================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9977
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 86-0611231
(State or Other Jurisdiction) (I.R.S.Employer
of Incorporation or Organization) Identification No.)
5333 North 7th Street,Suite 219 85014
Phoenix, Arizona (Zip Code)
(Address of Principal Executive Offices)
(602) 265-8541
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No .
----- -----
As of November 14, 1996, 9,716,517 shares of Homeplex Mortgage Investments
Corporation common stock were outstanding.
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1 Financial Statements
--------------------
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As Of September 30, 1996 and December 31, 1995
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Short-term investments ................................................. $ 10,295 $ 8,969
Residual interests ..................................................... 4,225 5,457
Cash and cash equivalents .............................................. 3,525 3,347
Real estate loans ...................................................... 1,415 4,048
Other assets ........................................................... 571 357
Funds held by Trustee .................................................. - 5,638
-------- --------
Total Assets ........................................................... $ 20,031 $ 27,816
======== ========
LIABILITIES
Accounts payable and other liabilities ................................. $ 1,037 $ 1,182
Long-term debt ......................................................... - 7,819
Dividend payable ....................................................... - 291
Accrued interest payable ............................................... - 76
-------- --------
Total Liabilities ...................................................... 1,037 9,368
-------- --------
Contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 50,000,000 shares authorized;...
issued and outstanding - 9,875,655 shares ............................ 99 99
Additional paid-in capital ............................................. 84,046 84,046
Cumulative net loss .................................................... (23,211) (23,757)
Cumulative dividends ................................................... (41,530) (41,530)
Treasury stock - 159,138 shares ........................................ (410) (410)
-------- --------
Total Stockholders' Equity ............................................. 18,994 18,448
-------- --------
Total Liabilities and Stockholders' Equity ............................. $ 20,031 $ 27,816
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME
For The Three and Nine Months Ended September 30, 1996 and 1995
(Dollars In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Income from residual interests .............. $ 274 $ 275 $ 799 $ 1,025
Interest income on real estate loans ........ 144 223 510 1,420
Other income ................................ 112 209 491 443
----------- ----------- ----------- -----------
Total Income ................................ 530 707 1,800 2,888
----------- ----------- ----------- -----------
EXPENSES
General, administrative and other ........... 216 443 867 1,348
Interest .................................... - 206 238 684
----------- ----------- ----------- -----------
Total Expenses .............................. 216 649 1,105 2,032
----------- ----------- ----------- -----------
Income Before Extraordinary Loss From
Early Extinguishment Of Debt .............. 314 58 695 856
Extraordinary loss from early
extinguishment of debt .................... - - (149) -
----------- ----------- ----------- -----------
Net Income .................................. $ 314 $ 58 $ 546 $ 856
=========== =========== =========== ===========
SHARE DATA
Income Before Extraordinary Loss
From Early Extinguishment Of
Debt Per Share ............................. $ .03 $ .01 $ .07 $ .09
Extraordinary Loss From Early
Extinguishment Of Debt Per Share ........... - - (.02) -
----------- ----------- ----------- -----------
Net Income Per Share ........................ $ .03 $ .01 $ .05 $ .09
=========== =========== =========== ===========
Weighted Average Number Of Shares
Of Common Stock And Common
Stock Equivalents Outstanding ............. 10,088,000 9,747,000 9,953,000 9,736,000
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1996
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional Cumulative
Number Par Paid-In Net Income Cumulative Treasury
Of Shares Value Capital (Loss) Dividends Stock Total
--------- ----- ---------- ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .... 9,875,655 $ 99 $ 84,046 $ (23,757) $ (41,530) $ (410) $ 18,448
Net income ...................... -- -- -- 546 -- -- 546
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1996 ... 9,875,655 $ 99 $ 84,046 $ (23,211) $ (41,530) $ (410) $ 18,994
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 1996 and 1995
Increase (Decrease) In Cash
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................... $ 546 $ 856
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in other assets ......................... (297) 337
Extraordinary loss from early extinguishment of debt ........ 149 -
Decrease in accounts payable and other liabilities .......... (145) (205)
Decrease in accrued interest payable ........................ (76) (29)
