EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Continental Homes Holding Corp.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows for the year ended May 31, 1996, of
Continental Homes Holding Corp. (a Delaware corporation) and subsidiaries (the
Company). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the result of operations and cash flows of
Continental Homes Holding Corp. and subsidiaries for the year ended May 31,
1996, in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Phoenix, Arizona
June 19, 1996
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CONTINENTAL HOMES HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended May 31, 1996
---------------------------------
(In thousands, except share data)
Revenues:
Home sales.................................. $ 577,073
Land/lot sales.............................. 11,844
Mortgage banking and title operations
(Note B)................................. 11,481
Other income, net........................... 210
---------
Total revenues........................... 600,608
---------
Costs and Expenses:
Homebuilding:
Cost of home sales.......................... 469,098
Land/lot sales.............................. 11,907
Selling, general and
administrative expenses.................... 62,247
Interest, net (Note A)...................... 5,510
Minority interest (Note A).................. (248)
Mortgage Banking and Title Operations:
Selling, general and administrative
expenses................................... 7,028
Interest, net (Note A)...................... (316)
---------
Total costs and expenses................. 555,226
---------
Income before income taxes and
extraordinary loss......................... 45,382
Income taxes (Note D)....................... 19,595
---------
Income from operations...................... 25,787
Extraordinary loss:
Loss on extinguishment of debt; net of
income taxes of $4,807 in 1996 (Note C).. (6,918)
---------
Net income.................................. $ 18,869
=========
Earnings per common share (Note A)
Income from operations.................... $ 3.71
Net income................................ 2.71
Earnings per common share assuming full
dilution (Note A)
Income from operations.................... $ 3.00
Net income................................ 2.27
Cash dividends per share.................... $ .20
=========
Weighted average number of shares
outstanding................................ 6,959,736
=========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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CONTINENTAL HOMES HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended May 31, 1996
--------------------------------------------------------------------
($ in thousands)
Capital in
Common Stock Treasury Excess of Retained
Shares Amount Stock Par Value Earnings Total
--------- ------ -------- ---------- ---------- ----------
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
========= ===== ====== ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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CONTINENTAL HOMES HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31, 1996
-----------------------
(In thousands)
Cash flows from operating activities:
Net income............................................... $ 18,869
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 3,190
Minority interest..................................... (248)
Increase in deferred income taxes..................... 95
Tax benefit of employee stock options exercised....... 404
Extraordinary loss on extinguishment of debt.......... 11,725
Decrease (increase) in assets:
Homes, lots and improvements in production............ (48,504)
Receivables........................................... 8,458
Prepaid expenses and other assets..................... 4,826
Increase in liabilities:
Accounts payable and other liabilities................ 11,445
--------
Net cash provided by operating activities................ 10,260
--------
Cash flows from financing activities:
Net additions to property and equipment............... (581)
Cash paid for acquisitions, net of cash acquired...... (705)
--------
Net cash used by investing activities................. (1,286)
--------
Cash flows from financing activities:
Increase in notes payable to
financial institutions............................... (46,424)
Retirement of Convertible Subordinated Notes.......... (33,250)
Retirement of 12% Senior Notes........................ (107,542)
Retirement of bonds payable........................... (17,771)
Issuance of Convertible Subordinated Notes............ 83,279
Issuance of 10% Senior Notes.......................... 125,925
Stock options exercised............................... 589
Dividends paid........................................ (1,392)
--------
Net cash provided by financing activities............. 3,414
--------
Net increase in cash and cash equivalents................ 12,388
Cash and cash equivalents at beginning of year........... 12,848
--------
Cash and cash equivalents at end of year................. $ 25,236
========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized.................. 7,767
Income taxes.......................................... 16,430
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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CONTINENTAL HOMES HOLDING CORP.
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"). See Note
D.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash investing and financing activities:
During fiscal 1996, the Company entered into a joint venture whereby
the Company contributed cash and the joint venture partners contributed assets
(primarily land) valued at $5,045,000.
