assumptions, including but not limited to, changes in general economic conditions, fluctuations in interest rates or labor and material costs, consumer confidence, competition, government regulations, financing availability, geographic concentration and risks associated with new and future communities. Report of Independent Public Accountants To Continental Homes Holding Corp.: We have audited the accompanying consolidated balance sheets of CONTINENTAL HOMES HOLDING CORP. (a Delaware corporation) and subsidiaries as of May 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1997. These financial statements are the responsibility of the Company'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 Continental Homes Holding Corp. and subsidiaries as of May 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Phoenix, Arizona, June 18, 1997. Continental Homes Consolidated Balance Sheets
May 31, 1997 1996 (in thousands) ASSETS HOMEBUILDING Cash and cash equivalents $ 23,759 $ 25,236 Receivables 27,894 16,693 Homes, lots and improvements in production 392,540 344,880 Property and equipment, net 3,656 2,271 Prepaid expenses and other assets 20,868 16,797 Excess of cost over related net assets acquired 9,565 11,715 Deferred income tax asset 2,471 -- --------- --------- 480,753 417,592 --------- --------- MORTGAGE BANKING Mortgage loans held for sale 27,229 20,350 Other assets 274 492 --------- --------- 27,503 20,842 --------- --------- Total assets $ 508,256 $ 438,434 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY HOMEBUILDING Accounts payable and other liabilities $ 62,163 $ 52,240 Notes payable, senior and convertible subordinated debt 270,763 244,999 Deferred income tax liability -- 1,236 --------- --------- 332,926 298,475 --------- --------- MORTGAGE BANKING Notes payable 15,662 5,359 Other liabilities 560 854 --------- --------- 16,222 6,213 --------- --------- Total liabilities 349,148 304,688 --------- --------- Minority interest 4,209 4,797 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value: Authorized - 2,000,000 shares, Issued - None -- -- Common stock, $.01 par value: Authorized - 20,000,000 shares, Issued - 7,080,900 shares 71 71 Treasury stock, at cost - 228,320 and 88,265 shares (2,973) (384) Capital in excess of par value 60,878 60,396 Retained earnings 96,923 68,866 --------- --------- Total stockholders' equity 154,899 128,949 --------- --------- Total liabilities and stockholders' equity $ 508,256 $ 438,434 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. Continental Homes Consolidated Statements of Income
Years ended May 31, 1997 1996 1995 (in thousands, except share data) REVENUES Home sales $ 681,838 $ 577,073 $ 414,718 Land sales 33,404 11,844 10,658 Mortgage banking and title operations 10,618 11,481 6,707 Other income, net 110 210 369 ----------- ----------- ----------- Total revenues 725,970 600,608 432,452 ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding: Cost of home sales 561,003 469,098 339,288 Cost of land sales 32,167 11,907 10,958 Selling, general and administrative expenses 71,590 62,247 46,308 Interest, net 4,596 5,510 4,993 Minority interest (588) (248) -- Mortgage banking and title operations: Selling, general and administrative expenses 8,185 7,028 5,639 Interest, net (734) (316) (199) ----------- ----------- ----------- Total costs and expenses 676,219 555,226 406,987 ----------- ----------- ----------- Income before income taxes and extraordinary loss 49,751 45,382 25,465 Income taxes 20,306 19,595 11,644 ----------- ----------- ----------- Income from operations 29,445 25,787 13,821 Extraordinary loss: Loss on extinguishment of debt; net of income taxes of $4,807 in 1996 -- (6,918) -- ----------- ----------- ----------- Net income $ 29,445 $ 18,869 $ 13,821 =========== =========== =========== Earnings per common share Income from operations $ 4.24 $ 3.71 $ 1.99 Net income 4.24 2.71 1.99 Earnings per common share assuming full dilution Income from operations $ 3.10 $ 3.00 $ 1.82 Net income 3.10 2.27 1.82 Cash dividends per share $ .20 $ .20 $ .20 =========== =========== =========== Weighted average number of shares outstanding 6,938,489 6,959,736 6,947,719 =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Continental Homes Consolidated Statements of Stockholders' Equity