Amortization of debt costs .................................. 28 81
------- -------
Net Cash Provided By Operating Activities ...................... 205 1,040
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in funds held by Trustee .............................. 5,638 762
Principal payments received on real estate loans ............... 3,339 7,708
Increase in short-term investments ............................. (1,326) (9,962)
Amortization of residual interests ............................. 1,232 1,659
Real estate loans funded ....................................... (706) (2,625)
------- -------
Net Cash Provided By (Used In) Investing Activities ............ 8,177 (2,458)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments, including prepayment penalty of $94 in 1996,
made on long-term debt ....................................... (7,913) (2,973)
Dividends paid ................................................. (291) (194)
------- -------
Net Cash Used In Financing Activities .......................... (8,204) (3,167)
------- -------
Net Increase (Decrease) In Cash ................................ 178 (4,585)
Cash And Cash Equivalents At Beginning Of Period ............... 3,347 6,666
------- -------
Cash And Cash Equivalents At End Of Period ..................... $ 3,525 $ 2,081
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest ......................................... $ 286 $ 632
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE 1 - ORGANIZATION
Homeplex Mortgage Investments Corporation, a Maryland corporation,
("Homeplex" or the "Company") commenced operations in July 1988. As described in
Note 4 the Company has purchased interests in mortgage certificates securing
collateralized mortgage obligations (CMOs) and interests relating to mortgage
participation certificates (MPCs) (collectively residual interests). Since
December 1993 the Company has originated various loans secured by real estate
(see Note 3).
The accompanying interim financial statements do not include all of the
information and disclosures generally required for annual financial statements.
In the opinion of management, however, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
1996 and 1995 are not necessarily indicative of the results that may be expected
for the entire year. These financial statements should be read in conjunction
with the December 31, 1995 financial statements and notes thereto.
In September 1996, the Company entered into a merger agreement with
Monterey Homes. Such agreement will be subject to Homeplex obtaining the
approval of its stockholders at the Stockholders' Meeting to be held on December
18, 1996 (see Note 8).
NOTE 2 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Homeplex
Mortgage Investments Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Income Taxes
The Company has elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code. As a REIT, the Company must distribute
annually at least 95% of its taxable income to its stockholders.
At December 31, 1995, the Company has available, for income tax
purposes, a net operating loss carryforward of approximately $57,000,000. Such
loss may be carried forward, with certain restrictions, for up to 14 years to
offset future taxable income, if any. Until the tax loss carryforward is fully
utilized or expires, the Company will not be required to pay dividends to its
stockholders except for income that is deemed to be excess inclusion income.
The income reported in the accompanying financial statements is
different than taxable income because some income and expense items are reported
in different periods for income tax purposes. The principal differences relate
to the amortization of residual interests and the treatment of stock option
expense.
6
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
If the proposed merger with Monterey Homes is consummated, the Company
would be required to terminate its REIT status (see Note 8).
Residual Interests
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Note 4.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and certificates of
deposit with maturities of less than three months.
Net Income Per Share
Primary net income per share is calculated using the weighted average
shares of common stock outstanding and common stock equivalents. Common stock
equivalents consist of dilutive stock options. Net income per share is the same
for both primary and fully diluted calculations.
Short-Term Investments
At September 30, 1996, short-term investments consist of three CMO PAC
bonds with a combined principal balance of $10,298,000, estimated yields to
maturity of approximately 5.2% to 5.4% and estimated maturities of approximately
five to seven months.
NOTE 3 - REAL ESTATE LOANS
The following is a summary of the real estate loan outstanding at
September 30, 1996:
<TABLE>
<CAPTION>
Interest Payment Principal and
Description Rate Terms Carrying Amount (1)
----------- -------- -------------------------------- -------------------
<S> <C> <C> <C>
First Deed of Trust on 16% Interest only monthly, principal $ 1,415,000
41 acres of land in Gilbert, due October 16, 1996; extended
Arizona. for one year on October 16,
1996 under the same terms and
conditions.
</TABLE>
___________________________________________________
(1) Also represents cost for federal income tax purposes.
Such loan was current as of September 30, 1996.
