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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission file number: 1-9977
HOMEPLEX MORTGAGE
INVESTMENTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Maryland 86-0611231
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5333 North Seventh Street, Suite 219, 85014
Phoenix, Arizona (Zip Code)
(Address of principal executive offices)
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(602) 265-8541
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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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 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
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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 amendment to this
Form 10-K. [X]
As of March 25, 1996, 9,716,517 shares of Homeplex Mortgage Investments
Corporation common stock were outstanding, and the aggregate market value of the
8,244,817 shares held by non-affiliates (based upon the closing price of the
shares on the New York Stock Exchange on March 25, 1996) was approximately
$13,397,000. Shares of Common Stock held by each officer and director of the
Company and by each person who owns more than 5% of the outstanding Common Stock
of the Company have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business ....................................................................1
Item 2. Properties ..................................................................33
Item 3. Legal Proceedings ...........................................................33
Item 4. Submission of Matters to a Vote of Security Holders .........................33
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ..34
Item 6. Selected Financial Data .....................................................36
Item 7. Management's Discussion and Analysis of Financial Condition, Results of
Operations and Interest Rates and Other Information .........................37
Item 8. Financial Statements and Supplementary Data .................................39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ..................................................................39
PART III
Item 10. Directors and Executive Officers of Registrant .............................40
Item 11. Executive Compensation .....................................................42
Item 12. Security Ownership of Certain Beneficial Owners and Management ............47
Item 13. Certain Relationships and Related Transactions .............................48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...........49
SIGNATURES ..........................................................................50
FINANCIAL STATEMENTS ................................................................F-1
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PART I
ITEM 1. BUSINESS
Introduction
Homeplex Mortgage Investments Corporation (the "Company") makes short-term
and intermediate- term mortgage loans on improved and unimproved real property
("Real Estate Loans") and owns Mortgage Assets as described herein. In 1993, the
Company decided to shift its focus to making Real Estate Loans from the
ownership of Mortgage Assets consisting of Mortgage Interests (commonly known as
residual interests) and Mortgage Instruments. Mortgage Instruments include
residential mortgage loans ("Mortgage Loans") and mortgage certificates
representing interest in pools of residential mortgage loans ("Mortgage
Certificates"). Mortgage Interests represent the right to receive the net cash
flows ("Net Cash Flows") on Mortgage Instruments. Substantially all of the
Company's Mortgage Instruments and the Mortgage Instruments underlying the
Company's Mortgage Interests currently secure or underlie
mortgage-collateralized bonds ("CMOs" or "Bonds"), mortgage pass-through
certificates ("MPCs" or "Pass-Through Certificates") or other mortgage
securities (collectively "Mortgage Securities") issued by various Mortgage
Securities issuers ("Issuers").
The Company does not currently plan to acquire any additional Mortgage
Assets. Instead, the Company plans in the short-term to utilize its available
funds to make or acquire additional Real Estate Loans and to implement its
acquisition strategy as described herein. At December 31, 1995 the Company had
outstanding three Real Estate Loans aggregating $4,048,000, each with a loan
term of one year and an interest rate of 16.00% per annum. The Company plans to
emphasize land acquisition and development loans, residential land development
loans, single family residential construction loans, commercial land development
loans, and interim construction and bridge loans. The Real Estate Loans have
been concentrated in Arizona.
The Company's strategy is to utilize available funds and equity to acquire
one or more operating companies, which may include one or more entries engaged
in the home-building business. The Company's management is currently reviewing a
number of operating companies for potential acquisition.
The Company was incorporated in the State of Maryland in May 1988 and
commenced operations on July 27, 1988. The Company changed its name from Emerald
Mortgage Investments Corporation to Homeplex Mortgage Investments Corporation in
April 1990.
The Company has elected to be taxed as a real estate investment trust
("REIT") pursuant to Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"). The Company generally will not be subject to tax
on its income to the extent that it distributes its earnings to stockholders and
maintains its qualification as a REIT. See "Business -- Federal Income Tax
Considerations." The Company may consider electing to discontinue its
qualification as a REIT for tax purposes as a result of its substantial tax-loss
carryforward and its acquisition strategy. If such a determination were made,
the Company would be taxed as a regular domestic corporation and, among other
consequences, any distributions to the Company's stockholders will not be
deductible by the Company in computing its taxable income.
The Company's Common Stock is listed on the New York Stock Exchange. Unless
the context otherwise requires, the term the Company means Homeplex Mortgage
Investments Corporation and its subsidiaries.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for certain recent information with respect
to the the Company.
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Business
Real Estate Loans
General
The Company makes or acquires short-term and intermediate-term Real Estate
Loans. A short-term loan generally has a maturity of one year or less and an
intermediate-term loan generally has a maturity of not more than three years.
Such loans are expected to consist primarily of first mortgage loans,
development loans, interim construction loans, bridge loans, and to a much
lesser extent, junior mortgage loans and wrap-around mortgage loans.
The Company may make or acquire development or interim construction loans on
unimproved real properties which are either expected to be developed within a
reasonable period of time, generally less than one year, into income-producing
properties, are being subdivided into lots for resale, or are being held for
resale by the borrowers. Certain of the other loans to be made by the Company
may be made on a first mortgage basis on the security of apartment complexes,
shopping centers, warehouses, office buildings and other commercial and
industrial properties, and as bridge loans on completed income- producing
projects during leasing activities. The Company also may make or acquire junior
mortgage loans and wrap-around mortgage loans, although such Real Estate Loans
are not expected to represent a significant portion of the Company's Real Estate
Loan portfolio.
The Company's Real Estate Loans may be made on both large and small
properties and in various combinations and may incorporate a variety of
financing techniques. There are no limitations on the types of properties on
which the Company may make or acquire loans. The Company's Real Estate Loans
will provide for regular debt service payments, normally consisting of interest
only with repayment of principal on maturity or earlier as the result of
contractual provisions requiring balloon payments of principal. The Company also
may make or acquire loans on the security of apartments or office buildings with
repayment to be derived from the conversion of the properties to condominiums
and the sale of units.
In general, the amount of each Real Estate Loan made by the Company will not
exceed at the date the loan is funded, when added to the amount of any existing
senior indebtedness, (i) 95% of the Company's assessment of the value of the
property in the case of improved income-producing property or unimproved real
property and (ii) 90% of the Company's assessment of the value of the property
on the assumption that construction or development, as the case may be, is
completed substantially in accordance with the plans and specifications as of
the date the loan commitment is provided, in the case of construction or
development loans. Such loan-to-value ratio may be increased in the case of a
specific Real Estate Loan if, in the judgment of the Company, the Real Estate
Loan is supported by credit or collateral adequate to justify a higher ratio.
The Company may make Real Estate Loans to borrowers that acquire properties for
prices below their appraised values. Thus, the loan-to-cost ratios of certain of
the Company's Real Estate Loans may exceed the loan-to-value ratios described
above. As a result, loans by the Company may not be limited to the purchase
price of a property.
The Company's Real Estate Loans generally provide for fixed interest rates
although it may make or acquire loans which float with changes in the prime rate
or other benchmark interest rates. Interest rates on Real Estate Loans will be
determined by taking into account a variety of factors including the prevailing
interest rate in the area for the type of loan being considered, the proposed
term of the loan, the loan-to-value ratio, and the creditworthiness of the
borrower and any guarantors. See "Special Considerations -- Real Estate Loans"
for additional information respecting Real Estate Loans.
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Current Real Estate Loans
The following table sets forth information relating to the Company's
outstanding Real Estate Loans at December 31, 1995.
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Interest Payment Principal and
Description Rate Terms Carrying Amount
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First Deed of Trust on 41 16% Interest only monthly, principal $1,278,000
acres of land in Gilbert, due October 18, 1996; may be
Arizona. extended for one year under
certain terms and conditions.
First Deed of Trust on 33 16% Interest only monthly, principal $2,272,000
acres of land in Tempe, due November 21, 1995; extended
Arizona. for one year on November 21,
1995 under the same terms and
conditions.
First Deed of Trust on 21.4 16% Interest only monthly, principal $ 498,000
acres of land in Tempe, due January 6, 1996; extended
Arizona. for six months on January 6,
1996 under the same terms and
conditions.
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In the latter half of 1995 in anticipation of a potential acquisition
transaction, the Company slowed its origination of Real Estate Loans.
Types of Real Estate Loans
In furtherance of its objectives, the Company may make and acquire a wide
variety of Real Estate Loans. In connection with certain of the Company's Real
Estate Loans, a portion of the Company's return could be in the form of deferred
interest payments, accruing in each year of the loan but payable only on
repayment of the loan. Such deferred interest may accrue at a fixed rate over
the term of a loan or may accrue at a faster rate in the later period of a loan.
In either case, the present value of deferred interest is less than it would be
if received currently.
The types of Real Estate Loans which the Company may make or acquire include
the following.
First Mortgage Loans. First mortgage loans will be secured by first mortgages
on the fee or a leasehold interest in improved income-producing real property
and generally will provide for repayment in full prior to the end of the
amortization period. Such loans will be in an amount which generally will not
exceed 95% of the Company's assessment of value of the property.
Land Loans. Land loans are first or junior mortgage loans on unimproved real
property normally providing only for interest payments prior to maturity. Such
loans are made on properties held by borrowers for inventory, investment or
development purposes and generally are expected to be repaid from the proceeds
of the resale of the properties. As a result and due in addition to the absence
of cash flow, such loans normally are considered more risky than loans on
improved property. The maximum loan-to-value ratio will generally not exceed 90%
of the Company's assessment of the value of the property.
Development Loans. Development loans are mortgage loans made to finance or
refinance the acquisition of unimproved land and the costs of developing such
land into finished sites, including the installation of utilities, drainage,
sewerage and road systems. Such loans are expected to be repaid from the
proceeds of construction loans or the sale of the developed sites. The Company
will not normally require the borrower to have a commitment for a construction
or long-term mortgage loan on the developed property. In some instances, the
Company may receive an equity participation or other interest in connection with
the property being developed. The original term of any development loan made by
the Company generally will not exceed three years, and the maximum loan-to-value
ratio generally will not exceed 90% of the Company's assessment of the value of
the property on the assumption that development is completed substantially in
accordance with the plans and specifications as of the date the loan commitment
is provided.
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Construction Loans. Construction loans are mortgage loans made to finance the
acquisition of land and the erection of improvements thereon, such as
residential subdivisions, apartment complexes, shopping centers, office
buildings, and commercial and industrial buildings. Such loans generally have
maturities of less than three years and usually provide for higher yields than
those prevailing on long-term mortgage loans on comparable properties.
Disbursements by the Company under construction loan commitments will be related
to actual construction progress. Before a construction loan is made or acquired,
the Company, in most cases, will either require that the borrower have a
commitment from a responsible financial institution for financing upon
completion or will itself have made the determination that such a loan is
readily available or unnecessary. In some cases, the Company may receive an
equity participation or other interest in connection with the property being
constructed. Construction loans will be in amount which generally will not
exceed 90% of the Company's assessment of value of the property on the
assumption that construction is completed substantially in accordance with the
plans and specifications as of the date the loan commitment is provided.
Construction loans made to finance single family tract developments or
condominiums generally will be repaid from proceeds of the sale of completed
residential units.
Junior Mortgage Loans. Junior mortgage loans will be secured by mortgages
which are subordinate to one or more prior liens on the fee or a leasehold
interest in real property and generally, but not in all cases, will provide for
repayment in full prior to the end of the amortization period. Such loans will
be in an amount which, when added to the amount of prior liens, generally will
not exceed 90% of the Company's assessment of the value of the property.
Wrap-Around Mortgage Loans. Wrap-around mortgage loans are expected to be
made or acquired by the Company on real property which is already subject to
prior mortgage indebtedness in an amount which, when added to the amount of
prior indebtedness, generally will not exceed 90% of the Company's assessment of
the value of the property. A wrap-around loan is a junior mortgage loan having a
principal amount equal to the sum of the outstanding balance under the existing
mortgage loans plus the amount actually advanced under the wrap-around mortgage
loan. Under a wrap-around mortgage loan, the Company would make principal and
interest payments to the holders of the prior mortgage loans but ordinarily only
to the extent that payments are received from the borrower. The Company expects
to negotiate all wrap-around mortgage loans so that the borrowers' payments to
be made to the Company will equal or exceed the amount of the Company's
principal and interest payments on the underlying loans.
The Company also is permitted to invest in agreements for sale, which for the
most part are governed by contract law but generally provide a statutory method
for foreclosure. In addition, the Company is permitted to acquire Real Estate
Loans secured by other comparable security devices as permitted by applicable
state law.
In those types of loans described above, the Company generally receives as
security for its loan a deed of trust or mortgage on the property financed.
Loans generally will be made on a nonrecourse basis by which recourse will be
limited to the real properties on which the loans have been made so that in the
event of default the Company would be required to rely on the value of such real
property to protect its interests. In other instances, the Company's Real Estate
Loans will be made on a full recourse basis so that the borrower will be liable
for any deficiency in the event that proceeds of a foreclosure or trustee's sale
were insufficient to repay the loan. In connection with any loans to a
corporation or other non- individual borrower, the Company may require that the
loan be personally guaranteed by the borrower's principal individual owners. In
addition, the Company may purchase or otherwise acquire participations or
fractional interests in Real Estate Loans which are originated by parties that
are not affiliated with the Company or may retain participations or fractional
interests in such loans which the Company has originated and a portion of which
have been acquired by parties that are not affiliated with the Company. In such
cases, the Company may not have control over the loan or the unrestricted right
to institute foreclosure proceedings. Except for the personal guarantees of a
borrower's owners, it is not intended that any loan will be guaranteed or
insured.
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Standards for Real Estate Loans
In making or acquiring a Real Estate Loan, the Company considers various
relevant real property and financial factors including the value of the property
underlying the loan as security, the location and other aspects of the property,
the potential for development of the property within one to three years, the
income-producing capacity and quality of the property, the rate and terms of the
loan (including the discount from the face amount of the note that can be
obtained giving consideration to current interest rates and the Company's
overall portfolio) and the quality, experience and creditworthiness of the
borrower. The Company will calculate internal rates of return in reviewing the
terms and purchase discount that can be obtained.
Although the Company generally receives a deed of trust or mortgage on the
financed property as security for each Real Estate Loan, it may use other
security devices from time to time. In most cases, recourse for a Real Estate
Loan will be limited to the real property securing the loan.
The Company will not make or acquire a Real Estate Loan on any one property
if the aggregate amount of all senior mortgage loans outstanding on the property
plus the loan of the Company would exceed an amount equal to 95% of the value of
the property as determined by the Company. The Company may lend additional funds
to the borrower if the outstanding principal amount plus any outstanding senior
indebtedness encumbering the property and additional advances does not exceed
95% of the value of the underlying property at the time the Real Estate Loan is
made or at the time of any new appraisal.