Years ended May 31, 1997, 1996 and 1995 (Dollars in thousands) Capital in Common Stock Treasury Excess of Retained Shares Amount Stock Par Value Earnings Total Balance, May 31, 1994 7,080,900 $ 71 $ (83) $ 59,610 $ 38,962 $ 98,560 Net income -- -- -- -- 13,821 13,821 Repurchase of common stock -- -- (556) -- -- (556) Cash dividends -- -- -- -- (1,394) (1,394) Exercise of employee stock options -- -- 48 -- -- 48 --------- ---------- ---------- ---------- ---------- ---------- Balance, May 31, 1995 7,080,900 71 (591) 59,610 51,389 110,479 Net income -- -- -- -- 18,869 18,869 Cash dividends -- -- -- -- (1,392) (1,392) Exercise of employee stock options -- -- 207 786 -- 993 --------- ---------- ---------- ---------- ---------- ---------- Balance, May 31, 1996 7,080,900 71 (384) 60,396 68,866 128,949 Net income -- -- -- -- 29,445 29,445 Repurchase of common stock -- -- (2,628) -- -- (2,628) Cash dividends -- -- -- -- (1,388) (1,388) Exercise of employee stock options -- -- 39 482 -- 521 --------- ---------- ---------- ---------- ---------- ---------- Balance, May 31, 1997 7,080,900 $ 71 $ (2,973) $ 60,878 $ 96,923 $ 154,899 ========= ========== ========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Continental Homes Consolidated Statements of Cash Flows
Years ended May 31, 1997 1996 1995 (in thousands) Cash flows from operating activities: Net income $ 29,445 $ 18,869 $ 13,821 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 3,228 3,190 3,050 Minority interest (588) (248) -- Increase (decrease) in deferred income taxes (3,707) 95 (1,209) Tax benefit of employee stock options exercised 295 404 -- Extraordinary loss on extinguishment of debt -- 11,725 -- Decrease (increase) in assets: Homes, lots and improvements in production (39,863) (48,504) (52,973) Receivables (17,923) 8,458 2,304 Prepaid expenses and other assets (4,173) 4,826 (6,987) Increase in liabilities: Accounts payable and other liabilities 8,185 11,445 1,022 --------- --------- --------- Net cash provided (used) by operating activities (25,101) 10,260 (40,972) --------- --------- --------- Cash flows from investing activities: Net additions to property and equipment (2,279) (581) (1,038) Cash paid for acquisitions, net of cash acquired (1,205) (705) (18,874) Adjustment to purchase price 1,700 -- -- --------- --------- --------- Net cash used by investing activities (1,784) (1,286) (19,912) --------- --------- --------- Cash flows from financing activities: Increase (decrease) in notes payable to financial institutions 9,191 (46,424) 49,852 Retirement of Convertible Subordinated Notes -- (33,250) -- Retirement of 12% Senior Notes -- (107,542) -- Retirement of bonds payable (168) (17,771) (3,027) Issuance of Convertible Subordinated Notes -- 83,279 -- Issuance of 10% Senior Notes 20,175 125,925 -- Repurchase of stock (2,628) -- (556) Stock options exercised 226 589 48 Dividends paid (1,388) (1,392) (1,394) --------- --------- --------- Net cash provided by financing activities 25,408 3,414 44,923 --------- --------- --------- Net increase (decrease) in cash and cash equivalents (1,477) 12,388 (15,961) Cash and cash equivalents at beginning of year 25,236 12,848 28,809 --------- --------- --------- Cash and cash equivalents at end of year $ 23,759 $ 25,236 $ 12,848 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 6,207 $ 7,767 $ 7,780 Income taxes $ 24,870 $ 16,430 $ 16,539
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Continental Homes Notes to Consolidated Financial Statements A. ACCOUNTING POLICIES NATURE OF OPERATIONS The Company designs, constructs and sells high quality single-family homes targeted primarily to entry-level and first-time move-up homebuyers. The Company is geographically diversified, currently operating in Phoenix, Arizona; Austin, San Antonio and Dallas, Texas; Denver, Colorado; South Florida; and Southern California. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions. INCOME TAXES The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). Among other things, FAS 109 requires the liability method and that current and deferred tax balances be determined based on tax rates and laws enacted as of the balance sheet date rather than the historical tax rates. See Note F. CASH AND CASH EQUIVALENTS Cash equivalents include amounts with initial maturities of less than 90 days. In the normal course of business, the Company receives deposits from its customers and maintains certain escrow funds. CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental schedule of non-cash investing and financing activities: On November 18, 1994, the Company acquired Heftler Realty Co. As a result of the acquisition, the Company recorded additional assets of $51,116,000 (primarily homes, lots and improvements in production) and liabilities of $22,616,000 (primarily notes payable to financial institutions). During fiscal 1996, the Company entered into a