7
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
NOTE 4 - RESIDUAL INTERESTS
The Company owns residual interests in collateralized mortgage
obligations (CMOs) and residual interests in mortgage participation certificates
(MPCs) (collectively residual interests) with respect to which elections to be
treated as a real estate mortgage investment conduit (REMIC) have been made.
Residual Interest Certificates
The Company owns 100% of the residual interest certificates
representing the residual interests in five series of CMOs secured by mortgage
certificates and cash funds held by trustee. The CMOs have been issued through
Westam Mortgage Financial Corporation (Westam) or American Southwest Financial
Corporation (ASW). The mortgage certificates securing the CMOs all have fixed
interest rates. Certain of the classes of CMOs have fixed interest rates and
certain have interest rates that are determined monthly based on the London
Interbank Offered Rates (LIBOR) for one month Eurodollar deposits, subject to
specified maximum interest rates.
Each series of CMOs consists of several serially maturing classes
collateralized by mortgage certificates. Generally, principal payments received
on the mortgage certificates, including prepayments on such mortgage
certificates, are applied to principal payments on the classes of CMOs in
accordance with the respective indentures. Scheduled payments of principal and
interest on the mortgage certificates securing each series of CMOs and
reinvestment earnings thereon are intended to be sufficient to make timely
payments of interest on such series and to retire each class of such series by
its stated maturity. Certain series of CMOs are subject to redemption according
to specific terms of the respective indentures.
The Company's residual interest certificates entitle the Company to
receive the excess, if any, of payments received from the pledged mortgage
certificates together with reinvestment income thereon over amounts required to
make debt service payments on the related CMOs and to pay related administrative
expenses of the REMICs. The Company also has the right, under certain
conditions, to cause an early redemption of the CMOs. Under the early redemption
feature, the mortgage certificates are sold at the then current market price and
the CMOs repaid at par value. The Company is entitled to any excess cash flow
from such early redemptions. The conditions under which such early redemptions
may be elected vary but generally cannot be done until the remaining outstanding
CMO balance is less than 10% of the original balance.
Interests In Mortgage Participation Certificates
The Company owns residual interests in REMICs with respect to three
separate series of Mortgage Participation Certificates (MPCs) issued by the
Federal Home Loan Mortgage Corporation (FHLMC) or by the Federal National
Mortgage Association (FNMA). The Company's MPC residual interests entitle the
Company to receive its proportionate share of the excess (if any) of payments
received from the mortgage certificates underlying the MPCs over principal and
interest required to be passed through to the holders of such MPCs. The Company
is not entitled to reinvestment income earned on the underlying mortgage
certificates, is not required to pay any administrative expenses related to the
MPCs and does not have the right to elect early termination of any of the MPC
classes. The mortgage certificates underlying the MPCs all have fixed interest
rates. Certain of the classes of the MPCs have fixed interest rates and certain
have interest rates
8
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
that are determined monthly based on LIBOR or based on the Monthly Weighted
Average Cost of Funds (COFI) for Eleventh District Savings Institutions as
published by the Federal Home Loan Bank of San Francisco, subject to specified
maximum interest rates.