In general, the Company will make or acquire Real Estate Loans in amounts
ranging from a minimum of $300,000 to a maximum of $5,000,000.
The Company may obtain a current independent appraisal for a property on
which it plans to make or acquire a Real Estate Loan, the cost of which usually
will be paid by the borrower. The Company also may require, among other things,
a survey and an aerial photograph of the property underlying each Real Estate
Loan. The Company, however, generally relies on its own analysis and not on
appraisals and other documents in determining whether to make or acquire a
particular loan. It should be noted that appraisals are estimates of value and
should not be relied upon as measures of true worth or realizable value. The
Company will require that the borrower obtain a mortgagee's or owner's title
insurance policy or commitment as to the priority of a mortgage or the condition
of title be obtained in connection with each Real Estate Loan. The Company also
will require public liability insurance naming the Company as an additional
insured for claims arising on or about each underlying property when making a
Real Estate Loan and, to the extent permitted by the existing loan documents,
when acquiring a Real Estate Loan. Such liability insurance will be for suitable
amounts as determined by the Company, but to the extent that a borrower incurs
uninsured liabilities or liabilities in excess of the applicable coverage, such
liabilities may adversely affect the borrower's ability to repay the Real Estate
Loan.
In some cases, the Company may attempt to obtain equity participations in
connection with making Real Estate Loans. Participations are designed to provide
the potential for a higher return when such equity participations are deemed by
management to be in the best interests of the Company. Such a participation is
expected to be in the form of additional interest based upon items such as gross
receipts from the property securing the loan in excess of certain levels or
appreciation in the value of the property on whose security the Company has made
the Real Estate Loan based upon either sales price or increases in value. There
can be no assurance, however, that any Real Estate Loans will be structured in
this manner or that any such loans will provide enhanced yields.
In determining whether to make or acquire a Real Estate Loan, the Company
also will review the borrower's ability to repay the loan. Despite such review,
the ability of a borrower to repay the principal amount of a loan will depend
primarily upon the borrower's ability to obtain sufficient funds to pay the
outstanding principal balance of the Real Estate Loan by refinancing, sale or
other disposition of the property underlying the Real Estate Loan. See "Real
Estate Loan Considerations -- Balloon Payments -- Sufficiency of Collateral."
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The Company will invest in agreements for sale or real estate contracts of
sale only if such contracts are in recordable form and are appropriately
recorded in the chain of title.
Maturity of Loans
The Company expects that its Real Estate Loans generally will provide for
payment of interest only during their term and for repayment of principal in
full at maturity, generally within one to two years after funding. The Company
plans to reinvest the proceeds which are received by it upon loan repayments.
The Company believes its policy of making and acquiring short-term and
intermediate-term Real Estate Loans will enable it to reinvest loan repayment
proceeds in new loans and thus to vary its portfolio more quickly in response to
changing economic, financial and investment conditions than would be the case if
the Company were to make long-term Real Estate Loans.
Borrowing Policies
The Company has a line of credit from a financial institution primarily to
increase the amount of the Real Estate Loans that it is able to make or acquire
and to increase its potential returns. Under a revolving line of credit
agreement with a bank, the Company may borrow up to $5,000,000, upon payment of
a 1/2 % commitment fee with interest payable monthly at prime plus 1/2 %. Such
advances are to be secured by certain of the Company's Real Estate Loans with
the amount advanced equal to between 40% to 60% of the principal amount of the
Real Estate Loans pledged. Only Real Estate Loans approved by the bank are
eligible for advances. The agreement contains certain financial covenants and
expires on May 5, 1996. Through December 31, 1995, the Company has not drawn
upon the line of credit. No assurance can be given that such line of credit will
be renewed. In the event that any portion of an outstanding line of credit is
not renewed, the Company will be required to reevaluate its reserve requirements
and review its portfolio for possible disposition of Real Estate Loans.
The Company also may incur indebtedness in order to meet expenses of holding
any property on which the Company has theretofore made a Real Estate Loan and
has subsequently taken over the operation of the underlying property as a result
of default or to protect a Real Estate Loan. In addition, the Company may incur
indebtedness in order to complete development of a property on which the Company
has theretofore made a development or land loan and has subsequently taken over
the operation of the underlying property as a result of default. The Company
also may utilize a line of credit in order to prevent default under senior loans
or to discharge them entirely if this becomes necessary to protect the Company's
Real Estate Loans. Such borrowing may be required if foreclosure proceedings are
instituted by the holder of a mortgage loan that is senior to that held by the
Company.
The amount and terms and conditions of any line of credit will affect the
profitability of the Company and the funds that will be available to satisfy its
obligations. Interest will be payable on a line of credit regardless of the
profitability of the Company. The Company's ability to increase its return
through borrowings will depend in part upon the Company's ability to generate
income from its borrowed funds based upon the difference between the Company's
return on investment from such borrowed funds and the interest rate charged by
its lender for the funds. Adverse economic conditions could increase defaults by
borrowers on the Real Estate Loans and could impact the Company's ability to
make its loan payments to its lenders. Adverse economic conditions could also
increase the Company's borrowing costs and cause the terms on which funds become
available to be unfavorable. In such circumstances, the Company could be
required to liquidate some of its loans at a significant loss.
The Company may pledge Real Estate Loans as security for any borrowing. In
addition, any property acquired by the Company upon default and foreclosure
of any Real Estate Loan may be pledged as collateral for a line of credit.
Remedies Upon Default by Borrower
Real Estate Loans are subject to the risk of default, in which event the
Company would have the added responsibility of foreclosing and protecting its
loans. In the state of Arizona, where all of the Company's Real Estate Loans
have been made, the Company will have a choice of two alternative and mutually
exclusive remedies in the event of default by a borrower with respect to a Real
Estate Loan
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secured by a deed of trust. In such case, the Company either can proceed to
cause the trustee under the deed of trust to exercise its power of sale under
the deed of trust and sell the collateral at a non-judicial sale or it can
choose to have the deed of trust judicially foreclosed as if it were a mortgage.
In the event of default by a borrower with respect to a Real Estate Loan secured
by a mortgage, the Company will have no election of remedies and will be
required to foreclose the mortgage judicially. Remedies in other states in which
the Company may acquire or make Real Estate Loans could vary significantly from
those available in Arizona.
In Arizona, mortgages must be foreclosed judicially. A judicial foreclosure
is usually a time consuming and potentially expensive undertaking. Under
judicial foreclosure proceedings, the borrower does not have a right to
reinstate the loan and can only cure its default by either paying the entire
accelerated sum owing under the note before the judicial sale or by redeeming
the property within six months after the date of the judicial sale.
The major advantage of a deed of trust is that Arizona law permits the
beneficiary of a deed of trust to foreclose the deed of trust as a mortgage
through judicial proceedings or by a non-judicial trustee's sale. A non-judicial
trustee's sale conducted under the power of sale provided to the trustee usually
is more expedient and less expensive than a judicial foreclosure and may be held
any time after 90 days from the date of recording of the trustee's notice of
sale. Furthermore, unlike a judicial foreclosure, there is no redemption period
following a non-judicial sale. The major disadvantage of a deed of trust is the
significantly greater reinstatement rights granted to a borrower. Before a
trustee's sale, the borrower under a deed of trust has a right to reinstate the
contract and deed of trust as if no breach or default had occurred by payment of
the entire amount then due, plus costs and expenses, reasonable attorney's fees
actually incurred, the recording fee for a cancellation of notice of sale and
the trustee's fee. The accelerated portion of the loan balance need not be paid
in order to reinstate. As a result, a borrower could repeatedly be in default
under a deed of trust and use its right to reinstate the loan under successive
non-judicial sale proceedings. Nonetheless, the borrower's right to reinstate a
deed of trust without payment of the accelerated portion of the loan balance can
be cut off upon the filing of an action to judicially foreclose the deed of
trust as a mortgage.
In the case of both judicial and non-judicial foreclosure, if a proceeding
under the Bankruptcy Code is commenced by or against a person or other entity
having an interest in the real property that secures payment of the loan, then
the foreclosure will be prevented from going forward until authorization to
foreclose is obtained from the Bankruptcy Court. During the period when the
foreclosure is stayed by the Bankruptcy Court, it is possible that payments,
including payments from any interest reserve account, may not be made on the
loan if so ordered by the Bankruptcy Court. The length of time during which the
foreclosure is delayed as a result of the bankruptcy, and during which the
payments may not be made, is indefinite. In addition, under the Bankruptcy Code,
the Bankruptcy Court may render a portion of the loan unsecured if it determines
that the value of the real property that secures payment of the loan is less
than the balance of the loan and, under other circumstances, may modify or
otherwise impair the lien of the lender in connection with the defaulted
mortgage or deed of trust.
The Company will have the right to bid on and purchase the property
underlying a Real Estate Loan at a foreclosure or trustee's sale following a
default by the borrower. If the Company is the successful bidder and purchases a
property underlying a Real Estate Loan, the Company's return on such Real Estate
Loan will depend upon the amount of cash or other funds that can be realized by
selling or otherwise disposing of the property. There can be no assurance that
the Company will be able to sell such a property on terms favorable to the
Company particularly as the result of real estate market conditions. Recent
conditions in real estate loan markets have affected the availability and cost
of real estate loans, thereby making real estate financing difficult and costly
to obtain and impeding the ability of real estate owners to sell their
properties at favorable prices. Such conditions may adversely affect the ability
of the Company to sell the property securing a Real Estate Loan in the event
that the Company deems it in the best interests of the Company to foreclose upon
and purchase the property. To the extent that the funds
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generated by such actions are less than the amounts advanced by the Company
for such Real Estate Loan, the Company may realize a loss of all or part of
the principal and interest on the loan. Thus, there can be no assurance that
the Company will not experience financial loss upon a default by a borrower.
Transactions with Affiliates and Joint Venture Investments
The Company does not intend to make Real Estate Loans to affiliates.
The Company may enter into joint ventures, general partnerships and loan
participations with third parties for the purpose of acquiring or making Real
Estate Loans in accordance with the Company's investment policies. Any such
investments will be made consistently with the then existing Securities and
Exchange Commission interpretations and case law respecting the applicability of
the Investment Company Act.
Ownership of Underlying Real Estate
The Company will make or acquire Real Estate Loans for investment or make or
acquire Real Estate Loans primarily for sale or other disposition in the
ordinary course of business. The Company may be required to engage in real
estate operations if, among other things, the Company forecloses on a property
on which it has made or acquired a Real Estate Loan and takes over management of
the property. Since the ownership of equity interests in real estate underlying
a Real Estate Loan is not an objective of the Company, such operations would
only be conducted for a limited period pending sale of the properties so
acquired.
Ownership of Mortgage Assets
The Company owns Mortgage Assets as described herein consisting of Mortgage
Interests (commonly known as "residuals") and Mortgage Instruments. Mortgage
Instruments consist of mortgage certificates representing interests in pools of
residential mortgage loans ("Mortgage Certificates").
Mortgage Interests entitle the Company to receive Net Cash Flows (as
described below) on Mortgage Instruments securing or underlying Mortgage
Securities and are treated for federal income tax purposes as interests in real
estate mortgage investments conduits ("REMICs") under the Code. Substantially
all of the Company's Mortgage Instruments and the Mortgage Instruments
underlying the Company's Mortgage Interests currently secure or underlie
mortgage-collateralized bonds ("CMOs" or "Bonds"), mortgage pass-through
certificates ("MPCs" or "Pass-Through Certificates") or other mortgage
securities (collectively "Mortgage Securities").
The Company's Mortgage Assets generate net cash flows ("Net Cash Flows")
which result primarily from the difference between (i) the cash flows on
Mortgage Instruments (including those securing or underlying various series of
Mortgage Securities as described herein) together with reinvestment income
thereon and (ii) the amount required for debt service payments on such Mortgage
Securities, the costs of issuance and administration of such Mortgage Securities
and other borrowing and financing costs of the Company. The revenues received by
the Company are derived from the Net Cash Flows received directly by the Company
as well as any Net Cash Flows received by subsidiaries of the Company and paid
to the Company as dividends and any Net Cash Flows received by trusts in which
the Company has a beneficial interest to the extent of distributions to the
Company as the owner of such beneficial interest. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Mortgage Certificates consist of fully-modified pass-through mortgage-backed
certificates guaranteed by GNMA ("GNMA Certificates"), mortgage participation
certificates issued by FHLMC ("FHLMC Certificates"), guaranteed mortgage
pass-through certificates issued by FNMA ("FNMA Certificates") and certain other
types of mortgage certificates and mortgage-collateralized obligations ("Other
Mortgage Certificates").
Mortgage Securities consisting of CMOs and MPCs typically are issued in
series. Each such series generally consists of several serially maturing classes
secured by or representing interests in Mortgage Instruments. Generally,
payments of principal and interest received on the Mortgage Instruments
(including prepayments on such Mortgage Instruments) are applied to principal
and interest payments on
8
<PAGE>
one or more classes of the CMOs or MPCs. Scheduled payments of principal and
interest on the Mortgage Instruments and other collateral are intended to be
sufficient to make timely payments of interest on such CMOs or MPCs and to
retire each class of such CMOs or MPCs by its stated maturity or final payment
date. The Company also finances its Mortgage Assets in long-term structured
obligations involving borrowings or other credit arrangements secured by
Mortgage Instruments or Mortgage Interests owned by the Company.
Current Mortgage Assets
As of December 31, 1995, the Company owned approximately $52,310,000 in
principal amount of Mortgage Instruments which have been pledged in a long-term
financing transaction. As of December 31, 1995, the Company also owned Mortgage
Interests with respect to seven separate series of Mortgage Securities with a
net amortized cost balance of approximately $5,445,000 (representing the
aggregate purchase price paid for such Mortgage Interests less the amount of
distributions on such Mortgage Interests received by the Company representing a
return of investment).
The Company owns Mortgage Interests which entitle it to receive the Net Cash
Flows on the Mortgage Instruments pledged to secure the following four series of
Bonds: (i) the Series 1 Mortgage- Collateralized Bonds issued by Westam Mortgage
Financial Corporation ("Westam") (the "Series 1 Bonds" or "Westam 1"), (ii) the
Series 3 Mortgage-Collateralized Bonds issued by Westam (the "Series 3 Bonds" or
"Westam 3"), (iii) the Series 65 Mortgage-Collateralized Bonds issued by
American Southwest Financial Corporation ("ASW") (the "Series 65 Bonds" or "ASW
65") and (iv) the Series 5 Mortgage-Collateralized Bonds issued by Westam (the
"Series 5 Bonds" or "Westam 5"). Each of these series of Bonds are CMOs, and an
election has been made to treat the Mortgage Instruments and other collateral
securing such series of Bonds as REMICs.