joint venture whereby the Company contributed cash and the joint venture partner contributed assets (primarily land) valued at $5,045,000. HOMES, LOTS AND IMPROVEMENTS IN PRODUCTION Homes, lots, and improvements in production are stated at the lower of accumulated cost or estimated net realizable value. Interest costs incurred during construction or development activities related to homes, lots and improvements in production and certain indirect project costs (employee related costs) are capitalized and subsequently charged to cost of home sales as the units associated with such costs are sold. See Note C. The components of homes, lots and improvements in production are as follows: May 31, 1997 1996 (in thousands) Homes and lots in production $183,410 $169,615 Land and developed lots held for housing 187,282 137,676 Unimproved land held for development or sale 12,407 30,839 Capitalized interest 9,441 6,750 -------- -------- $392,540 $344,880 ======== ======== MINORITY INTEREST During fiscal 1996, the Company entered into a joint venture to develop an age restricted community. The Company contributed cash and the joint venture partners contributed assets (primarily land). The Company is entitled to 55% of the profits and/or losses and is the managing partner of the joint venture. Due to the control that the Company exercises, it has consolidated the financial position and results of operation of the joint venture. The partners' equity position is disclosed as a minority interest in the accompanying consolidated balance sheets. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists primarily of office furniture, equipment and vehicles. Depreciation expense is provided using the straight-line method over the estimated useful lives (three to five years). Depreciation expense was $894,000, $773,000 and $535,000 in 1997, 1996 and 1995, respectively. The costs of maintenance and repairs are charged to expense as incurred. EXCESS OF COST OVER RELATED NET ASSETS ACQUIRED The excess of cost over related net assets acquired of $17,349,000 is being amortized over periods ranging from three to twenty years using the straight-line method. Amortization expense was $1,451,000, $1,401,000 and $1,459,000 in 1997, 1996 and 1995, respectively. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Continental Homes FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, receivables and trade payables approximate fair value because of the short maturity of these financial instruments. The homebuilding notes payable bear interest at a rate indexed to LIBOR or the prime rate, therefore, the carrying amounts of the outstanding borrowings at May 31, 1997 approximate fair value. The fair value of the Company's senior and subordinated debt is estimated based on quoted market prices. At May 31, 1997 and 1996, the estimated fair value of the Company's senior and subordinated debt was $251,052,000 and $233,157,000, respectively. Mortgage loans held for sale are stated at the lower of cost or market which approximates the fair value. The mortgage banking notes payable bear interest at a rate indexed to the prime rate, therefore, the carrying amounts of the outstanding borrowings at May 31, 1997 and 1996 approximate fair value. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect estimates. NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During fiscal 1996, the Company elected to early adopt Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("FAS 121") retroactive to June 1, 1995. The adoption of FAS 121 did not impact the Company's results of operations or financial position for the fiscal years ended May 31, 1997 and 1996. The Company believes the adoption of FAS 121 would not have had a material effect in fiscal 1995 had FAS 121 been applied to that year. Under FAS 121 real estate assets are to be reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If indications are that the carrying amount of the assets may not be recoverable, FAS 121 requires an estimate of the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss must be recognized to write down the asset to its estimated fair value less costs to sell. The fair value calculation under FAS 121 would result in a lower valuation of the asset than under the net realizable value method previously required. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), issued in October 1995, establishes financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 requires either the recognition of compensation cost in the financial statements for those companies that adopt the new fair value based method or expanded disclosure of pro forma net income and earnings per share information for those companies that retain the current method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees". The Company has not adopted the expense recognition provisions of this standard; therefore the new standard has no effect on the Company's financial condition or results of operations. See Note G for the required disclosure under FAS 123. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share", ("FAS 128"), which supersedes Accounting Principal Board Opinion 15, the existing authoritative guidance. FAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997 and requires restatement of all prior-period earnings per share ("EPS") data presented. The new statement modifies the calculations of primary and fully diluted EPS and replaces them with basic and diluted EPS. The adoption of FAS 128 will not have a material impact on the Company's previous or current reported EPS data. SALES RECOGNITION The Company recognizes income from home and land sales in accordance with Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate." The Company includes the discounts incurred in obtaining permanent financing for its customers in cost of home sales. MORTGAGE BANKING FEE RECOGNITION Loan origination fees are recognized as income in accordance with Statements of Financial Accounting Standards Nos. 65, "Accounting for Certain Mortgage Banking Activities," and 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." INTEREST, NET The summary of the components of interest, net is as follows: Years ended May 31, 1997 1996 1995 (in thousands) Homebuilding: Interest expense $ 5,699 $ 5,982 $ 5,420 Interest income (1,103) (472) (427) ------- ------- ------- $ 4,596 $ 5,510 $ 4,993 ======= ======= ======= Mortgage Banking: Interest expense $ 508 $ 1,785 $ 2,360 Interest income (1,242) (2,101) (2,559) ------- ------- ------- $ (734) $ (316) $ (199) ======= ======= ======= EARNINGS PER COMMON SHARE Earnings per common share has been computed using the weighted average number of common shares outstanding during the period. Earnings per common share assuming full dilution has been computed assuming the conversion of the Convertible Subordinated Notes due November 2002. B. RECEIVABLES Notes and accounts receivable are as follows: May 31, 1997 1996 (in thousands) Proceeds receivable arising from home sales $11,646 $10,361 Municipal Utility District receivables 2,236 2,788 Other notes and accounts receivable 14,012 3,544 ------- ------- $27,894 $16,693 ======= ======= C. INTEREST CAPITALIZATION The Company follows the practice of capitalizing for its homebuilding operations certain interest costs incurred on land under development and homes under construction. Such capitalized interest is included in cost of home sales when the units are delivered. The Company capitalized interest in the amount of $20,003,000, $16,440,000 and $14,108,000 and expensed as a component of cost of home sales $17,488,000, $16,233,000 and $10,687,000 in fiscal 1997, 1996 and 1995, respectively. Continental Homes D. CONSOLIDATED MORTGAGE SUBSIDIARY The Company's consolidated financial statements include its wholly-owned mortgage banking subsidiary. Financial data of the mortgage banking subsidiary, prior to intercompany eliminations, is summarized as follows:
May 31, 1997 1996 (in thousands) Current assets, principally mortgage loans held for sale $28,685 $21,066 Total assets, principally mortgage loans and mortgage-backed securities 29,333 21,451 Current liabilities, principally notes payable 21,182 13,063 Total liabilities, principally notes and bonds payable 21,182 14,715 Stockholder's equity 8,151 6,736
Years ended May 31, 1997 1996 1995 (in thousands) Total revenues $8,703 $9,948 $5,217 Net interest income 734 316 199 Net income 1,415 2,596 396 Mortgage loans held for sale are stated at the lower of cost or market determined in the aggregate. Mortgage loans held for sale consist of: May 31, 1997 1996 (in thousands) Single-family first mortgage loans $ 28,061 $ 20,877 Market discount and loss reserve (832) (527) -------- -------- $ 27,229 $ 20,350 ======== ======== E. NOTES, BONDS AND SENIOR AND CONVERTIBLE SUBORDINATED DEBT HOMEBUILDING Notes payable, senior and convertible subordinated debt consist of:
May 31, 1997 1996 (in thousands) Notes payable $ 24,547 $ 19,108 10% senior notes, due 2006, net of discount of $1,599 and $1,972 148,401 128,028 12% senior notes due 1999, net of premium of $65 and $113 11,565 11,613 6-7/8% convertible subordinated notes, due 2002 86,250 86,250 -------- -------- $270,763 $244,999 ======== ========