The following summarizes the Company's investment in residual interests
at September 30, 1996:
<TABLE>
<CAPTION>
Type Of Company's Company's Percentage
Series Investments Amortized Cost Ownership
------ ----------------------------- -------------- --------------------
(In Thousands)
<S> <C> <C>
Westam 1 Residual Interest Certificate $ 439 100.00%
Westam 3 Residual Interest Certificate 25 100.00%
Westam 5 Residual Interest Certificate 164 100.00%
Westam 6 Residual Interest Certificate 2 100.00%
ASW 65 Residual Interest Certificate 2,109 100.00%
FHLMC 17 Interest in MPCs 102 100.00%
FNMA 1988-24 Interest in MPCs 866 20.20%
FNMA 1988-25 Interest in MPCs 518 45.07%
-------
$ 4,225
=======
</TABLE>
The following summarizes the Company's proportionate interest in the
aggregate assets and liabilities of the eight residual interests at September
30, 1996 (in thousands):
<TABLE>
<S> <C>
Assets:
Outstanding Principal Balance of Mortgage Certificates ............... $ 295,762
Funds Held By Trustee and Accrued Interest Receivable ................ 8,446
---------
$ 304,208
=========
Range of Stated Coupon of Mortgage Certificates ...................... 9.0% - 10.5%
Liabilities:
Outstanding Principal Balance of CMOs and MPCs:
Fixed Rate ......................................................... $ 269,248
Floating Rate - LIBOR Based ........................................ 26,209
Floating Rate - COFI Based ......................................... 3,586
---------
Total ..................................................... 299,043
Accrued Interest Payable ............................................. 2,035
---------
$ 301,078
=========
Range of Stated Interest Rates on CMOs and MPCs....................... 0% to 9.9%
</TABLE>
9
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
The average LIBOR and COFI rates used to determine income from residual
interests were as follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, At Sept. 30, 1996
---------------------------- --------------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LIBOR......... 5.50% 5.94% 5.48% 6.03% 5.50%
COFI.......... 5.07% 5.15% 4.93% 4.91% 4.82%
</TABLE>
The Company accounts for residual interests using the prospective net
level yield method. Under this method, a residual interest is recorded at cost
and amortized over the life of the related CMO or MPC issuance. The total
expected cash flow is allocated between principal and interest as follows:
1. An effective yield is calculated as of the date of purchase based
on the purchase price and anticipated future cash flows.
2. In the initial accounting period, interest income is accrued on the
investment balance using the effective yield calculated as of the
date of purchase.
3. Cash received on the investment is first applied to accrued
interest with any excess reducing the recorded principal balance of
the investment.
4. At each reporting date, the effective yield is recalculated based
on the amortized cost of the investment and the then-current
estimate of the remaining future cash flows.
5. The recalculated effective yield is then used to accrue interest
income on the investment balance in the subsequent accounting
period.
6. The above procedure continues until all cash flows from the
investment have been received.
At the end of each period, the amortized balance of the investment
should equal the present value of the estimated cash flows discounted at the
newly-calculated effective yield. If a residual interest is determined to have
other than temporary impairment, the residual interest is written down to fair
value.
At September 30, 1996, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 33% without early redemptions
or terminations being considered and 90% if early redemptions or terminations
are considered. At September 30, 1996, the estimated fair value of the Company's
residual interests, in the aggregate, is estimated to be between $5 million and
$7 million.
The projected yield and estimated fair value of the Company's residual
interests are based on prepayment and interest rate assumptions at September 30,
1996. There will be differences, which may be material, between the projected
yield and the actual yield and the fair value of the residual interests may
change significantly over time.
10
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
NOTE 5 - LONG-TERM DEBT
On December 17, 1992, a wholly owned, limited purpose subsidiary of the
Company issued $31,000,000 of Secured Notes under an Indenture to a group of
institutional investors. The Notes bore interest at 7.81% and required quarterly
payments of principal and interest with the balance due on February 15, 1998. In
connection with the financing, the Company paid fees of $635,000 which were
included in other assets in the accompanying consolidated balance sheet and were
amortized to interest expense over the life of the financing. The Notes were
secured by the Company's residual interests in Westam 1, Westam 3, Westam 5,
Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 (see Note 4), and by Funds held
by the Note Trustee. The Company used $3,100,000 of the proceeds to establish a
reserve fund. The reserve fund, which had a specified maximum balance of
$7,750,000, was to be used to make the scheduled principal and interest payments
on the Notes if the cash flow available from the collateral was not sufficient
to make the scheduled payments. Depending on the level of certain specified
financial ratios relating to the collateral, the cash flow from the collateral
was required to either prepay the Notes at par, increase the reserve fund up to
its $7,750,000 maximum or was remitted to the Company.
On May 15, 1996 the Company repaid the remaining outstanding Note
balance of $6,828,000 plus accrued interest. The Company paid prepayment penalty
fees of $94,000 and wrote off the remaining unamortized balance of $55,000 of
capitalized debt costs in connection with such repayment resulting in an
extraordinary loss of $149,000 from the early extinguishment of debt.