The Company also owns the residual interest in the REMIC with respect to the
Series 17 Multi-Class Mortgage Participation Certificates (Guaranteed) ("FHLMC
17") issued by the Federal Home Loan Mortgage Corporation ("FHLMC") and 20.20%
and 45.07%, respectively, of the residual interests in the REMICs with respect
to the FNMA REMIC Trust 1988-24 Guaranteed REMIC Pass-Through Certificates
("FNMA 24") and the FNMA REMIC Trust 1988-25 Guaranteed REMIC Pass-Through
Certificates ("FNMA 25") issued by the Federal National Mortgage Association
("FNMA"). An election has been made to treat the Mortgage Instruments and other
collateral underlying each of the above series of Mortgage Securities as REMICs.
The Company has not purchased any Mortgage Interests since October 26, 1988.
All of the series described above collectively are referred to herein as the
"Outstanding Mortgage Securities." For purposes of the remainder of this section
only, "Bonds," "Pass-Through Certificates," "Mortgage Securities," "Net Cash
Flows" and "Mortgage Instruments" refer to the Bonds issued by ASW and Westam,
the Pass-Through Certificates issued by FHLMC and FNMA, the Outstanding Mortgage
Securities, the Net Cash Flows generated by the Mortgage Instruments securing or
underlying the Specified Mortgage Securities, and the Mortgage Instruments
securing or underlying the Outstanding Mortgage Securities, respectively. Unless
otherwise specified, information as to the Outstanding Mortgage Securities is as
of their respective closing dates.
The Outstanding Mortgage Securities were issued during the period from April
29, 1988 through October 26, 1988 in an aggregate original principal amount of
$2,700,200,000, and all are collateralized by or represent interests in Mortgage
Instruments.
The Mortgage Instruments Securing or Underlying the Outstanding Mortgage
Securities
The Mortgage Instruments pledged as collateral for the Bonds are beneficially
owned by the Issuers of such Bonds, and the Company owns the residual interests
in the REMICs with respect to the Bonds. The Mortgage Instruments contained in
the pools underlying the Pass-Through Certificates are beneficially owned by the
holders of the Pass-Through Certificates (including the holders of the residual
interests relating thereto), and the Company owns 100%, 20.20% and 45.07% of the
residual interest in the REMICs with respect to FHLMC 17, FNMA 24 and FNMA 25,
respectively. The Mortgage Instruments securing or underlying the Mortgage
Securities consist of mortgage-backed certificates guaranteed by
9
<PAGE>
GNMA ("GNMA Certificates"), mortgage participation certificates issued by FHLMC
("FHLMC Certificates") and guaranteed mortgage pass-through certificates issued
by FNMA ("FNMA Certificates"). As of December 31, 1995, the GNMA Certificates
had an aggregate principal balance of $196,990,000, the FHLMC Certificates had
an aggregate principal balance of $59,874,000 and the FNMA Certificates had an
aggregate principal balance of $137,665,000.
The following table sets forth the remaining principal balances, the weighted
average pass-through rates, the weighted average mortgage coupon rates and the
weighted average remaining terms to maturity of the Mortgage Instruments pledged
as collateral for each series of Bonds or contained in the pool underlying each
series of Pass-Through Certificates. The information presented in the table was
provided to the Company by the respective Issuer of each series of Mortgage
Securities. The Company did not issue such Mortgage Securities and is relying on
the respective Issuers regarding the accuracy of the information provided.
Summary Of Mortgage Instrument Characteristics
Weighted
Weighted Average
Weighted Average Remaining
Series Of Type Of Remaining Average Mortgage Term
Mortgage Mortgage Principal Pass-through Coupon To Maturity
Securities Instrument Balance(1) Rate Rate (Years)(1)
- ------------ ------------ -------------- -------------- ---------- -------------
(In Thousands)
Westam 1 GNMA $ 37,942 10.50% 11.00% 20.8
Westam 3 GNMA 44,717 9.50 10.00 21.7
ASW 65 GNMA 45,315 10.00 10.50 21.6
Westam 5 GNMA 69,016 9.00 9.50 21.2
FHLMC 17 FHLMC 59,874 10.00 10.57 21.5
FNMA 24 FNMA 56,824(2) 10.00 10.65 22.2
FNMA 25 FNMA 80,840(3) 9.50 10.14 22.2
- ----------
(1) As of December 31, 1995.
(2) The Company owns a 20.2% interest in the residual interest in the REMIC with
respect to FNMA 24.
(3) The Company owns a 45.07% interest in the residual interest in the REMIC
with respect to FNMA 25.
The prepayment experience on the Mortgage Instruments securing or underlying
the Mortgage Securities will significantly affect the average life of such
Mortgage Securities because all or a portion of such prepayments will be paid to
the holders of the related Mortgage Securities as principal payments on such
Mortgage Securities. Prepayments on mortgage loans commonly are measured by a
prepayment standard or model. The model used herein (the "Prepayment Assumption
Model") is based on an assumed rate of prepayment each month of the unpaid
principal amount of a pool of new mortgage loans expressed on an annual basis.
100% of the Prepayment Assumption Model assumes that each mortgage loan
underlying a Mortgage Certificate (regardless of interest rate, principal
amount, original term to maturity or geographic location) prepays at an annual
compounded rate of 0.2% per annum of its outstanding principal balance in the
first month after origination, that this rate increases by an additional 0.2%
per annum in each month thereafter until the thirtieth month after origination
and in the thirtieth month and in each month thereafter prepays at a constant
prepayment rate of 6% per annum.
The Prepayment Assumption Model does not purport to be either a historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the mortgage loans underlying the Mortgage Certificates, and there is
no assurance that the prepayment of the mortgage loans underlying the Mortgage
Certificates will conform to any of the assumed prepayment rates. The rate of
principal payments on pools of mortgage loans is influenced by a variety of
economic, geographic, social and other factors. In general, however, Mortgage
Instruments are likely to be subject to higher prepayment rates if prevailing
interest rates fall significantly below the interest rates on the mortgage loans
underlying the Mortgage Certificates. Conversely, the rate of prepayment would
be expected to decrease if interest rates rise above the interest
10
<PAGE>
rate on the mortgage loans underlying the Mortgage Certificates. Other factors
affecting prepayment of mortgage loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties, assumability of mortgage loans and servicing decisions.
Description of the Outstanding Mortgage Securities
Each series of Bonds constitutes a nonrecourse obligation of the Issuer of
such series of Bonds payable solely from the Mortgage Instruments and any other
collateral pledged to secure such series of Bonds. All of the Bonds are rated
"AAA" by Standard & Poor's Corporation. All of the Bonds have been issued in
series pursuant to indentures (the "Indenture") between the Issuer and a bank
trustee (the "Trustee") which holds the underlying Mortgage Instruments and
other collateral pledged to secure the related series of Bonds.
Each series of the Bonds is structured so that the monthly payments on the
Mortgage Instruments pledged as collateral for such series of Bonds, together
(in certain cases) with reinvestment income on such monthly payments at the
rates required to be assumed by the rating agencies rating such Bonds or at the
rates provided pursuant to a guaranteed investment contract, will be sufficient
to make timely payments of interest on each class of Bonds of such series (each
a "Bond Class"), to begin payment of principal on each Bond Class not later than
its "first mandatory principal payment date" or "first mandatory redemption
date" (as defined in the related Indenture) and to retire each Bond Class no
later than its "stated maturity" (as defined in the related Indenture).
Each series of Pass-Through Certificates represents beneficial ownership
interests in a pool ("Mortgage Pool") of Mortgage Instruments formed by the
Issuer thereof and evidences the right of the holders of such Pass-Through
Certificates to receive payments of principal and interest at the pass-through
rate with respect to the related Mortgage Pool. Pass-Through Certificates issued
by FHLMC or FNMA generally are not rated by any rating agency. The Pass-Through
Certificates issued by FHLMC have been issued pursuant to an agreement ("Pooling
Agreement") which generally provides for the formation of the Mortgage Pool and
the performance of administrative and servicing functions. The Pass-Through
Certificates issued by FNMA have been issued pursuant to a trust agreement
("Trust Agreement") between FNMA in its corporate capacity and in its capacity
as trustee which generally provides for the formation of the Mortgage Pool and
the performance of administrative and servicing functions. The Pass-Through
Certificates are not obligations of the Issuers thereof.
Each series of Pass-Through Certificates is structured so that the monthly
payments of principal and interest on the Mortgage Instruments in the Mortgage
Pool underlying such series of Pass-Through Certificates are passed through on
monthly payment dates to the holders of each class of Pass-Through Certificates
of such series (each a "Pass-Through Class") as payments of principal and
interest, respectively, and each Pass-Through Class is retired no later than its
"final payment date" or "final distribution date" (as defined in the related
Pooling Agreement or Trust Agreement, respectively).
With respect to FHLMC 17, FHLMC guarantees to each holder of a Pass-Through
Certificate that bears interest the timely payment of interest at the applicable
interest rate on such Pass-Through Certificates. FHLMC also guarantees to each
holder of a Pass-Through Certificate the payment of the principal amount of such
holder's Pass-Through Certificates as payments are made on the underlying FHLMC
Certificates. Such guarantees, however, do not assure the Company any particular
return on its Mortgage Interests with respect to these Mortgage Securities. The
FHLMC 17 Pass-Through Certificates have been issued pursuant to agreements
between the holders of the Pass-Through Certificates and FHLMC, which holds and
administers, or supervises the administration of, the pool of Mortgage
Instruments underlying the Pass-Through Certificates.
With respect to FNMA 24 and FNMA 25, FNMA is obligated to distribute on a
timely basis to the holders of the Pass-Through Certificates required
installments of principal and interest and to distribute the principal balance
of each Class of Pass-Through Certificate in full no later than its applicable
"final distribution date," whether or not sufficient funds are available in the
"certificate account" (as defined in the offering circular). The guarantee of
FNMA is not backed by the full faith and credit of the United States. The FNMA
24 and FNMA 25 Pass-Through Certificates represent beneficial ownership
interests
11
<PAGE>
in trusts created pursuant to a Trust Agreement. FNMA is responsible for the
administration and servicing of the mortgage loans underlying the FNMA
Certificates, including the supervision of the servicing activities of lenders,
if appropriate, the collection and receipt of payments from lenders, and the
remittance of distributions and certain reports to holders of the Pass-Through
Certificates.
Interest payments on the Bond Classes and the Pass-Through Classes (together
"Classes") are due and payable on specified payment dates, except with respect
to principal only or zero coupon Classes ("Principal Only Classes") which do not
bear interest and with respect to compound interest Classes ("Compound Interest
Classes") as to which interest accrues but generally is not paid until other
designated Classes in the same series of Mortgage Securities are paid in full.
The payment dates for the Mortgage Securities are monthly. Each Class of
Mortgage Securities, except the Principal Only Classes, provides for the payment
of interest either at a fixed rate, or at an interest rate which resets
periodically based on a specified spread from (i) the arithmetic mean of
quotations of the London interbank offered rates ("LIBOR") for one-month
Eurodollar deposits, subject to a specified maximum interest rate, (ii) the
Monthly Weighted Average Cost of Funds Index for Eleventh District Savings
Institutions (the "COF Index"), as published by the Federal Home Loan Bank of
San Francisco (the "FHLB/SF"), subject to a specified maximum interest rate or
(iii) other indices specified in the prospectus supplement or offering circular
for a series of Mortgage Securities.
According to information furnished by the FHLB/SF, the COF Index is based on
financial reports submitted monthly to the FHLB/SF by Eleventh District savings
institutions and is computed by the FHLB/SF for each month by dividing the cost
of funds (interest paid during the month by Eleventh District savings
institutions on savings, advances and other borrowings) by the average of the
total amount of those funds outstanding at the end of that month and at the end
of the prior month, subject to certain adjustments. According to such FHLB/SF
information, the COF Index reflects the interest cost paid on all types of funds
held by Eleventh District savings institutions, and is weighted to reflect the
relative amount of each type of funds held at the end of the particular month.
The COF Index has been reported each month since August 1981.
Unlike most other interest rate measures, the COF Index does not necessarily
reflect current market rates. A number of factors affect the performance of the
COF Index which may cause the COF Index to move in a manner different from
indices tied to specific interest rates, such as United States Treasury Bills or
LIBOR. Because of the various maturities of the liabilities upon which the COF
Index is based (which may be more or less sensitive to market interest rates),
the COF Index may not necessarily reflect the average prevailing market interest
rates on new liabilities of similar maturities. Additionally, the COF Index may
not necessarily move in the same direction as market interest rates, because as
longer term deposits or borrowings mature and are renewed at prevailing market
interest rates, the COF Index is influenced by the differential between the
prior rates on such deposits or borrowings and the cost of new deposits or
borrowings. Moreover, the COF Index represents the weighted average cost of
funds for Eleventh District savings institutions for the month prior to the
month in which the COF Index is customarily published, and therefore lags
current rates. Movement of the COF Index, as compared to other indices tied to
specific interest rates, also may be affected by changes instituted by the
FHLB/SF in the method used to calculate the COF Index.
Principal payments on each Class of the Mortgage Securities are made on
monthly payment dates. Payments of principal generally are allocated to the
earlier maturing Classes until such Classes are paid in full. However, in
certain series of Mortgage Securities, principal payments on certain Classes are
made concurrently with principal payments on other Classes of such series of
Mortgage Securities in certain specified percentages (as described in the
prospectus supplement or offering circular for such series of Mortgage
Securities). In addition, payments of principal on certain Classes (referred to
as "SAY," "PAC," "SMRT" or "SPPR" Classes) occur pursuant to a specified
repayment schedule to the extent funds are available therefor, regardless of
which other Classes of the same series of Mortgage Securities remain
outstanding. Each of the Principal Only Classes has been issued at a substantial
discount from par value and receives only principal payments. Certain Classes of
the Mortgage Securities will be subject to redemption at the option of the
Issuer of such series (in the case of FHLMC 17) or upon the instruction of the
Company (as the holder of the residual interest in the REMICs with respect to
the other Mortgage
12
<PAGE>
Securities Classes subject to redemption) on the dates specified herein in
accordance with the specific terms of the related Indenture, Pooling Agreement
or Trust Agreement, as applicable. Certain Classes which represent the residual
interest in the REMIC with respect to a series of Mortgage Securities (referred
to as "Residual Interest Classes") generally also are entitled to additional
amounts, such as the remaining assets in the REMIC after the payment in full of
the other Classes of the same series of Mortgage Securities and any amount
remaining on each payment date in the account in which distributions on the
Mortgage Instruments securing or underlying the Mortgage Securities are invested
after the payment of principal and interest on the related Mortgage Securities
and the payment of expenses.
The table below sets forth certain information regarding the Mortgage
Securities with respect to which the Company owns all or a part of the Mortgage
Interest.