At May 31, 1997, the Company had available an unsecured bank line of credit for borrowings (excluding the mortgage warehouse line) of up to $140,000,000. Available borrowings under the credit line are limited to certain percentages of housing unit costs, finished lots, land under development and receivables. Borrowings bear interest at LIBOR plus 1-3/4% to prime plus 1/8% at the Company's election and subject to the rating on its Senior debt. This line of credit matures in November 1999. During fiscal 1997, the weighted average interest rate on the average month end balance was 7.8% and the year end weighted average rate was 8.6%. The average month end outstanding balance during the year was $23,183,000 and the maximum amount outstanding at any month end was $41,500,000. At May 31, 1997, $12,000,000 was outstanding under this line of credit. In addition, the Company had borrowed $12,547,000 in other financing, which is secured by land, at interest rates ranging from 8% to prime plus 1% with maturities ranging from October 1997 to February 2000. In April 1996, the Company issued $130,000,000 principal amount of 10% Senior Notes due April 15, 2006. The Company used approximately $107,542,000 of the net proceeds to repurchase $98,500,000 aggregate principal amount of its 12% Senior Notes due 1999. The remaining proceeds were used to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit. In connection with the repurchase of the 12% Senior Notes, the Company recorded, in the fourth quarter of fiscal 1996, an extraordinary loss, net of taxes, of approximately $6,059,000 related primarily to the tender offer premium. In January 1997, the Company issued an additional $20,000,000 principal amount of its 10% Senior Notes due April 15, 2006. The net proceeds were used to reduce temporarily outstanding amounts under the Company's revolving line of credit. On August 1, 1997 the Company will redeem the remaining $11,500,000 principal amount outstanding of its 12% Senior Notes due August 1999, at a redemption price of 104%. The 10% Senior Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2001 at redemption prices decreasing from 105%. The Senior Notes are senior unsecured obligations of the Company and are guaranteed, on a joint and several basis, by all of the Restricted Subsidiaries (as defined in the indenture). The indentures relating to the Company's 10% and 12% Senior Notes contain certain covenants which impose certain limitations on the ability of the Company to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments and investments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets. As of May 31, 1997, approximately $23,356,000 was available for making restricted payments. In addition, the indentures provide that in the event of defined changes in control or if the consolidated tangible net worth of the Company falls below a specified level or, in certain circumstances, upon sales of assets, the Company is required to make an offer to repurchase certain specified amounts of outstanding Senior Notes. In November and December 1995, the Company issued $86,250,000 principal amount of 6-7/8% Convertible Subordinated Notes due November 1, 2002. The Notes are convertible at a rate of 42.105 shares of Common Stock per $1,000 principal amount of Notes at any time prior to maturity. The Notes are redeemable in whole or in part at the option of the Company at any time on or after November 1, 1998, at redemption prices decreasing from 103.438%. The Notes are subordinated to all senior indebtedness of the Company. The net proceeds were used to redeem the Company's 6-7/8% Convertible Subordinated Notes due March 2002 and to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit (including the warehouse line of credit). In connection with the redemption of the notes, the Company recorded an extraordinary loss, net of taxes, of approximately $859,000 due to the write-off of unamortized discount and debt issuance costs. Continental Homes MORTGAGE BANKING Mortgage warehousing notes payable enable CH Mortgage Company ("CHMC") to perform its loan origination and warehousing functions. At May 31, 1997, CHMC had a warehouse line of credit of $25,000,000 which is guaranteed by the Company. Borrowings are secured by the mortgage loans held for sale, mature on December 1, 1997 and bear interest at LIBOR plus 1-3/4%. At May 31, 1997, $5,502,000 was outstanding under this line of credit and $10,160,000 of funding drafts were issued thereunder. At May 31, 1996, no amounts were outstanding under this line of credit and $5,359,000 of funding