NOTE 6 - COMMON STOCK AND STOCK OPTIONS
The Company has a Stock Option Plan which is administered by the Board
of Directors. The plan provides for qualified stock options which may be granted
to key personnel of the Company and non-qualified stock options which may be
granted to the Directors and key personnel of the Company. The purpose of the
plan is to provide a means of performance-based compensation in order to attract
and retain qualified personnel whose job performance affects the Company.
Options to acquire a maximum (excluding dividend equivalent rights) of
437,500 shares of the Company's common stock may be granted under the plan. The
exercise price may not be less than the fair market value of the common stock at
the date of grant. The options expire ten years after date of grant.
Option holders also receive, at no additional cost, dividend equivalent
rights which entitle them to receive, upon exercise of the options, additional
shares calculated based on the dividends declared during the period from the
grant date to the exercise date. At September 30, 1996 accounts payable and
other liabilities in the accompanying consolidated balance sheets, include
approximately $850,000 related to the Company's granting of dividend equivalent
rights. This liability will remain in the accompanying consolidated balance
sheets until the options to which the dividend equivalent rights relate are
exercised, cancelled or expire.
Under the plan, an exercising optionholder also has the right to
require the Company to purchase some or all of the optionholder's shares of the
Company's common stock. That redemption right is exercisable by the optionholder
only with respect to shares (including the related dividend equivalent rights)
that the optionholder has acquired by exercise of an option under the Plan.
Furthermore, the optionholder can only exercise his redemption rights within six
months from the last to expire of (i) the two year period commencing
11
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
with the grant date of an option, (ii) the one year period commencing with the
exercise date of an option, or (iii) any restriction period on the
optionholder's transfer of the shares of common stock he acquires through
exercise of his option. The price for any shares repurchased as a result of an
optionholder's exercise of his redemption right is the lesser of the book value
of those shares at the time of redemption or the fair market value of the shares
on the original date the options were exercised.
At September 30, 1996, there were 445,177 of options (including
dividend equivalent rights) outstanding of which 438,376 were currently
exercisable at effective exercise prices ranging from $1.22 per share to $4.48
per share.
Additionally, in December 1995, in connection with the renegotiation of
the Chief Executive Officer's Employment Agreement, the Company replaced his
annual salary of $250,000 plus bonus with 750,000 of non-qualified stock options
which vest over the three year term of the new Employment Agreement. The
exercise price of the options is $1.50 per share which was equal to the closing
market price of the common stock on grant date. As of September 30, 1996,
200,000 of the options were vested, with 275,000 vesting in December 1996 and
the remaining 275,000 vesting in December 1997. The options will immediately
vest upon a change in control, as defined. The options will expire in December
2000. These stock options are subject to stockholder approval. In the event the
stock options are not approved by the stockholders, the Employment Agreement
provides that the options will be converted into phantom stock rights (PSRs).
Such PSRs have the same vesting provisions, exercise price and expiration date
as the related stock options, except that upon exercise of a PSR no stock is
actually issued. Instead, the Company will make a cash payment to the holder
equal to the difference between the market value of the stock on the exercise
date and the exercise price of $1.50 per share. The PSRs, also, provide that the
holder will receive payments equal to the product of the per share dividend
amount times the number of PSRs outstanding.
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with requirements of SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments". Although management
uses its best judgement in estimating the fair value of these instruments, there
are inherent limitations in any estimation technique and the estimates are thus
not necessarily indicative of the amounts which the Company could realize on a
current transaction.
The following describes the significant assumptions underlying the
estimates of fair value:
(a) Real Estate Loans - The Company's real estate loan is short-term
and considered to be fully collectible. The terms and conditions of
the loan are the same as would be used by the Company to fund
similar type loans at September 30, 1996. As such, fair value
approximates cost.
(b) Short-Term Investments - Short-term investments consist of three
CMO PAC bonds with a fair value that approximates cost.
(c) Cash and Cash Equivalents - Cash and cash equivalents consist of
demand deposits and liquid money market funds with fair value
approximating cost.
(d) Residual Interests - Residual interests and their fair value are
described in Note 4 to the financial statements.