Summary Of The Mortgage Securities
<TABLE>
<CAPTION>
Weighted
Remaining Average Pass-
Principal Through Rate
Balance of the of the
Mortgage Mortgate First
Instruments Instruments Stated Optional
Collateralizing Collateralizing Maturity Redemption
or Underlying or Underlying Initial Remaining or Final or
the Mortgage the Mortgage Issue Principal Principal Payment Termination
Series(1) Securities(2) Securities Class Date Balance Balance(2) Coupon Date Date
- ----------- --------------- --------------- --------- --------- ---------- ----------- ------------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Variable
Westam 1 $37,942 10.50% 1-A 4/29/88 $109,228 $ 6,794 Rate(3) 9/1/12 6/1/98
1-B 4/29/88 85,142 0 8.55 1/1/09 6/1/98
1-C 4/29/88 44,380 8,056 8.55 9/1/12 6/1/98
1-Z(4) 4/29/88 11,250 23,774 9.90 5/1/18 6/1/98
Variable
Westam 3 $44,717 9.50% 3-A 6/30/88 $ 80,960 $ 0 Rate(5) 6/1/07 8/1/98
3-B 6/30/88 54,000 0 6.00 10/1/02 8/1/98
3-C 6/30/88 16,000 0 6.00 10/1/04 8/1/98
3-D 6/30/88 25,040 0 6.00 6/1/07 8/1/98
3-E(4) 6/30/88 24,000 45,551 9.45 7/1/18 8/1/98
ASW 65 $45,315 10.00% 65-A 6/29/88 $ 41,181 $ 0 9.00% 5/1/14 8/1/98
Variable
65-B 6/29/88 7,746 0 Rate(6) 9/1/14 8/1/98
65-C(7) 6/29/88 11,872 0 8.25 10/1/18 8/1/98
65-D(7) 6/29/88 21,169 0 7.25 10/1/18 8/1/98
65-E(7) 6/29/88 6,965 0 7.50 10/1/18 8/1/98
65-F(7) 6/29/88 19,977 11,042 7.50 10/1/18 8/1/98
65-G(7) 6/29/88 12,540 12,540 7.50 10/1/18 8/1/98
Variable
65-H(7) 6/29/88 60,344 22,656 Rate(6) 10/1/18 8/1/98
65-I(7) 6/29/88 32,230 0 7.00 10/1/18 8/1/98
Variable
65-J(7) 6/29/88 23,476 0 Rate(6) 10/1/18 8/1/98
65-Z(4) 6/29/88 12,500 0 7.75 10/1/18 8/1/98
Variable
Westam 5 $69,016 9.00% 5-A 7/28/88 $ 70,488 $ 844 Rate(8) 8/1/18 (9)
Zero
5-B (10) 7/28/88 39,784 477 Coupon 8/1/18 (9)
5-Y (7) 7/28/88 139,728 68,861 8.95 8/1/18 (9)
FHLMC 17 $59,874 10.00% 17-A (7) 9/30/88 $ 26,000 $ 0 9.35% 5/15/02 (14)
17-B (7) 9/30/88 98,850 0 9.00 9/15/19 (14)
Variable
17-C 9/30/88 92,400 0 Rate(12) 10/15/19 (14)
Zero
17-D(10) 9/30/88 27,750 0 Coupon 10/15/19 (14)
17-E(7) 9/30/88 $ 75,400 0 9.30 2/15/12 (14)
17-F(7) 9/30/88 26,700 0 9.35 12/15/13 (14)
17-G(7) 9/30/88 67,400 0 9.55 3/15/17 (14)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Weighted
Remaining Average Pass-
Principal Through Rate
Balance of the of the
Mortgage Mortgate First
Instruments Instruments Stated Optional
Collateralizing Collateralizing Maturity Redemption
or Underlying or Underlying Initial Remaining or Final or
the Mortgage the Mortgage Issue Principal Principal Payment Termination
Series(1) Securities(2) Securities Class Date Balance Balance(2) Coupon Date Date
- ----------- --------------- --------------- --------- --------- ---------- ----------- ------------ ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
17-H (7) 9/30/88 34,700 16,166 9.70 6/15/18 (14)
17-I (7) 9/30/88 43,696 43,696 9.90 10/15/19 (14)
17-J (7) 9/30/88 7,104 0 9.00 10/15/19 (14)
17-R (11) 9/30/88 100 12 Residual(13) 10/15/19 (14)
FNMA 24(15) $56,824 10.00% 24-A (7) 10/26/88 $ 13,300 $ 0 7.00% 3/25/02 (19)
24-B (7) 10/26/88 33,400 0 7.00 3/25/11 (19)
24-C (7) 10/26/88 13,200 0 7.00 2/25/13 (19)
24-D (7) 10/26/88 29,100 0 7.00 3/25/16 (19)
24-E (7) 10/26/88 16,600 6,944 7.00 7/25/17 (19)
Variable
24-F (16) 10/26/88 217,350 30,970 Rate(17) 10/25/18 (19)
24-G (7) 10/26/88 18,899 18,899 7.00 10/25/18 (19)
24-H (7) 10/26/88 36,100 0 9.50 7/25/16 (19)
24-J (7) 10/26/88 32,850 0 9.50 4/25/17 (19)
24-K (7) 10/26/88 72,151 0 9.50 10/25/18 (19)
Zero
24-L 10/26/88 17,050 0 Coupon 10/25/18 (19)
24-R (11) 10/26/88 100 11 Residual(18) 10/25/18 (19)
FNMA 25(20) $80,840 9.50% 25-A (7)(21) 10/25/88 $165,000 $ 0 9.00% 6/25/08 (19)
25-B (7) 10/25/88 270,823 70,942 9.25 10/25/18 (19)
Variable Rate
25-C (16) 10/25/88 37,500 9,823 (22) 10/25/18 (19)
Variable Rate
25-D 10/25/88 70,912 0 (23) 10/25/18 (19)
Variable Rate
25-E 10/25/88 139,575 0 (24) 10/25/18 (19)
Zero
25-G (25) 10/25/88 66,115 0 Coupon 10/25/18 (19)
25-R (11) 10/25/88 75 75 Residual(26) 10/25/18 (19)
<FN>
- ----------
(1) Unless otherwise specified, the Company owns 100% of the residual interest
with respect to each series of Mortgage Securities.
(2) As of December 31, 1995.
(3) Determined monthly, and generally equal to 0.65% above the arithmetic mean
of LIBOR, subject to a maximum rate of 12.75%.
(4) Compound Interest Class.
(5) Determined monthly, and generally equal to 0.70% above the arithmetic mean
of LIBOR, subject to a maximum rate of 13.00%.
(6) Determined monthly, and generally equal to 0.80%, 0.70% and 0.95%,
respectively, above the arithmetic mean of LIBOR, subject to a maximum rate
of 13.50%, 12.50% and 14.00%, respectively.
(7) SAY, PAC, SMRT, SPPR or other Class which receives a preferential
allocation of principal payments during a designated period.
(8) Determined monthly, and generally equal to 0.85% above the arithmetic mean
of LIBOR, subject to a maximum rate of 14.00%.
(9) The Westam 5 Bonds may be redeemed at any time after the aggregate
principal amount of such Bonds then outstanding is less than 10% of their
original aggregate principal amount.
(10) Principal Only Class.
(11) Residual Interest Class. This class represents the "residual interest"
in the REMIC with respect to such Series.
(12) Determined monthly, and generally equal to 0.90% above the arithmetic mean
of LIBOR, subject to a maximum rate of 13.00%.
(13) The Class of Pass-Through Certificates will bear interest on each payment
date in an amount equal to the amounts received as interest payments on the
FHLMC Certificates in the Mortgage Pool on such payment date, less the
aggregate amount of interest payable on the FHLMC 17 Pass-Through
Certificates (other than the Residual Interest Class) on such payment date.
</FN>
</TABLE>
14
<PAGE>
(14) The FHLMC 17 Pass-Through Certificates may be redeemed in whole, but not in
part, on any payment date if the aggregate principal amount of such
Pass-Through Certificates outstanding is less than 1% of the initial
principal amount of such Pass-Through Certificates.
(15) The Company owns a 20.20% interest in the residual interest in the REMIC
with respect to FNMA 24.
(16) Paid principal in the manner of a SAY, PAC, SMRT or SPPR Class with respect
to a portion of its principal balance.
(17) Determined monthly, and generally equal to 2.10% below the product of 1.15
and the arithmetic mean of LIBOR, subject to a maximum rate of 12.50%.
(18) On each payment date, the Class of Pass-Through Certificates will receive
the excess of the sum of all distributions payable on the FNMA Certificates
underlying the Pass-Through Certificates on such payment date over all
amounts distributable on such payment date as principal and interest on
each Class of the Pass-Through Certificates (including amounts
distributable as principal on this Class of Pass-Through Certificates).
(19) Not subject to optional redemption.
(20) The Company owns a 45.07% interest in the residual interest in the REMIC
with respect to FNMA 25.
(21) On any payment date on which the principal distributions from the FNMA
Certificates underlying the FNMA 25 Pass-Through Certificates are not
sufficient to reduce the principal balance of this Class of such
Pass-Through Certificates to a designated amount, the amount of interest
distributed from the FNMA Certificates underlying such Pass-Through
Certificates not required to be paid out as interest on such Pass-Through
Certificates on such payment date ("Excess Interest") will be applied to
reduce the principal balance of this Class to the designated amount for
that payment date.
(22) Determined monthly, and generally equal to .7586% above the product of
.9632 and the COF Index, subject to a maximum rate of 11.3054%.
(23) Determined monthly, and generally equal to 1.5229% below the product of
.9247 and the COF Index, subject to a maximum rate of 9.50%.
(24) Determined monthly, and generally equal to 1.25% above the COF Index,
subject to a maximum rate of 14.00%.
(25) On any payment date on which this Class of Pass-Through Certificates
receives principal payments, 30% of the Excess Interest will be applied to
reduce the principal balance of this Class.
(26) When Excess Interest is used to pay principal on Classes 25-A and 25-G, the
amount of Excess Interest so applied will be added to the principal balance
of this Class of Pass-Through Certificates. In addition, on each Payment
Date, this Class of Pass- Through Certificates will receive the excess of
the sum of all distributions payable on the FNMA Certificates underlying
the FNMA 25 Pass-Through Certificates on such payment date over all amounts
distributable on such payment date as principal and interest (including
amounts distributable as principal on this Class of Pass-Through
Certificates).
Net Cash Flows
The Net Cash Flows available from the Company's Mortgage Assets are derived
principally from three sources: (i) the favorable spread between the interest or
pass-through rates on the Mortgage Instruments securing or underlying the
Mortgage Securities and the interest or pass-through rates of the Mortgage
Securities Classes, (ii) reinvestment income in excess of the amount thereof
required to be applied to pay the principal of and interest on the Mortgage
Securities, and (iii) any amounts available from prepayments on the Mortgage
Instruments securing or underlying the Mortgage Securities that are not
necessary for the payments on the Mortgage Securities. The amount of Net Cash
Flows generally decreases over time as the Classes are retired. Distributions of
Net Cash Flows represent both the return on and the return of the investment on
the Mortgage Assets purchased. In addition, the Company may exercise its rights
in accordance with the terms of a series of Mortgage Securities to redeem all or
a part of such series prior to maturity and sell the related Mortgage
Instruments, in which case the net payment (after payment of the Mortgage
Securities and related costs) will be remitted to the Company.
The principal factors which influence Net Cash Flows are as follows:
(1) Other factors being equal, Net Cash Flows in each payment period
tend to decline over the life of a series of Mortgage Securities,
because (a) as normal amortization of principal and principal
prepayments occur on the Mortgage Instruments securing or underlying
such Mortgage Securities, the principal balances of earlier,
lower-yielding Classes of such Mortgage Securities are reduced, thereby
resulting in a reduction of the favorable spread between the weighted
average interest or pass-through rate on outstanding Classes and the
interest or pass-through rates on the Mortgage Instruments securing or
underlying such Mortgage Securities and (b) the higher coupon Mortgage
Instruments are likely to be prepaid faster, reinforcing the same
effect.
(2) The rate of prepayments on the Mortgage Instruments securing or
underlying a series of Mortgage Securities significantly affects the Net
Cash Flows. Because prepayments shorten the life
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of the mortgage loans underlying the Mortgage Instruments securing or
underlying a series of Mortgage Securities, a higher rate of prepayments
normally reduces overall Net Cash Flows. The rate of prepayments may be
expected to vary over the life of a series of Mortgage Securities, and
the timing of prepayments will further affect their significance. The
rate of prepayments is affected by mortgage interest rates and other
factors. Generally, increases in mortgage interest rates reduce
prepayment rates, while decreases in mortgage interest rates increase
prepayment rates. Because an important component of Net Cash Flows
derives from the spread between the weighted average interest or
pass-through rate on the Mortgage Instruments securing or underlying a
series of Mortgage Securities and the weighted average interest or
pass-through rate on the outstanding classes of such Mortgage Securities
Classes, a higher than expected level of prepayments concentrated during
the early life of such Mortgage Securities (thereby reducing the
weighted average life of the earlier, lower-yielding Classes) has a more
negative effect on Net Cash Flows than the same volume of prepayments
have at a constant rate over the life of such Mortgage Securities or at
a later date.
(3) With respect to Variable Rate Classes of Mortgage Securities,
increases in the level of the index on which the interest rate for such
Variable Rate Classes are based increase the interest or pass-through
rate payable on Variable Rate Classes and thus reduce or, in some
instances, eliminate Net Cash Flows, while decreases in the level of the
relevant index decrease the interest or pass- through rate payable on
Variable Rate Classes and thus increase Net Cash Flows.
(4) The interest rate at which the monthly cash flow from the
Mortgage Instruments securing or underlying a series of Mortgage
Securities may be reinvested until payment dates for such Mortgage
Securities influences the amount of reinvestment income contributing to
the Net Cash Flows unless such reinvestment income is not paid to the
owner of the related Mortgage Asset.
(5) The administrative expenses of a series of Mortgage Securities
(if any) may increase as a percentage of Net Cash Flows as the
outstanding balances of the Mortgage Instruments securing or underlying
such Mortgage Securities decline, if some of such administrative
expenses are fixed. In later years, it can be expected that fixed
expenses will exceed the available cash flow. Although reserve funds
generally are established to cover such shortfalls, there can be no
assurance that such reserves will be sufficient to cover such
shortfalls. In addition, although each series of Mortgage Securities
(other than FNMA 24 or FNMA 25) generally has an optional redemption
provision that allows the Issuer thereof (in the case of FHLMC 17) or
the Company (as the holder of the residual interest in the REMICs with
respect to the other series of Mortgage Securities) to retire the
remaining Classes that are subject to redemption or retirement after a
certain date, there can be no assurance that the Issuer or the Company
will exercise such options and, in any event, in a high interest rate
environment the market value of the remaining Mortgage Instruments
securing or underlying the Mortgage Securities may be less than the
amount required to retire the remaining outstanding Classes. The Company
may be liable for, or its return subject to, administrative expenses
relating to a series of Mortgage Securities if reserves prove to be
insufficient. Moreover, any unanticipated liability or expenses with
respect to the Mortgage Securities could adversely affect Net Cash
Flows.