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 (primary 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 on the consolidated balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists primarily of
office furniture and equipment. Depreciation expense is provided using the
straight-line method over the estimated useful lives (three to five years).
Depreciation expense was $773,000 in 1996. The costs of maintenance and repairs
are charged to expense as incurred.
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EXCESS OF COST OVER RELATED NET ASSETS ACQUIRED
The excess of costs over related net assets acquired is being amortized
over periods ranging from three to twenty years using the straight-line method.
Amortization expense was $1,401,000 in 1996.
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 revenues and expenses during the
reported periods. Actual results could differ from those estimates.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During the fourth quarter of 1996, the Company elected to adopt early
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 positions and did not result in
a restatement of any of the financial results for the prior three quarters of
fiscal 1996. 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." FAS 123 will be
effective for the Company's fiscal year ending May 31, 1997. The Company plans
to retain the current method set forth in APB Opinion 25 and will present the
expanded disclosure in the fiscal 1997 financial statements.
SALES RECOGNITION
The Company recognizes income from home and land sales in accordance
with Statement of Financial Accounting Standards No. 66. The Company includes
the discounts incurred in obtaining permanent financing for its customers in
cost of home sales.
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MORTGAGE BANKING FEE RECOGNITION
Loan origination fees are recognized as income in accordance with
Statements of Financial Accounting Standards Nos. 65 and 91.
INTEREST, NET
The summary of the components of interest, net are as follows:
Year Ended May 31, 1996
-----------------------
(In thousands)
Interest expense, homebuilding......................... $ 5,982
Interest income, homebuilding.......................... (472)
-------
$ 5,510
=======
Interest expense, mortgage banking..................... $ 1,785
Interest income, mortgage banking...................... (2,101)
-------
$ (316)
=======
In addition to the amounts above, the Company expensed interest as a
component of cost of homes sales of $16,233,000 in fiscal 1996.
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. Consolidated Mortgage Subsidiaries
The Company's consolidated financial statements of income include its
wholly-owned mortgage banking and finance subsidiaries. Financial data of the
mortgage banking and finance subsidiaries is summarized as follows:
Year Ended May 31, 1996
-----------------------
(In thousands)
Total revenues.......................................... $ 9,948
Net interest income..................................... 316
Net income.............................................. 2,596
C. Extinguishment of Debt
In November 1995, the Company issued $86,250,000 principal amount of
6-7/8% Convertible Subordinated Notes due November 1, 2002. 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
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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 writeoff
of unamortized discount and debt issuance costs.
D. Income Taxes
The Company will file a consolidated Federal income tax return which
will include all subsidiaries. Components of current and deferred income taxes
follow:
Current Deferred Total
------- -------- -------
(In thousands)
Year Ended May 31, 1996
Federal....................................... $ 17,484 $ 81 $ 17,565
State and other............................... 2,016 14 2,030
------- ----- -------
$ 19,500 $ 95 $ 19,595
======= ===== =======
The effective income tax rate differs from the Federal statutory tax
rate for the following reasons:
Year Ended May 31, 1996
-----------------------
U.S. statutory tax rate................................. 35%
State income taxes, net of Federal tax benefit.......... 6
Amortization and other, net............................. 2
--
43%
==
E. Stock Options
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, 1998 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
month 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 options were granted.
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The following summarizes the stock option transactions for the year
ended May 31, 1996:
Number of
Shares Option Price
--------- ----------------
Outstanding at May 31, 1995.............. 244,635 $ 4.00 - $21.375
Granted............................... 35,000 $18.25
Canceled.............................. (8,000) $12.50 - $21.375
Exercised............................. (67,865) $ 4.00 - $21.375
-------
Outstanding at May 31, 1996.............. 203,770 $ 6.50 - $21.375
=======
Exercisable at May 31, 1996.............. 101,095 $ 6.50 - $21.375
=======
At May 31, 1996, there were 162,995 shares reserved for future grants.
F. 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.
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