12
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
Based on these assumptions the Company estimates the fair value of
its financial instruments at September 30, 1996 to be as follows (in thousands):
Carrying
Amount Estimated Fair Value
-------- --------------------
Real Estate Loans.............. $ 1,415 $ 1,415
Short-term Investments......... 10,295 10,295
Residual Interests............. 4,225 5,000 to 7,000
Cash and Cash Equivalents...... 3,525 3,525
NOTE 8 - PROPOSED MERGER
In September 1996 the Company entered into an agreement to merge with
Monterey Homes, a group of privately-held companies engaged in the homebuilding
business in Phoenix, Scottsdale and Tucson, Arizona. As currently contemplated
the merger would involve the issuance of approximately 3.9 million shares of
Homeplex common stock in exchange for 100% of the outstanding stock of Monterey
Homes. Additionally, up to 800,000 additional shares of Homeplex common stock
will be issued in the event that (i) the stock price of Homeplex reaches certain
targeted levels of between $1.75 to $3.50 in the five years following the merger
and (ii) the two current stockholders of Monterey Homes are still employed by
the post-merger company when the stock price reaches the targeted levels. Prior
to closing, Monterey Homes, a group of subchapter S corporations, will
distribute to their stockholders a significant portion of their previously taxed
retained earnings which will reduce the net worth of Monterey Homes to $2.5
million, subject to certain accounting adjustments.
If the merger is consummated, William W. Cleverly and Steven J. Hilton,
the current stockholders of Monterey Homes, will become the Chairman and the
President, respectively, and co-chief executive officers of the combined company
after the closing, and each will enter into a five-year employment agreement
providing for additional options to purchase 500,000 shares each of Homeplex
common stock at $1.75 per share. Messrs. Cleverly and Hilton will serve on the
new Board of Directors along with two new outside directors and one current
Homeplex director.
Monterey Homes had combined revenue of approximately $61 million and
$71 million and pre-tax earnings of approximately $6.3 million and $6.4 million
for the years ended December 31, 1994 and 1995, respectively. After the merger,
the combined entities would continue with Monterey Homes' building operations as
its main line of business. Upon consummation of the merger, it is anticipated
that the combined entities will have total assets of approximately $75 million.
It is anticipated that Homeplex's $57 million net operating-loss carryforward
for income tax purposes would be available to the combined company, and the
transaction would require Homeplex to terminate its tax status as a real estate
investment trust (REIT).
The agreement is subject to certain terms and conditions including
approval by the stockholders of Homeplex. A meeting of the Homeplex stockholders
has been scheduled on December 18, 1996, to vote upon the merger and other
business matters.
13
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1996
(Unaudited)
At September 30, 1996, approximately $314,000 of legal, accounting
and investment banking costs related to the proposed merger have been
capitalized and are included in other assets in the accompanying balance sheets.
If the merger is consummated, the Company anticipates that it will incur
approximately $300,000 of expenses related to severance costs of employees
expected to be terminated by the merged Company.
14
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
ITEM 2. Management's Discussion and Analysis of Financial Condition, Results of
-----------------------------------------------------------------------
Operations and Interest Rates and Other Information
---------------------------------------------------
Results of Operations For The Three And Nine Months Ended September 30, 1996 and
- --------------------------------------------------------------------------------
1995
- ----
The Company had net income of $314,000 or $.03 per share, and $546,000
or $.05 per share, respectively, for the three and nine months ended September
30, 1996 compared to net income of $58,000, or $.01 per share and $856,000 or
$.09 per share for the comparable periods in 1995. Results for the nine months
ended September 30, 1996 include an extraordinary loss from the early
extinguishment of debt of $149,000, or $.02 per share.
The Company's income from mortgage assets was $530,000 and $1,800,000,
respectively, for the three and nine months ended September 30, 1996 as compared
to income of $707,000 and $2,888,000 for the comparable periods in 1995.
Interest income on real estate loans decreased from $223,000 and $1,420,000,
respectively, for the three and nine months ended September 30, 1995 to $144,000
and $510,000, respectively, for the comparable periods in 1996 due to a
reduction of the Company's real estate lending programs. See "Liquidity, Capital
Resources and Commitments".