Other Policies
Investment Company Act
The Company intends to operate in such a manner as not to be within the
definition of investment company under the Investment Company Act of 1940. The
Company may not invest in public entities similar to the Company and may not
invest in securities of other issuers for the purpose of exercising control.
Hedging
The Company from time to time hedges its Mortgage Assets and indebtedness in
whole or in part so as to provide protection from interest rate fluctuations or
other market movements. With respect to assets, hedging can be used either to
increase the liquidity or decrease the risk of holding an asset by guaranteeing,
in whole or in part, the price at which such asset may be disposed of prior to
its maturity. With
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respect to indebtedness, hedging can be used to limit, fix or cap the interest
rate on variable interest rate indebtedness. The Company's hedging activities
may include the purchase of interest rate cap agreements, the consummation of
interest rate swaps, the purchase of Stripped Mortgage Securities, the
maintenance of short positions in financial futures contracts, the purchase of
put options on such contracts and the trading of forward contracts. For a
description of the Company's current hedging activities and the costs associated
therewith, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Certain of the federal income tax requirements that the
Company has been required to satisfy to qualify as a REIT have limited its
ability to hedge. See "Business -- Federal Income Tax Considerations --
Qualification of the Company as a REIT."
Capital Resources
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions and restrictions that may be contained in
the Company's financing arrangements from time to time and other factors as
described herein, the Company may increase the amount of funds available for its
activities with the proceeds of borrowings including borrowings under lines of
credit, loan agreements, repurchase agreements and other credit facilities.
Subject to the foregoing, the Company's borrowings may bear fixed or variable
interest rates, may require additional collateral in the event that the value of
existing collateral declines on a market value basis and may be due on demand or
upon the occurrence of certain events. Repurchase agreements are agreements
pursuant to which the Company sells assets for cash and simultaneously agrees to
repurchase such assets on a specified date for the same amount of cash plus an
interest component. The Company also may increase the amount of funds available
for investment through the issuance of debt securities (including Mortgage
Securities). In general, the Company may make use of short-term borrowings to
provide additional funds when it is able to borrow at interest rates lower than
the yields expected to be earned on such funds. If borrowing costs are higher
than the yields generated by such funds, the Company's ability to utilize
borrowed funds may be substantially reduced and it may experience losses.
A substantial portion of the assets of the Company are pledged to secure
indebtedness incurred by the Company. Accordingly, such assets will not be
available for distribution to the stockholders of the Company in the event of
the Company's liquidation except to the extent that the value of such assets
exceeds the amount of such indebtedness.
On December 17, 1992, a wholly owned, limited-purpose subsidiary of the
Company issued $31,000,000 of Secured Notes under an Indenture to several
institutional investors. The Secured Notes bear interest at 7.81% per annum
which is payable quarterly. Scheduled principal repayments were $1,532,000 per
quarter during the first four quarters, $991,000 per quarter for the next 12
quarters, $901,000 per quarter for the next eight quarters and $721,000 per
quarter thereafter through February 15, 2001.
The Secured Notes are secured by the Company's Mortgage Assets with respect
to Westam 1, Westam 3, Westam 5, ASW 65, FNMA 1988-24 and FNMA 1988-25 and by a
reserve fund in an initial amount of $3,100,000 with a specified maximum amount
of $7,750,000. The reserve fund will be used to make the scheduled principal and
interest payments on the Secured Notes if the cash flow available from the
pledged Mortgage Assets is not sufficient to make the scheduled payments.
Under the Indenture, the cash flow from the Mortgage Assets pledged to secure
the Secured Notes is used to make payments of interest and scheduled principal
on the Secured Notes and to pay expenses in connection therewith. Any excess
cash flow will be applied to prepay the Secured Notes at par or to increase the
reserve fund up to its $7,750,000 maximum amount or will be remitted to the
Company, in each case depending on the level of certain specified financial
ratios set forth in the Indenture.
The Company used the proceeds from the issuance of the Secured Notes to repay
a term loan, to repay its short-term borrowings under a repurchase agreement, to
establish the reserve fund and for working capital.
Under a revolving line of credit agreement with a bank, the Company may
borrow up to $5,000,000, upon payment of a 1/2 % commitment fee with interest
payable monthly at prime plus 1/2 %. Such advances
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are to be secured by certain of the Company's Real Estate Loans with the amount
advanced equal to between 40% to 60% of the principal amount of the Real Estate
Loans pledged. Only Real Estate Loans approved by the bank are eligible for
advances. The agreement contains certain financial covenants and expires on May
5, 1996. Through December 31, 1995, the Company has not drawn upon the line of
credit.
The Company in the future may increase its capital resources by making
additional offerings of its Common Stock or securities convertible into Common
Stock. The effect of such offerings may be the dilution of the equity of
stockholders of the Company or the reduction of the market price of shares of
the Company's Common Stock, or both. The Company is unable to estimate the
amount, timing or nature of future sales of its Common Stock as such sales will
depend upon the Company's need for additional funds, market conditions and other
factors.
Employees
The Company currently has three full time salaried employees.
The Subcontract Agreement
The Company is a party to an amended Subcontract Agreement pursuant to which
American Southwest Financial Group, L.L.C. ("ASFG"), as assignee of American
Southwest Financial Services, Inc. ("ASFS") performs certain services for the
Company in connection with the structuring, issuance and administration of
Mortgage Securities issued by the Company or by any Issuer affiliated with ASFS
with respect to which the Company acquires Mortgage Interests. Under the
Subcontract Agreement, the Company will be charged for any series of CMOs an
issuance fee of .1% of the principal amount for such series, generally subject
to a minimum fee of $10,000 and a maximum fee of $100,000, and for any series of
Pass-Through Certificates an issuance fee not to exceed .125% of the principal
amount of such series. In addition, the Company will be charged an
administration fee for each series of CMOs equal to a maximum of $20,000 per
year and for any series of Pass-Through Certificates an administration fee equal
to up to .025% of the amount of the series outstanding at the beginning of each
year; provided that commencing February 1, 1996 the administrative fee with
respect to ASW 65, Westam 1, Westam 3, Westam 5 and Westam 6, has been reduced
from $20,000 per year to $16,250 per year.
The Subcontract Agreement had an initial term expiring on December 31, 1989
and continuing from year to year thereafter. The Company has the right to
terminate the Subcontract Agreement upon the happening of certain specified
events, including a breach by ASFG of any provision contained in the Subcontract
Agreement. ASFG is a privately held Arizona limited liability company and
indirectly owns up to 25% of the capital interest of the preferred members of
ASFG. Alan D. Hamberlin directly or indirectly owns up to 25% of the Capital
Interest held by the common members of ASFG.
Based on reports received by the Company from ASFG, ASFS received
administration fees of $235,000 for the year ended December 31, 1991, $227,000
for the year ended December 31, 1992, $201,000 for the year ended December 31,
1993, $165,000 for the year ended December 31, 1994 and $144,000 for the year
ended December 31, 1995.
Pursuant to the Subcontract Agreement, ASFS will not assume any
responsibility other than to render the services called for therein. ASFS and
its directors, officers, stockholders and employees will not be liable to the
Company or any of its directors or stockholders for any acts or omissions by
ASFS, its directors, officers, stockholders or employees under or in connection
with the Subcontract Agreement, except by reason of acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties under
the Subcontract Agreement.
Special Considerations
Real Estate Loan Considerations
New Business Activity
The Company has been involved in making and acquiring Real Estate Loans since
December 1993. Although officers of the Company have substantial real estate
investment and real estate loan experience,
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they have no prior experience in the management or operation of a company
engaged primarily in making and acquiring such loans. The Company competes for
acceptable Real Estate Loans with numerous other companies, many of which have
greater resources and experience than the Company and its officers.
Real Estate Market Conditions
The Company's Real Estate Loan activities subject the Company to the risks
generally incident to the ownership of and investment in real estate because of
the impact of such risks on the ability of its borrowers' to repay their Real
Estate Loans and the ability of the Company to resell, refinance or dispose of
property following a foreclosure for an amount at least equal to its loan. These
risks include general and local economic conditions; the investment climate for
real estate investments; the demand for and supply of competing properties;
local market conditions and neighborhood characteristics; unanticipated holding
costs; the availability and cost of necessary utilities and services; real
estate tax rates and other operating expenses; governmental rules and fiscal
policies, including rent, wage and price controls; zoning and other land use
regulations; environmental controls; acts of God (which may result in uninsured
losses); the treatment for federal and state income tax purposes of income
derived from real estate; the levels of interest rates; the availability and
cost of financing in connection with the purchase, sale or refinancing of
properties; and other factors beyond the control of the Company. In recent
years, the presence of hazardous substances or toxic waste has adversely
affected real estate values in various areas of the country and resulted in the
imposition of costs and damages to real estate owners and lenders. In addition,
certain expenses related to properties, such as property taxes and insurance,
tend to increase over time. These and other factors could result in an increase
in the Company's cost of holding any real estate it acquires as a result of a
foreclosure or adversely affect the terms and conditions upon which the Company
may sell or refinance any properties held by it. In addition, all Real Estate
Loans, including the Company's Real Estate Loans, are subject to loss resulting
from the priority of real estate tax liens, mechanic's liens and materialman's
liens. Therefore, the success of the Company will depend in part upon events
beyond its control.
Lack of Geographic Diversification
Through December 31, 1995, the Company has made Real Estate Loans on real
estate located only in Arizona. As a result of this geographic concentration,
unfavorable economic conditions in Arizona could increase the likelihood of
defaults on the Company's Real Estate Loans and affect the Company's ability to
protect the principal of and interest on such loans following foreclosures upon
the real properties securing such loans. The Company intends to continue to
assess real estate lending opportunity in Arizona and other parts of the
Southwest.
Concentration of Loan Amounts
The Company can be expected to make Real Estate Loans to a relatively small
number of borrowers as a result of the amount of its funds available for lending
activities. Therefore, the Company may be subject to increased risk to the
extent that a single borrower defaults with respect to a loan constituting
significant percentage of the Company's total Real Estate Loan portfolio.
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Loans Secured by Unimproved Properties
The Company's Real Estate Loans generally are secured by deeds of trust,
mortgages or other similar instruments on unimproved real property. A Real
Estate Loan secured by unimproved real property involves a particularly high
degree of risk since such property generally does not generate income other than
as the result of a sale or refinancing, and the borrower's loan payments
generally will be the Company's only source of cash flow on the property until a
sale or refinancing. Accordingly, the Company will be subject to a greater risk
of loss in the event of delinquency or default by a borrower on a Real Estate
Loan secured by a deed of trust, mortgage or similar instrument on unimproved
real property than if such Real Estate Loan were secured by a deed of trust,
mortgage or similar instrument on improved real property.
Balloon Payments
The Company makes or acquires a significant number of Real Estate Loans that
do not provide for the payment of all or any part of principal prior to maturity
including all of its currently outstanding Real Estate Loans. The ability of a
borrower to repay the outstanding principal amount of such a Real Estate Loan at
maturity will depend primarily upon the borrower's ability to obtain, by
refinancing, sale or other disposition of the property or otherwise, sufficient
funds to pay the outstanding principal balance at a time when such funds may be
difficult to obtain, with the result that the borrower may default on its
obligation to repay the amount of the Real Estate Loan in accordance with the
terms of the deed of trust, mortgage or other security instrument. In addition,
a substantial reduction in the value of the property securing a Real Estate Loan
could precipitate or otherwise result in the borrower's default. Any such
default could result in a loss to the Company of all or part of the principal of
or interest on such a Real Estate Loan.
Development and Construction Loans
The development and interim construction loans which the Company may make
generally are expected to generate higher rates of return than other types of
Real Estate Loans, but generally will entail greater risks. Such a loan will be
subject to substantial risk because the ability of the borrower to complete or
dispose of the project being developed or constructed on the underlying real
estate and repay the loan may be affected by various factors including adverse
changes in general economic conditions, interest rates, the availability of
permanent mortgage funds, local conditions, such as excessive building resulting
in an excess supply of real estate, a decrease in employment reducing the demand
for real estate in the area, and the borrower's ability to control costs and to
conform to plans, specifications and time schedules, which will depend upon the
borrower's management and financial capabilities and which may also be affected
by strikes, adverse weather and other conditions beyond the borrower's control.
Such contingencies and adverse factors could deplete the borrower's borrowed
funds and working capital and could result in substantial deficiencies
precluding compliance with specified conditions of commitments for permanent
mortgage funds relied on as a primary source of repayment of the loan. In
addition, in some jurisdictions, construction and development lenders, such as
the Company, in certain circumstances, may be liable for defective construction.
The possibility of such liability may be increased if, in addition to its loan,
the Company is deemed to have an equity position in the developer or contractor
or in the property being developed or improved. This, however, is not likely to
be the case since the Company does not plan to make construction and development
loans to affiliates.
Risk of Joint Ventures
The Company may enter into joint ventures, general partnerships and loan
participations with third parties for the purpose of making or acquiring Real
Estate Loans. Any such investments will be made consistently with the then
existing Securities and Exchange Commission interpretations and case law
respecting the applicability of the Investment Company Act of 1940, as amended
(the "Investment Company Act"). Any such Real Estate Loans also will be subject
to certain additional restrictions. See "Business -- Real Estate Loans --
Transactions with Affiliates and Joint Venture Investments." Joint ventures,
general partnerships and loan participations involve the potential risk of
impass on decision making in situations in which no single party fully controls
the Real Estate Loan with the result that neither the Company nor any other
party will be able to exercise full authority with respect to the
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protection of the investment in the loan. In addition, although the Company or
another party to the transaction often will have the right to purchase the
interest of any other party in the Real Estate Loan, the party seeking to
acquire the interest of another party may not have sufficient funds to do so.
Junior Loans
Although not currently contemplated, the Company in the future may make or
acquire junior mortgage loans or wrap-around mortgage loans. A junior mortgage
loan or a wrap-around mortgage loan generally entails greater risks than a first
mortgage loan on the same property. In the event of default under a senior loan,
the holder of a junior loan may be forced to cure the default on the senior loan
in order to prevent the sale of the underlying property or to discharge the
senior loan entirely by paying the entire amount of principal and interest then
outstanding in the event of the acceleration of the senior loan. There can be no
assurance that the Company will have sufficient funds to pay amounts owing on
the related first loan to prevent default or to discharge the first loan
entirely. If the Company decides to cure a default under a senior mortgage loan
or purchases an underlying property at a foreclosure or trustee's sale, the
Company will be subject to the risks of ownership of real property.