drafts were issued thereunder. F. INCOME TAXES The Company files a consolidated Federal income tax return. Components of current and deferred income taxes follow: Current Deferred Total (In thousands) Year ended May 31, 1997: Federal $ 21,011 $ (3,244) $ 17,767 State and other 3,002 (463) 2,539 -------- -------- -------- $ 24,013 $ (3,707) $ 20,306 ======== ======== ======== Year ended May 31, 1996: Federal $ 17,484 $ 81 $ 17,565 State and other 2,016 14 2,030 -------- -------- -------- $ 19,500 $ 95 $ 19,595 ======== ======== ======== Year ended May 31, 1995: Federal $ 10,126 $ (952) $ 9,174 State and other 2,727 (257) 2,470 -------- -------- -------- $ 12,853 $ (1,209) $ 11,644 ======== ======== ======== The effective income tax rate differs from the Federal statutory tax rate for the following reasons: Years ended May 31, 1997 1996 1995 U.S. statutory tax rate 35% 35% 35% State income taxes, net of Federal tax benefit 5 6 6 Amortization and other, net 1 2 5 -- -- -- 41% 43% 46% == == == The components of the net deferred taxes are as follows: May 31, 1997 1996 (In thousands) Deferred tax liabilities: Capitalized interest $ 637 $ 1,903 Receivable basis differences 26 1,043 ------- ------- 663 2,946 ------- ------- Deferred tax assets: Inventory basis differences 2,005 759 Other, net 1,129 951 ------- ------- 3,134 1,710 ------- ------- Net deferred tax (asset) liability ($2,471) $ 1,236 ======= ======= G. STOCK INCENTIVE PLANS The Company has two stock incentive plans (the "Plans"). The 1988 Stock Incentive Plan was approved by the Board of Directors on July 29, 1988 and the stockholders on August 26, 1988 and amended by the Board of Directors on July 23, 1992 and the stockholders on August 26, 1992. The 1986 Stock Incentive Plan was approved by the Board of Directors and the stockholders of the Company on July 26, 1986. The Plans are intended to provide an incentive to officers and key employees of the Company and its subsidiaries to remain with the Company. The Board of Directors has authorized the reservation of 700,000 shares of the Company's common stock for issuance under the Plans. Options may be granted at a price equal to the market value on the date of the grant (or 85% of market value in the case of non-qualified options) and may not be exercised for one year (six months in the case of non-qualified options) from the date of the grant. Under the Plans, options must be exercised within 10 years (5 years for a 10% holder) from the date the option was granted. The following summarizes the stock option transactions for the two years ended May 31, 1997: Number Option Weighted Avg. 7 of shares Price Price Outstanding at May 31, 1995 244,635 $4.000 - $21.375 $ 12.43 Granted 35,000 18.250 18.25 Canceled (8,000) 12.500 - 21.375 16.10 Exercised (67,865) 4.000 - 21.375 8.65 ------- Outstanding at May 31, 1996 203,770 6.500 - 21.375 14.54 Granted 139,800 15.875 - 18.750 17.22 Canceled (21,500) 12.500 - 21.375 17.72 Exercised (21,945) 7.750 - 13.750 10.84 ------- Outstanding at May 31, 1997 300,125 6.500 - 21.375 15.83 ======= Exerciseable at May 31, 1997 118,425 6.500 - 21.375 13.83 ======= At May 31, 1997, there were 44,695 shares reserved for future grants. Continental Homes During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost related to stock options issued to employees under these plans using the method of accounting prescribed by the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Entities electing to remain with the accounting in APB No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in FAS 123 has been applied. The Company has elected to account for its stock-based compensation plans under APB No. 25; however, the Company has computed, for pro forma disclosure purposes, the value of all options granted during 1997 and 1996, using the following weighted average assumptions used for grants: Years ended May 31, 1997 1996 Risk free interest rate 6.41% 5.56% Expected dividend yield 1.16% 1.10% Expected lives 4 years 4 years Expected volatility 39.52% 43.48% Options were assumed to be exercised over the four-year expected life for the purpose of this valuation. Adjustments were made for options forfeited prior to vesting. The total value of options granted was computed to be the following approximate amounts, which would be amortized on the straight-line basis over the vesting period of the options (dollars in thousands): Year ended May 31, 1997 $881 Year ended May 31, 1996 $243 If the Company had accounted for stock options issued to employees using a fair value based method of accounting, the Company's year end