The Company's interest expense declined from $206,000 and $684,000,
respectively, for the three and nine months ended September 30, 1995 to $0 and
$238,000 for the comparable periods in 1996 as a result of the Company reducing
its long-term debt.
Liquidity, Capital Resources and Commitments
- --------------------------------------------
The Company raised $80,593,000 in connection with its initial public
offering on July 27, 1988. The proceeds were immediately utilized to purchase
residual interests. Subsequently, through October 1988, the Company purchased an
additional $59,958,000 of residual interests which were initially financed using
a combination of borrowings under repurchase agreements and the Company's bank
line of credit. The Company has not purchased any residual interests since
October 1988.
Since December 1993, the Company has originated real estate loans
secured by various first deeds of trust on real properties located in Arizona.
The Company's loan program seeks higher returns by targeting loan opportunities
to which the Company can respond on a more timely basis than traditional real
estate lenders. In the latter half of 1995, in anticipation of a potential
acquisition transaction, the Company slowed its origination of real estate
loans. At September 30, 1996 the Company had one real estate loan outstanding
with a balance of $1,415,000. The loan bears interest at 16%, payable monthly,
with all principal due on October 16, 1996 and was extended for one year on
October 16, 1996 under the same terms and conditions.
On December 17, 1992, a wholly owned limited-purpose subsidiary of the
Company issued $31,000,000 of Secured Notes under an Indenture to a group of
institutional investors. The Notes bore interest at 7.81% and required quarterly
payments of principal and interest with the balance due on February 15, 1998.
The Notes were secured by the Company's residual interests in Westam 1, Westam
3, Westam 5, Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 and by funds held
by the Note Trustee. The Company used $3,100,000 of the proceeds to establish a
reserve fund. The reserve fund had a specified maximum balance
15
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
of $7,750,000 and was to be used to make the scheduled principal and interest
payments on the Notes if the cash flow available from the collateral was not
sufficient to make the scheduled payments. Depending on the level of certain
specified financial ratios relating to the collateral, the cash flow from the
collateral is required to either repay the Notes at par, increase the reserve
fund up to its $7,750,000 maximum or was remitted to the Company. On May 15,
1996 the Company repaid the remaining outstanding Note balance of $6,828,000
plus accrued interest. The Company paid prepayment penalty fees of $94,000 and
wrote off the remaining unamortized balance of $55,000 of capitalized debt costs
in connection with such repayment resulting in an extraordinary loss of $149,000
from the early extinguishment of debt.
At September 30, 1996, the Company does not have any used or unused
short-term debt or line of credit facilities.
As a real estate investment trust (REIT), the Company is not subject to
income tax at the corporate level as long as it distributes 95% of its taxable
income to its stockholders. At December 31, 1995, the Company has a net
operating loss carryforward, for income tax purposes, of approximately
$57,000,000. This tax loss may be carried forward, with certain restrictions,
for up to 14 years to offset future taxable income, if any. Until the tax loss
carryforward is fully utilized or expires, the Company will not be required to
distribute dividends to its stockholders except for income that is deemed to be
excess inclusion income.
In September 1996 the Company entered into an agreement to merge with
Monterey Homes, a group of privately-held companies engaged in the homebuilding
business in Phoenix, Scottsdale and Tucson, Arizona. As currently contemplated
the merger would involve the issuance of approximately 3.9 million shares of
Homeplex common stock in exchange for 100% of the outstanding stock of Monterey
Homes. Additionally, up to 800,000 additional shares of Homeplex common stock
will be issued in the event that (i) the stock price of Homeplex reaches certain
targeted levels of between $1.75 to $3.50 in the five years following the merger
and (ii) the two current stockholders of Monterey Homes are still employed by
the post-merger company when the stock price reaches the targeted levels. Prior
to closing, Monterey Homes, a group of subchapter S corporations, will
distribute to their stockholders a significant portion of their previously taxed
retained earnings which will reduce the net worth of Monterey Homes to $2.5
million, subject to certain accounting adjustments.