Sufficiency of Collateral
Many of the Company's Real Estate Loans are made on a nonrecourse basis. In
such a case, the Company relies for its security solely on the value of the
underlying real property and does not have any right to make any claims for
repayment personally against the borrower. Other Real Estate Loans may be full
recourse loans, may be secured by personal guarantees or may be secured by one
or more items of real or personal property in addition to the property
constituting the primary security for the Real Estate Loan. Nevertheless, the
property constituting the primary security for a Real Estate Loan in most cases
will be the primary source for repayment of the loan upon maturity or in the
event of a default. The ability of the borrower to pay the outstanding balance
of a Real Estate Loan (particularly a non- amortizing Real Estate Loan) on
maturity will depend primarily upon the borrower's ability to obtain sufficient
funds by refinancing, sale or other disposition of the property.
The risk of a Real Estate Loan will increase as the ratio of the amount of
the loan to the value of the property securing such loan increases because the
real property will possess less protective equity in the event of a default by
the borrower. The principal amount of each Real Estate Loan, when added to the
aggregate amount of any senior indebtedness outstanding on the property,
generally will not exceed 95% of the Company's assessment of the value of the
property at the time the loan is made or acquired. The Company will make an
assessment of the loan-to-value ratio prior to making a Real Estate Loan. In
making its assessment of the value of the real estate to secure a Real Estate
Loan, the Company will review any available appraisals of the property by
qualified appraisers, the purchase price of the property, recent sales of
comparable properties, and other factors. The Company generally will rely on its
own assessment of the value of a property rather than requiring a current
appraisal. Although appraisals are estimates of value which should not be relied
upon as measures of true worth or realizable value, neither the Company nor any
of its officers are qualified real estate appraisers and the absence of an
independent appraisal removes an independent estimate of value. There can be no
assurance that the Company's estimated values will be comparable or bear any
relation to the actual market value of a property or the amount that could be
realized upon the refinancing, sale or other disposition of the property. As a
result, the amount realized in connection with the refinancing, sale or other
disposition of the property by the buyer in the ordinary course of business by
the Company or at or following a foreclosure sale may not equal the then
outstanding balance of the related Real Estate Loan.
Remedies Upon Default by Borrower
Real Estate Loans are subject to the risk of default, in which event the
Company would have the added responsibility of foreclosing and protecting its
loans. See "Business -- Real Estate Loans -- Remedies Upon Default by Borrower"
for a discussion of remedies in the event of default by a borrower with respect
to a Real Estate Loan.
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Effect of Interest Rate Fluctuations; Length of Maturity and Prepayment
Provisions
The Company's Real Estate Loans generally are fixed-rate debt instruments of
specified maturities, including all of the Company's currently outstanding Real
Estate Loans. The economic value of an investment in the Company's shares may
fluctuate to the extent that market rates of interest for similar Real Estate
Loans of similar maturities exceed or fall below the Company's anticipated rate
of return on investment on its Real Estate Loans.
Certain Real Estate Loans may be variable or adjustable-rate Real Estate
Loans under which the interest rate will be based on the prime or other
benchmark rate published by a designated institutional lender, and will be
periodically adjusted as such prime or other benchmark rate is adjusted. The
adjustability of the interest rate with respect to such Real Estate Loans
generally will reduce the risk that the economic value of an investment in the
Company's shares will decline in the event that market rates of interest for
similar Real Estate Loans of similar maturities exceed the Company's initial
return on investment. However, in the event of a general decline in such market
rates of interest, such adjustability will result in a lowering of the the
Company's return on investment, thereby lowering the economic value of an
investment in the Company's shares.
The economic value of an investment in the Company's shares also may
fluctuate as a result of the length of maturity and prepayment terms of its Real
Estate Loans, depending in part upon whether funds to be received by the Company
upon maturity of a Real Estate Loan or prepayment of all or a portion of the
principal amount of a Real Estate Loan may be reinvested at interest rates
higher or lower than the return on the original Real Estate Loan. A substantial
number of the Real Estate Loans comprising the Company's portfolio can be
expected to allow the borrower to prepay all or a portion of the principal
amount at any time without penalty.
In some cases, the Company may attempt to obtain equity participations in
connection with making Real Estate Loans designed to provide an increased return
when such equity participations are deemed by management to be in the best
interests of the Company. Such a participation can be expected to be in the form
of additional interest based upon items such as gross receipts from the property
securing the loan in excess of certain levels or appreciation in the value of
the property on whose security the Company has made the Real Estate Loan based
upon either sales price or increases in appraised value. There can be no
assurance, however, that any Real Estate Loans will be structured in this manner
or that any such loans will provide enhanced returns.
Interest Ceilings Under Usury Statutes
Interest on Real Estate Loans may be subject to state usury laws imposing
maximum interest charges and possible penalties for violation, including
restitution of excess interest and unenforceability of the debt. Uncertainty may
exist in determining what constitutes interest, including, among other things,
the treatment of loan commitment fees or other fees payable by the borrower
under a Real Estate Loan. The Company does not intend to make Real Estate Loans
with terms that may violate applicable state usury provisions. Nevertheless,
uncertainties in determining the legality of rates of interest and other
borrowing charges under some statutes may result in inadvertent violations.
Environmental Considerations
Real estate in general is subject to certain environmental risks arising from
the location or site on which a project is built or from materials used in
construction or stored on the property. Although the Company will use
commercially reasonable efforts to become aware of any environmental problem
with regard to any property before it makes a loan secured by that property, the
occurrence of health problems or other dangerous conditions caused by work on
the property may only become apparent after a lengthy period of time. Thus,
there can be no assurance that environmental problems will not develop with
respect to any property securing a Real Estate Loan. If hazardous substances are
discovered on such properties or discovered to be emanating from any such
properties, the owner of the property (including the Company) may be held
strictly liable for all costs and liabilities relating to such hazardous
substances. This could negatively affect the Company's security in the Real
Estate Loan.
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In addition, the construction of improvements on such property may be
adversely affected by regulatory, administrative or other procedures or by
requirements by local, state or federal environmental agencies including matters
relating to the clean up of hazardous or toxic substances. Such factors could
impede the ability of the borrower to obtain permits and approvals for a project
or result in the inability to develop or use the property.
Risks of Leverage
The Company may utilize a line of credit or other financing from a financial
institution to increase the amount of the Real Estate Loans that it is able to
make or acquire and to increase its potential returns. The Company also may
incur indebtedness in order to meet expenses of holding any property on which
the Company has theretofore made a Real Estate Loan and has subsequently taken
over the operation of the underlying property as a result of default or to
protect a Real Estate Loan. In addition, the Company may incur indebtedness in
order to complete development of a property on which the Company has theretofore
made a development or land loan and has subsequently taken over the operation of
the underlying property as a result of default. The Company also may utilize a
line of credit in order to prevent default under senior loans or to discharge
them entirely if this becomes necessary to protect the Company's Real Estate
Loans. Such borrowing may be required if foreclosure proceedings are instituted
by the holder of a mortgage loan that is senior to that held by the Company. In
addition, any such line of credit in all likelihood will require periodic
renewals, and no assurance can be given that such renewals will always be
approved. In the event that any portion of an outstanding line of credit is not
renewed, the Company will be required to reevaluate its reserve requirements and
review its portfolio for possible disposition of Real Estate Loans. See
"Business -- Real Estate Loans -- Borrowing Policies" for a description of the
Company's current bank line of credit.
The amount and terms and conditions of any line of credit will affect the
profitability of the Company and the funds that will be available to satisfy its
obligations. Interest will be payable on a line of credit regardless of the
profitability of the Company. The Company's ability to increase its return
through borrowings will depend in part upon the Company's ability to generate
income from its borrowed funds based upon the difference between the Company's
return on investment from such borrowed funds and the interest rate charged by
its lender for the funds. Adverse economic conditions could increase defaults by
borrowers on the Real Estate Loans and could impact the Company's ability to
make its loan payments to its lenders. Adverse economic conditions also could
increase the Company's borrowing costs and cause the terms on which funds become
available to be unfavorable. In such circumstances, the Company could be
required to liquidate some of its loans at a significant loss.
Competition for Real Estate Loans
The Company may encounter significant competition in making or acquiring Real
Estate Loans from banks, insurance companies, savings and loan associations,
mortgage bankers, pension funds, real estate investment trusts, investment
partnerships, investment bankers and other investors that have been or may be
formed with objectives similar to those of the Company. An increase in the
availability of mortgage funds may increase competition for making and acquiring
Real Estate Loans and may reduce the yields available thereon.
Lack of Suitable Loans
The Company will attempt to make or acquire Real Estate Loans which will
produce returns sufficient to allow the Company to satisfy its objectives.
However, there is no assurance that interest rates will be such that the Company
will be able to make or acquire Real Estate Loans that will provide a
satisfactory return on investment or that any Real Estate Loans will be
available which meet all of the Company's investment criteria.
Uninsured Losses
Some, but likely not all, of the Real Estate Loans made or acquired by the
Company will require that the borrower carry general public liability insurance
for claims arising on or about the real property in
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suitable amounts as determined by the Company. To the extent that a borrower
incurs uninsured liabilities or liabilities in excess of the applicable
coverage, such liabilities may adversely affect the borrower's ability to
repay the Real Estate Loan.
Enforceability of Loan Documents
The Company will attempt to determine that the instruments relating to each
Real Estate Loan and the underlying real property will be legal, valid, binding
and enforceable. However, there can be no assurance of such enforceability in
all instances, and the unenforceability of any such instruments could result in
a complete or partial loss of the principal of or interest on a Real Estate
Loan. The Company will have the power to waive certain fees and penalties in
connection with a default or late payments with respect to a Real Estate Loan
should the Company be advised that provisions governing such fees and penalties
may not be enforceable.
Mortgage Asset Considerations
General
The results of the Company's operations depend, among other things, on the
level of Net Cash Flows generated by the Company's Mortgage Assets. The
Company's Net Cash Flows vary primarily as a result of changes in mortgage
prepayment rates, short-term interest rates, reinvestment income and borrowing
costs, all of which involve various risks and uncertainties as set forth below.
Prepayment rates, interest rates, reinvestment income and borrowing costs depend
upon the nature and terms of the Mortgage Assets, the geographic location of the
properties securing the mortgage loans included in or underlying the Mortgage
Assets, conditions in financial markets, the fiscal and monetary policies of the
United States Government and the Board of Governors of the Federal Reserve
System, international economic and financial conditions, competition and other
factors, none of which can be predicted with any certainty.
The rates of return to the Company on its Mortgage Assets will be based upon
the levels of prepayments on the mortgage loans included in or underlying such
Mortgage Instruments, the rates of interest or pass-through rates on such
Mortgage Securities that bear variable interest or pass-through rates, and rates
of reinvestment income and expenses with respect to such Mortgage Securities.
Prepayment Risks
Mortgage prepayment rates vary from time to time and may cause declines in
the amount and duration of the Company's Net Cash Flows. Prepayments of
fixed-rate mortgage loans included in or underlying Mortgage Instruments
generally increase when then current mortgage interest rates fall below the
interest rates on the fixed-rate mortgage loans included in or underlying such
Mortgage Instruments. Conversely, prepayments of such mortgage loans generally
decrease when then current mortgage interest rates exceed the interest rates on
the mortgage loans included in or underlying such Mortgage Instruments. See
"Business -- Special Considerations -- Mortgage Asset Considerations -- Interest
Rate Fluctuation Risks." Prepayment experience also may be affected by the
geographic location of the mortgage loans included in or underlying Mortgage
Instruments, the types (whether fixed or adjustable rate) and assumability of
such mortgage loans, conditions in the mortgage loan, housing and financial
markets, and general economic conditions.
In general, without regard to the interest or pass-through rates payable on
classes of a series of Mortgage Securities, prepayments on Mortgage Instruments
bearing a net interest rate higher than or equal to the highest interest rate on
the series of Mortgage Securities secured by or representing interests in such
Mortgage Instruments ("Premium Mortgage Instruments") will have a negative
impact on the Net Cash Flows of the Company because such principal payments
eliminate or reduce the principal balance of the Premium Mortgage Instruments
upon which premium interest was earned.
Net Cash Flows on Mortgage Instruments securing or underlying a series of
Mortgage Securities also tend to decline over the life of such Mortgage
Securities because the classes of such Mortgage Securities with earlier stated
maturities or final payment dates tend to have lower interest rates. In
addition, because an important component of the Net Cash Flows on Mortgage
Instruments securing or underlying a series
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of Mortgage Securities derives from the spread between the weighted average
interest rate on such Mortgage Instruments and the weighted average interest or
pass-through rate on the outstanding amount of such Mortgage Securities, a given
volume of prepayments concentrated during the early life of a series of Mortgage
Securities reduces the weighted average lives of the earlier maturing classes of
such Mortgage Securities bearing lower interest or pass-through rates. Thus, an
early concentration of prepayments generally has a greater negative impact on
the Net Cash Flows of the Company than the same volume of prepayments at a later
date.
Mortgage prepayments also shorten the life of the Mortgage Instruments
securing or underlying Mortgage Securities, thereby generally reducing overall
Net Cash Flows as described under "Business -- Special Considerations --
Mortgage Asset Considerations -- Decline in Net Cash Flows from Mortgage
Assets."
No assurance can be given as to the actual prepayment rate of mortgage
loans included in or underlying the Mortgage Instruments in which the Company
has an interest.
Interest Rate Fluctuation Risks
Changes in interest rates affect the performance of the Company and its
Mortgage Assets. A portion of the Mortgage Securities secured by the Company's
Mortgage Instruments and a portion of the Mortgage Securities with respect to
which the Company holds Mortgage Interests bear variable interest or
pass-through rates based on short-term interest rates (primarily LIBOR). As of
December 31, 1995, $40,977,000 of the $308,381,000 of the Company's
proportionate share of Outstanding Mortgage Securities associated with the
Company's Mortgage Assets consisted of variable interest rate Mortgage
Securities. Consequently, changes in short-term interest rates significantly
influence the Company's Net Cash Flows.
Increases in short-term interest rates increase the interest cost on variable
rate Mortgage Securities and, thus, tend to decrease the Company's Net Cash
Flows. Conversely, decreases in short-term interest rates decrease the interest
cost on the variable rate Mortgage Securities and, thus, tend to increase the
Company's Net Cash Flows. As stated above, increases in mortgage interest rates
generally tend to increase the Company's Net Cash Flows by reducing mortgage
prepayments, and decreases in mortgage interest rates generally tend to decrease
the Company's Net Cash Flows by increasing mortgage prepayments. Therefore, the
negative impact on the Company's Net Cash Flows of an increase in short-term
interest rates generally will be offset in whole or in part by a corresponding
increase in mortgage interest rates while the positive impact on the Company's
Net Cash Flows of a decrease in short-term interest rates generally will be
offset in whole or in part by a corresponding decrease in mortgage interest
rates. See "Business -- Special Considerations -- Mortgage Asset Considerations
- -- Prepayment Risks." However, although short-term interest rates and mortgage
interest rates normally change in the same direction and therefore generally
offset each other as described above, they may not change proportionally or may
even change in opposite directions during a given period of time with the result
that the adverse effect from an increase in short-term interest rates may not be
offset to a significant extent by a favorable effect on prepayment experience
and visa versa. Thus, the net effect of changes in short-term and mortgage
interest rates may vary significantly between periods resulting in significant
fluctuations in Net Cash Flows.