net income, net income per common share and net income per common share assuming full dilution would have been reported as follows: Years ended May 31, 1997 1996 Net income: Income from operations $ 29,445 $ 25,787 Pro forma 29,270 25,751 Net Income 29,445 18,869 Pro forma 29,270 18,833 Earnings per common share: Income from operations 4.24 3.71 Pro forma 4.21 3.67 Net Income 4.24 2.71 Pro forma 4.21 2.68 Earnings per common share assuming full dilution: Income from operations 3.10 3.00 Pro forma 3.09 3.00 Net Income 3.10 2.27 Pro forma 3.09 2.27 The effects of applying FAS 123 for providing pro forma disclosures for 1997 and 1996 are not likely to be representative of the effects on reported net income and net income per common share for future years, because options vest over several years and additional awards are made each year. H. CONTINGENCIES In management's opinion, the Company is not involved in any legal proceedings which will have a material effect on the Company's financial position or operating results. I. SELECTED UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION Unaudited quarterly consolidated financial information for the years ended May 31, 1997 and 1996 is summarized as follows:
Three months ended August 31 November 30 February 28 May 31 (In thousands, except share data) 1997 Revenues $ 187,536 $ 180,061 $ 172,809 $ 185,564 Gross profit from home sales 33,990 29,907 29,203 27,735 Net income 9,236 7,792 6,758 5,659 Earnings per share: Primary: Net income 1.32 1.12 .98 .82 Fully diluted: Net income .95 .81 .72 .62 Weighted average shares outstanding 7,003,206 6,978,297 6,897,402 6,874,591 1996 Revenues $ 146,405 $ 138,244 $ 140,996 $ 174,963 Gross profit from home sales 24,520 24,953 25,270 33,232 Net income 5,224 5,315 5,301 3,029 Earnings per share: Primary: Income from operations .75 .77 .88 1.30 Net income .75 .77 .76 .43 Fully diluted: Income from operations .66 .64 .65 .93 Net income .66 .64 .57 .36 Weighted average shares outstanding 6,927,672 6,946,666 6,974,427 6,990,196
EX-21 6 SUBSIDIARIES OF THE REGISTRANT LIST OF SUBSIDIARIES -------------------- 1. The Company holds 100% of the outstanding capital stock of: Continental Homes, Inc. ("CHI") (Delaware) KDB Homes, Inc. (Delaware) L&W Investments, Inc. (California) Continental Ranch, Inc. (Delaware) Continental Homes of Texas, Inc. (Texas) Miltex Management, Inc. ("MMI") (Texas) Milburn Investments, Inc. ("MII") (Texas) Heftler Realty Co. (Florida) CH Texas of Dallas, Inc. (Delaware) 2. CHI holds 100% of the outstanding capital stock of: CH Mortgage Company ("CHMC") (Colorado) CHI Construction Company (Arizona) 3. CHI is a 55% joint venture partner of: Surprise Village North L.L.C. Continental Traditions L.L.C. 4. MMI holds 1% of the partnership interest of: Miltex Mortgage of Texas Limited Partnership 5. MII holds 99% of the partnership interest of: Miltex Mortgage of Texas Limited Partnership 6. MII holds 100% of the outstanding capital stock of: Travis County Title Company (Texas) Acheter, Inc. ("Acheter") (Texas) R.O.S. Corporation (Texas) CHTEX of Austin, Inc. ("CHTEX/Austin") (Delaware) CH Investments of Texas II, Inc. ("CH Investments II") (Delaware) 7. Acheter holds 100% of the outstanding capital stock of: Settlement Corporation (Texas) 8. Continental Homes of Texas, Inc. holds 100% of the outstanding capital stock of: CHTEX of San Antonio, Inc. ("CHTEX/SA") (Delaware) CH Investments of Texas III, Inc. ("CH Investments III") (Delaware) 9. CH Texas of Dallas, Inc. holds 100% of the outstanding capital stock of: CHTEX of Dallas, Inc. ("CHTEX/Dallas") (Delaware) CH Investments of Texas, Inc. ("CH Investments") (Delaware) 10. Continental Homes of Dallas, L.P. (Texas) is a limited partnership comprised of: CHTEX/Dallas (1% g.p.) and CH Investments (99% l.p.) 11. Continental Homes of Austin, L.P. (Texas) is a limited partnership comprised of: CHTEX/Austin (1% g.p.) and CH Investments II (99% l.p.) 12. Continental Homes of San Antonio, L.P. (Texas) is a limited partnership comprised of: CHTEX/SA (1% g.p.) and CH Investments III (99% l.p.) EX-23 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8 (File Numbers 33-65912 and 33-33550) and Forms S-3 (File Numbers 33-69974, 33-63539 and 333-20527). /s/ Arthur Andersen LLP Phoenix, Arizona, August 14, 1997. EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS MAY-31-1997 JUN-01-1996 MAY-31-1997 1 23,759 0 55,123 0 392,540 0 3,656 0 508,256 0 286,425 0 0 71 154,828 508,256 681,838 725,970 561,003 0 0 0 3,862 49,751 20,306 29,445 0 0 0 29,445 4.24 3.10
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