If the merger is consummated, William W. Cleverly and Steven J. Hilton,
the current stockholders of Monterey Homes, will become the Chairman and the
President, respectively, and co-chief executive officers of the combined company
after the closing, and each will enter into a five-year employment agreement
providing for additional options to purchase 500,000 shares each of Homeplex
common stock at $1.75 per share. Messrs. Cleverly and Hilton will serve on the
new Board of Directors along with two new outside directors and one current
Homeplex director.
Monterey Homes had combined revenue of approximately $61 million and
$71 million and pre-tax earnings of approximately $6.3 million and $6.4 million
for the years ended December 31, 1994 and 1995, respectively. After the merger,
the combined entities would continue with Monterey Homes' building operations as
its main line of business. Upon consummation of the merger, it is anticipated
that the combined entities will have total assets of approximately $75 million.
It is anticipated that Homeplex's $57 million net operating-loss carryforward
for income tax purposes would be available to the combined company, and the
transaction would require Homeplex to terminate its tax status as a real estate
investment trust (REIT).
The agreement is subject to certain terms and conditions including
approval by the stockholders of Homeplex. A meeting of the Homeplex stockholders
has been scheduled on December 18, 1996, to vote upon the merger and other
business matters.
16
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
At September 30, 1996, approximately $314,000 of legal, accounting and
investment banking costs related to the proposed merger have been capitalized
and are included in other assets in the accompanying balance sheets. If the
merger is consummated, the Company anticipates that it will incur approximately
$300,000 of expenses related to severance costs of employees expected to be
terminated by the merged Company.
Interest Rates and Prepayments
One of the Company's major sources of income is its income from
residual interests which consists of the Company's investment in eight real
estate mortgage investment conduits ("REMICs") as described in Note 4 to the
financial statements. The Company's cash flow and return on investment from its
residual interests are highly sensitive to the prepayment rate on the related
mortgage certificates and the variable interest rates on variable rate CMOs and
MPCs.
At September 30, 1996, the Company's proportionate share of
floating-rate CMOs and MPCs in the eight REMICs is $26,209,000 in principal
amount that pays interest based on LIBOR and $3,586,000 in principal amount that
pays interest based on COFI. Consequently, absent any changes in prepayment
rates on the related mortgage certificates, increases in LIBOR and COFI will
decrease the Company's net income, and decreases in LIBOR and COFI will increase
the Company's net income. The average LIBOR and COFI rates were as follows:
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30, At Sept. 30, 1996
----------------- ----------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
LIBOR....... 5.50% 5.94% 5.48% 6.03% 5.50%
COFI........ 5.07% 5.15% 4.93% 4.91% 4.82%
The Company's cash flow and return on investment from residual
interests also is sensitive to prepayment rates on the mortgage certificates
securing the CMOs and underlying the MPCs. In general, slower prepayment rates
will tend to increase the cash flow and return on investment from residual
interests. The rate of principal prepayments on mortgage certificates is
influenced by a variety of economic, geographic, social and other factors. In
general, prepayments of the mortgage certificates should increase when the
current mortgage interest rates fall below the interest rates on the fixed rate
mortgage loans under-lying the mortgage certificates. Conversely, to the extent
that then current mortgage interest rates exceed the interest rates on the
mortgage loans underlying the mortgage certificates, prepayments of such
mortgage certificates should decrease. Prepayment rates also may be affected by
the geographic location of the mortgage loans underlying the mortgage
certificates, conditions in mortgage loan, housing and financial markets, the
assumability of the mortgage loans and general economic conditions.
17
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Changes in Securities
---------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
ITEM 5. Other Information
-----------------
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K - None
18
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
November 14, 1996 By \ JAY R. HOFFMAN
---------------------------------------
Jay R. Hoffman, President,
Treasurer, Chief Financial Officer
and a Duly Authorized Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 3525
<SECURITIES> 10295
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 20031
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 18895
<TOTAL-LIABILITY-AND-EQUITY> 20031
<SALES> 0
<TOTAL-REVENUES> 1800
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238
<INCOME-PRETAX> 695
<INCOME-TAX> 0
<INCOME-CONTINUING> 695
<DISCONTINUED> 0
<EXTRAORDINARY> 149
<CHANGES> 0
<NET-INCOME> 546
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