Changes in interest rates also affect the Company's reinvestment income. See
"Business -- Special Considerations -- Mortgage Asset Considerations --
Reinvestment Income and Expense Risks." Changes in interest rates after the
Company acquires Mortgage Assets can result in a reduction in the value of such
Mortgage Assets and could result in losses in the event of a sale.
The Company from time to time utilizes hedging techniques to mitigate against
fluctuations in market interest rates. However, no hedging strategy can
completely insulate the Company from such risks, and certain of the federal
income tax requirements that the Company has been required to satisfy to qualify
as a REIT have severely limited the Company's ability to hedge. Even hedging
strategies permitted by the federal income tax laws could result in hedging
income which, if excessive, could result in the Company's disqualification as a
REIT for failing to satisfy certain REIT income tests. See "Business -- Federal
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Income Tax Considerations -- Qualification of the Company as a REIT." In
addition, hedging involves transaction costs, and such costs increase
dramatically as the period covered by the hedging protection increases.
Therefore, the Company may be prevented from effectively hedging its
investments. See "Business -- Hedging."
No assurances can be given as to the amount or timing of changes in
interest rates or their effect on the Company's Mortgage Assets or income
therefrom.
Reinvestment Income and Expense Risks
In the event that actual reinvestment rates decrease over the term of a
series of Mortgage Securities, reinvestment income will be reduced, which in
turn will adversely affect the Company's Net Cash Flows. The Company also may be
liable for or its return may be subject to the expenses relating to such
Mortgage Securities including administrative, trustee, legal and accounting
costs and, in certain cases, for any liabilities under indemnifications granted
to the underwriters, trustees or other Issuers. These expenses are used in
projecting Net Cash Flows; however, to the extent that these expenses are
greater than those assumed, such Net Cash Flows will be adversely affected.
Moreover, in later years, Mortgage Instruments securing or underlying a series
of Mortgage Securities may not generate sufficient cash flows to pay all of the
expenses incident to such Mortgage Securities. Although reserve funds generally
are established to cover such future expenses, there can be no assurance that
such reserves will be sufficient.
No assurance can be given as to the actual reinvestment rates or the
actual expenses incurred with respect to such Mortgage Securities.
Borrowing Risks
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions, restrictions that may be contained in the
Company's financing arrangements from time to time and other factors, the
Company may increase the amount of funds available to it with funds from
borrowings including borrowings under loan agreements, repurchase agreements and
other credit facilities. The Company's borrowings to date generally have been
secured by Mortgage Assets owned by the Company. Any borrowings may bear fixed
or variable interest rates, may require additional collateral in the event that
the value of existing collateral declines on a market value basis and may be due
on demand or upon the occurrence of certain events. To the extent that
borrowings bear variable interest rates, changes in short-term interest rates
will significantly influence the cost of such borrowings and could result in
losses in certain circumstances. See "Business -- Special Considerations --
Mortgage Asset Considerations -- Interest Rate Fluctuation Risks." The Company
also may increase the amount of its available funds through the issuance of debt
securities.
If the Company pledges Mortgage Assets to secure borrowed funds and the cost
of such borrowings increases to the extent that such cost exceeds the Net Cash
Flows on such Mortgage Assets, such an increase would reduce Net Cash Flows and
could result in losses in certain circumstances. No assurance can be given as to
the cost or availability of any such borrowings which the Company may determine
to incur. As of December 31, 1995, the Company's long-term debt represented by
its Secured Notes (as described herein) totalled $7,819,000 or 42.38% of
stockholders' equity.
No assurance can be given as to the actual effect of borrowings by the
Company.
Inability to Predict Effects of Market Risks
Because none of the above factors including changes in prepayment rates,
interest rates, reinvestment income, expenses and borrowing costs are
susceptible to accurate projection, the Net Cash Flows generated by the
Company's Mortgage Assets cannot be predicted.
Decline in Net Cash Flows from Mortgage Assets
The Company derives income from the Net Cash Flows received on its Mortgage
Assets. The rights to receive such Net Cash Flows ("Net Cash Flow Interests")
result from the Company's ownership of Mortgage Instruments and Mortgage
Interests with respect to Mortgage Instruments. Because the Company's Net Cash
Flows derive principally from the difference between the cash flows on the
Mortgage
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Instruments underlying Mortgage Securities and the required cash payments on the
Mortgage Securities, Net Cash Flows are the greatest in the years immediately
following the purchase of Mortgage Assets and decline over time unless the
Company reinvests its Net Cash Flows in additional Mortgage Assets which it
currently does not contemplate. This decline in Net Cash Flows over time occurs
as (i) interest rates on Mortgage Securities classes receiving principal
payments first generally are lower than those on later classes thus effectively
increasing the relative interest cost of the Mortgage Securities over time and
(ii) mortgage prepayments on Mortgage Instruments with higher interest rates
tend to be higher than on those with lower interest rates thus effectively
lowering the relative interest income on the Mortgage Instruments over time.
Pledged Assets
Substantially all of the Company's Mortgage Assets and the Net Cash Flows
therefrom currently are and in the future can be expected to be pledged to
secure or underlie Mortgage Securities, bank borrowings, repurchase agreements
or other credit arrangements. Therefore, such Mortgage Assets and Net Cash Flows
will not be available to the stockholders in the event of the liquidation of the
Company except to the extent that the market value thereof exceeds the amounts
due to the senior creditors. However, the market value of the Mortgage Assets is
uncertain because the market for Mortgage Assets of the type owned by the
Company is not well developed and fluctuates rapidly as the result of numerous
market factors (including interest rates and prepayment rates) as well as the
supply of and demand for such assets. In addition, the Company may pledge its
Real Estate Loans in the future to secure any indebtedness that it may incur.
Market Price of Common Stock
The market price of the Company's Common Stock has been and may be expected
to continue to be extremely sensitive to a wide variety of factors including the
Company's operating results, dividend payments (if any), actual or perceived
changes in short-term and mortgage interest rates and their relationship to each
other, actual or perceived changes in mortgage prepayment rates, and any
variation between the net yield on the Company's Mortgage Assets and prevailing
market interest rates. Any actual or perceived unfavorable changes in the
Company's operating results, or other factors resulting from the circumstances
described herein or other circumstances, may adversely affect the market price
of the Company's Common Stock.
Future Offerings of Common Stock
The Company in the future may increase its capital resources by making
additional offerings of its Common Stock or securities convertible into its
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share of the Company's Common Stock
which may result in the reduction of the market price of the Company's Common
Stock. The Company is unable to estimate the amount, timing or nature of future
sales of its Common Stock as such sales will depend upon market conditions and
other factors such as its need for additional equity, its ability to apply or
invest the proceeds of such sales of its Common Stock, the terms upon which its
Common Stock could be sold, and any restrictions on its ability to sell its
Common Stock contained in any credit facility or other agreements.
Potential Conflicts of Interest
The Company's Articles of Incorporation limit the liability of its directors
and officers to the Company and its stockholders to the fullest extent permitted
by Maryland law, and both the Company's Articles and Bylaws provide for
indemnification of the directors and officers to such extent. See "Directors and
Executive Officers of Registrant." In addition, the Subcontract Agreement limits
the responsibilities of ASFS and provides for the indemnification of ASFS, its
affiliates and their directors and officers against various liabilities. See
"Business -- The Subcontract Agreement."
Certain Consequences of REIT Status
The Company is considering making an election to not be taxed as a REIT for
federal income tax purposes. See "Business -- Introduction." To the extent the
Company maintains its qualification as a
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REIT for federal income tax purposes, the Company must continually satisfy
certain tests with respect to the sources of its income, the nature and
diversification of its assets, the amount of its distributions to stockholders
and the ownership of its stock. See "Business -- Federal Income Tax
Considerations -- Status of the Company as a REIT" and "Qualification of the
Company as a REIT." Among other things, these restrictions may limit the
Company's ability to acquire certain types of assets that it otherwise would
consider desirable, limit the ability of the Company to dispose of assets that
it has held for less than four years if the disposition would result in gains
exceeding specified amounts, limit the ability of the Company to engage in
hedging transactions that could result in income exceeding specified amounts,
and require the Company to make distributions to its stockholders at times that
the Company may deem it more advantageous to utilize the funds available for
distribution for other corporate purposes (such as the purchase of additional
assets or the repayment of debt) or at times that the Company may not have funds
readily available for distribution.
The Company's operations from time to time may generate taxable income in
excess of its net income for financial reporting purposes. The Company also may
experience a situation in which its taxable income is in excess of the actual
receipt of Net Cash Flows. See "Business -- Federal Income Tax Considerations --
Activities of the Company." To the extent that the Company does not otherwise
have funds available, either situation may result in the Company's inability to
distribute substantially all of its taxable income as required to maintain its
REIT status. See "Business -- Federal Income Tax Considerations." The Company
may be required to borrow funds to make the required distributions which could
have the effect of reducing the yield to its stockholders, to sell a portion of
its assets at times or for amounts that are not advantageous, or to distribute
amounts that represent a return of capital which would reduce the equity of the
Company. Currently, the Company has net operating losses ("NOL") and is allowed
to offset those losses against most current taxable income. Thus, until the NOL
has been used, the Company generally will not have to make dividend
distributions.
If the Company should not qualify as a REIT in any tax year, whether
voluntarily or involuntarily, it would be taxed as a regular domestic
corporation and, among other consequences, distributions to the Company's
stockholders would not be deductible by the Company in computing its taxable
income provided it had any taxable income after application of its NOL. Any such
tax liability would reduce the amount of cash available for distributions to the
Company's stockholders. See "Business -- Federal Income Tax Considerations." In
addition, the unremedied failure of the Company to be treated as a REIT for any
one year would disqualify the Company from being treated as a REIT for the four
subsequent years. During any period that the Company was not a REIT, there would
be no federal income tax restrictions on its activities.
Excess Inclusions
The portion of any dividends paid by the Company and characterized as "excess
inclusions" constitutes unrelated business taxable income to certain otherwise
tax-exempt stockholders, will constitute a floor for the taxable income of
stockholders not exempt from tax, and will not be eligible for any reduction (by
treaty or otherwise) in the rate of income tax withholding in the case of
nonresident alien stockholders. See "Business -- Federal Income Tax
Considerations -- Tax Consequences of Common Stock Ownership -- Excess Inclusion
Rule."
Marketability Of Shares Of Common Stock And Restrictions On Ownership
The Company's Articles of Incorporation prohibit ownership of its Common
Stock by tax-exempt entities that are not subject to tax on unrelated business
taxable income and by certain other persons (collectively "Disqualified
Organizations"). Such restrictions on ownership exist so as to avoid imposition
of a tax on a portion of the Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are designed to
prevent concentrated ownership of the Company which might jeopardize its
qualification as a REIT under the Code if the Company continues its REIT
election as well as its tax loss carryforward. Among other things, these
provisions provide (i) that any acquisition of shares that would result in the
disqualification of the Company as a REIT under the Code will be void, and (ii)
that in the event any person acquires, owns or
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is deemed, by operation of certain attribution rules set out in the Code, to own
a number of shares in excess of 9.8% of the outstanding shares of the Company's
Common Stock ("Excess Shares"), the Board of Directors, at its discretion, may
redeem the Excess Shares. In addition, the Company may refuse to effectuate any
transfer of Excess Shares and certain stockholders, and proposed transferees of
shares, may be required to file an affidavit with the Company setting forth
certain information relating, generally, to their ownership of the Company's
Common Stock. These provisions may inhibit market activity and the resulting
opportunity for the Company's stockholders to receive a premium for their shares
that might otherwise exist if any person were to attempt to assemble a block of
shares of the Company's Common Stock in excess of the number of shares permitted
under the Articles of Incorporation. Such provisions also may make the Company
an unsuitable investment vehicle for any person seeking to obtain (either alone
or with others as a group) ownership of more than 9.8% of the outstanding shares
of Common Stock. Investors seeking to acquire substantial holdings in the
Company should be aware that this ownership limitation may be exceeded by a
stockholder without any action on such stockholder's part in the event of a
reduction in the number of outstanding shares of the Company's Common Stock.
On December 13, 1993, the Board of Directors approved the adoption of a
program to repurchase up to 2,000,000 shares of the Company's Common Stock in
open market conditions. The decision to repurchase shares pursuant to the
program, and the timing and amount of such purchases, will be based upon market
conditions then in effect and other corporate considerations. Through December
31, 1995, 15,200 shares of Common Stock have been repurchased under such
program.
Investment Consequences of Exemption from Investment Company Act
The Company conducts its business so as not to become regulated as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Accordingly, the Company does not expect to be
subject to the restrictive provisions of the Investment Company Act. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate." Under current interpretations of the staff of the
Securities and Exchange Commission, in order to qualify for this exemption, the
Company must maintain at least 55% of its assets directly in Real Estate Loans,
Mortgage Loans, certain Mortgage Certificates and certain other qualifying
interests in real estate. The Company's ownership of certain Mortgage Assets
therefore may be limited by the Investment Company Act. In addition, certain
Mortgage Certificates may be treated as securities separate from the underlying
Mortgage Loans and, thus, may not qualify as "mortgages and other liens on and
interests in real estate" for purposes of the 55% requirement, unless such
Mortgage Certificates represent all the certificates issued with respect to an
underlying pool of mortgages. If the Company failed to qualify for exemption
from registration as an investment company, its ability to use investment
leverage would be substantially reduced, it would be prohibited from engaging in
certain transactions with affiliates, and it would be unable to conduct its
business as described herein. Such a failure to qualify could have a material
adverse effect on the Company.
Federal Income Tax Considerations
Qualification of The Company as a REIT
General
The Company has made an election to be treated as a real estate investment
trust ("REIT"). Thus, if the Company satisfies certain tests in each taxable
year with respect to the nature of its income, assets, share ownership and the
amount of its distributions, among other things, it generally should not be
subject to tax at the corporate level on its income to the extent that it
distributes cash in the amount of such income to its stockholders.
Generally, the unremedied failure of the Company to be treated as a REIT for
any taxable year could materially and adversely affect the stockholders as net
income of the Company would be taxed at ordinary
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corporate rate (currently a maximum of 34 percent), and the Company would not
receive a deduction for any dividends to the stockholders and thus cause a
material reduction of the cash available for distribution to the stockholders as
dividends.
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to the
sources of its income, the nature and diversification of its assets, the amount
of its distributions, and the ownership of the Company. The following is a
summary discussion of those various tests.
Sources of Income
The Company must satisfy three separate income tests for each taxable year
with respect to which it intends to qualify as a REIT: (i) the 75% income test;
(ii) the 95% income test; and (iii) the 30% income test.
Under the first test, at least 75% of the Company's gross income for the
taxable year must be derived from certain qualifying real estate related
sources. The 95% income test requires that at least 95% of the Company's gross
income for the taxable year must be derived from the items of income that either
qualify under the 75% test or are from certain other types of passive
investments. Finally, the 30% income test requires the Company to derive less
than 30% of its gross income for the taxable year from the sale or other
disposition of (1) real property, including interests in real property and
interests in mortgages on real property, held for less than four years, other
than foreclosure property or property involuntarily converted through
destruction, condemnation or similar events, (2) stock or securities or swap
agreements held for less than one year, and (3) property in "prohibited
transactions." A prohibited transaction is a sale or disposition of dealer
property that is not foreclosure property or, under certain circumstances, a
real estate asset held for at least four years.
If the Company inadvertently fails to satisfy either the 75% income test or
the 95% income test, or both, and if the Company's failure to satisfy either or
both tests is due to reasonable cause and not willful neglect, the Company may
avoid loss of REIT status by satisfying certain reporting requirements and
paying a tax equal to 100% of any excess nonqualifying income. See "Business --
Federal Income Tax considerations -- Taxation of the Company." There is no
comparable safeguard that could protect against REIT disqualification as a
result of the Company's failure to satisfy the 30% income test.
For so long as the Company intends to maintain its REIT election, the Company
anticipates that its gross income will continue to consist principally of the
income that satisfies the 75% income test. The composition and sources of the
Company income should allow the Company to satisfy the income tests during each
year of its existence. Certain short-term reinvestments, however, may generate
qualifying income for purposes of the 95% income test but nonqualifying income
for purposes of the 75% income test, and certain hedging transactions could give
rise to income that, if excessive, could result in the Company's
disqualification as a REIT for failing to satisfy the 30% income test, the 75%
income test, and/or the 95% income test. The company intends to monitor its
reinvestments and hedging transactions closely to attempt to avoid
disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75% of the
value of the Company's assets must be cash and cash items (including
receivables), federal government securities and qualifying real estate assets.
Qualifying real estate assets include interests in real property and mortgages,
equity interests in other REITs, any stock or debt instrument for so long as the
income therefrom is qualified temporary investment income and, subject to
certain limitations, interests in REMICs. The balance of the Company's assets
may be invested without restriction, except that holdings of the securities of
any one non-governmental issuer may not exceed 5% of the value of the Company's
assets or 10% of the outstanding voting securities of that issuer.
If the Company fails to satisfy the 75% asset test at the end of any quarter
of its taxable year as a result of its acquisition of securities or other
property during that quarter, the failure can be cured by a disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company will take such action as may be required to cure any failure to
satisfy the 75% asset test within 30 days after
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the close of any quarter The Company may not be able to cure any failure to
satisfy the 75% asset test, however, if assets that the Company believes are
qualifying assets for purposes of the 75% asset test are later determined to be
nonqualifying assets.
Distributions
Each taxable year, the Company must distribute as dividends to its
stockholders an amount at least equal to (i) 95% of its REIT taxable income
(determined before the deduction of dividends paid and excluding any net capital
gain) plus (ii) 95% of the excess of its net income from foreclosure property
over the tax imposed on such income by the Code, less (iii) any excess noncash
income (as determined under the Code).
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in the
following year if certain guidelines are followed. Further, if the Company fails
to meet the 95% distribution requirement as a result of an adjustment to the
Company's tax returns by the Internal Revenue Service ("IRS"), the Company may,
if the deficiency is not due to fraud with intent to evade tax or a willful
failure to file a timely tax return, retroactively cure the failure by paying a
deficiency dividend to stockholders and certain interest and penalties to the
IRS. The Company intends to make distributions to its stockholders on a basis
that will allow the Company to satisfy the distribution requirement. In certain
instances, however, the Company's pre-distribution taxable income may exceed its
cash flow and the Company may have difficulty satisfying the distribution
requirement. The Company intends to monitor closely the relationship between its
pre-distribution taxable income and its cash flow. It is possible, although
unlikely, that the Company may decide to terminate its REIT status as a result
of any such cash shortfall. Such a termination would have adverse consequences
to the stockholders. See "Business -- Federal Income Tax considerations --
Status of the Company as a REIT."
The Company has a net operating loss carryforward for income taxes (the
"NOL"). Under REIT tax rules, the Company is allowed to offset taxable income
(except for Excess Inclusion Income) by the available NOL and thus, under most
circumstances, is not currently required to make distributions to stockholders
except for Excess Inclusion Income.
Ownership of the Company
Shares of the Company's Common Stock must be held by a minimum of 100 persons
for at least 335 days in each taxable year after the Company's first taxable
year. Further, at no time during the second half of any taxable year after the
Company's first taxable year may more than 50% of the Company's shares be owned,
actually or constructively, by five or fewer individuals. To evidence compliance
with these requirements, the Company is required to maintain records that
disclose the actual ownership of its outstanding shares. Each year, in order to
satisfy that requirement, the Company will demand written statements from record
holders owning designated percentages of Common Stock disclosing, among other
things, the identities of the actual owners of such shares. The Company's
Articles of Incorporation contain repurchase provisions and transfer
restrictions designed to prevent violation of the latter requirement. Therefore,
the Company believes that its shares of Common Stock currently are owned by a
sufficient number of unrelated persons to allow the Company to satisfy the
ownership requirements for REIT qualification.
Taxation of the Company
For any taxable year in which the Company qualifies and elects to be treated
as a REIT under the Code, it generally will not be subject to federal income tax
on that portion of its taxable income that is distributed to its stockholders in
or with respect to that year. Regardless of distributions to stockholders,
however, the Company may become subject to a tax on certain types of income.
The Company uses the calendar year both for tax purposes and for financial
reporting purposes. Due to the differences between tax accounting rules and
generally accepted accounting principles, the Company's REIT Taxable Income will
vary from its net income for financial reporting purposes.
31
<PAGE>
Tax Consequences of Common Stock Ownership
The federal income tax consequences of ownership in the Company's common
is a complex matter and may vary depending on the income tax status of the
stockholder. Accordingly, the following discussion is intended to be general
in nature. Stockholders should consult their own tax advisors regarding the
income tax considerations with respect to their investments in the Company.
Dividend Income
Distributions to stockholders out of the Company's current or accumulated
earnings and profits will be taxable as "portfolio income" in October, November
or December of any calendar year and payable to stockholders of record as of a
specified date prior to the end of the year, however, that dividend will be
deemed to have been received by the stockholder on December 31 if the dividend
is actually paid in January of the following calendar year.
The Company's dividends will not be eligible for the dividends-received
deduction for corporations. If the Company's total distributions for a taxable
year exceed its current and accumulated earnings and profits, a portion of each
distribution will be treated first as a return of capital, reducing a
stockholder's basis in his shares (but not below zero), and then as capital gain
in the event such distributions are in excess of a stockholder's adjusted basis
in his shares.
Distributions properly designated by the Company as "capital gain dividends"
will be taxable to the stockholders as long-term capital gain, to the extent
those dividends do not exceed the Company's actual net capital gain for the
taxable year, without regard to the stockholder's holding period for his shares.
The Company will notify stockholders after the close of its taxable year
regarding the portions of the distributions that constitute ordinary income,
return of capital and capital gain. The Company also will notify shareholders
regarding their reported share of excess inclusion income. See "Excess Inclusion
Rule" below.
Excess Inclusion Rule
Ownership by the Company of residual interests in REMICs may adversely affect
the federal income taxation of the Company and of certain stockholders to the
extent those residual interests generate "excess inclusion income." The
Company's excess inclusion income during a calendar quarter generally will equal
the excess of its taxable income from residual interests in REMICs over its
"daily accruals" with respect to those residual interests for the calendar
quarter. The daily accruals are calculated by multiplying the adjusted issue
price of the residual interest by 120 percent of the long-term federal interest
rate in effect on the REMICs startup date. It is possible that the Company will
have excess inclusion income without associated cash. In taxable years in which
the Company has both a net operating loss and excess inclusion income it will
still have to report a minimum amount of taxable income equal to its excess
inclusion income. In order to maintain its REIT status, the Company will be
required to distribute at least 95 percent of its taxable income, even if its
taxable income is comprised exclusively of excess inclusion income and otherwise
has a net operating loss.
In general, each stockholder is required to treat the stockholder's allocable
share of the portion of the Company's "excess inclusions" that is not taxable to
the Company as an "excess inclusion" received by such stockholder. The portion
of the Company's dividends that constitute excess inclusions typically will rise
as the degree of leveraging of the Company's activities increase. Therefore, all
or a portion of the dividends received by the stockholders may be excess
inclusion income. Excess inclusion income will constitute unrelated business
taxable income for tax-exempt entities and may not be used to offset deductions
or net operating losses from other sources for most other taxpayers.
Tax-Exempt Organizations as Stockholders
The Code requires a tax-exempt stockholder of the Company to treat as
unrelated business taxable income its allocable share of the Company's excess
inclusions. The Company is likely to receive excess inclusion income. See
"Excess Inclusion Rule," above. The Company's Common Stock may not be held by
tax-exempt entities which are not subject to tax on unrelated business taxable
income.
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<PAGE>
Taxation of Foreign Stockholders
Distributions of cash generated by the Company in its operations that are
paid to foreign persons generally will be subject to United States withholding
tax rate at a rate of 30 percent or at a lower rate if a foreign person can
claim the benefit of a tax treaty. Notwithstanding the foregoing, distributions
made to foreign stockholders will not be subject to treaty withholding
reductions to the extent of their allocable shares of the portion of the
Company's excess inclusions that are not taxable to the Company for the period
under review. It is expected that the company will continue to have excess
inclusions. Distributions to foreign persons of cash attributable to gain on the
Company's sale or exchange of real properties, if any, generally will be subject
to full United States taxation and withholding. If a foreign person holds more
than five percent of the shares of the Company, gain from the sale of the
person's shares could be subject to full United States taxation if the Company
held any real property interests and was not a domestically controlled REIT.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many considerations. Accordingly, foreign investors in
the Company should consult their own tax advisors regarding the income and
withholding tax considerations with respect to their investments in the Company.
Foreign governments and organizations, and their instrumentalities, may not
invest in the Company.
Backup Withholding
The Company is required by the Code to withhold from dividends 20% of the
amount paid to stockholders, unless the stockholder (i) files a correct taxpayer
identification number with the Company, (ii) certifies as to no loss of
exemption from backup withholding and (iii) otherwise complies with the
applicable requirements of the backup withholding rules. The Company will report
to its stockholders and the IRS the amount of dividends paid during each
calendar year and the amount of tax withheld, if any. Stockholders should
consult their tax advisors as to the procedure for insuring that the Company
dividends to them will not be subject to backup withholding.
State and Local Taxes
The discussion herein concerns only the federal income tax treatment likely
to be accorded the Company and its stockholders. No discussion has been provided
regarding the state or local tax treatment of the Company and its stockholders.
The state and local tax treatment may not conform to the federal income tax
treatment described above and each investor should discuss such issues with his
state and local tax advisor.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 5333 North
Seventh Street, Suite 219, Phoenix, Arizona 85014, telephone (602) 265-8541.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
33
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "HPX." The high and low sales prices of shares of the Common Stock on the
New York Stock Exchange and the dividends per share paid by the Company for the
periods indicated were as follows:
Dividends
High Low Per Share
-------- ------- -------------
1995
First quarter .....$1 3/4 $1 $ 0
Second quarter ... 2 1/8 1 1/4 0
Third quarter ..... 2 1/8 1 1/2 0
Fourth quarter ... 1 7/8 1 3/8 .03
1994
First quarter ..... 1 1/2 1 0
Second quarter ... 1 1/2 1 0
Third quarter ..... 1 1/2 1 0
Fourth quarter ... 1 3/8 1 .02
On March 25, 1996, the closing sales price of the Common Stock of the Company
on the New York Stock Exchange was $1 5/8 . On December 31, 1995, the Company
had outstanding 9,716,517 shares of Common Stock which were held by
approximately 700 stockholders of record. Based upon information available to
the Company, the Company believes that there are approximately 6,000 beneficial
owners of its Common Stock.
So long as the Company elects to maintain its qualification as a REIT under
the Code for any taxable year, the Company, among other things, must distribute
as dividends to its stockholders an amount at least equal to (i) 95% of its REIT
taxable income (determined before the deduction of dividends paid and excluding
any net capital gain) plus (ii) 95% of the excess of its net income from
foreclosure property over the tax imposed on such income by the Code less (iii)
any excess non-cash income (as determined under the Code). The Company generally
intends that the cash dividends paid each year to its stockholders will equal or
exceed the Company's taxable income. The actual amount and timing of dividend
payments, however, will be at the discretion of the Board of Directors and will
depend upon the financial condition of the Company in addition to the
requirements of the Code.
The Company has accumulated a net operating loss carryforward, for income tax
purposes, of approximately $57,000,000 as of December 31, 1995. 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, the Company will not be required to distribute dividends to its
stockholders except to the extent of its "excess inclusion income." See
"Business -- Federal Income Tax Considerations -- Taxation of Common Stock
Ownership -- Excess Inclusion Income."
The Company may apply the principal from repayments, sales and refinancings
of the Company's Mortgage Assets to reduce the unpaid principal balance of its
Secured Notes. The Company also may, under certain circumstances, and subject to
the distribution requirements referred to above, make distributions of
principal. Such distributions of principal, if any, will be made at the
discretion of the Board of Directors and only to the extent permitted by the
Company's Indenture with respect to the Secured Notes.
Although a portion of the dividends may be designated by the Company as
capital gain or may constitute a return of capital, it is anticipated that
dividends generally will be taxable as ordinary income to taxpaying stockholders
of the Company. With respect to tax-exempt organizations, it is likely that a
significant portion of the dividends will be treated as unrelated business
taxable income ("UBTI"). Dividends received by a corporation will not be
eligible for the dividends-received deduction so long as
34
<PAGE>
the Company qualifies as a REIT. The Company furnishes annually to each of its
stockholders a statement setting forth distributions paid during the preceding
year and their characterization as ordinary income, return of capital or capital
gains. For a discussion of the federal income tax treatment of distributions by
the Company, see "Business -- Federal Income Tax Considerations -- Taxation of
the Company, -- Tax Consequences of Common Stock Ownership, and -- Tax-Exempt
Organizations as Stockholders."
The taxable income of the Company from its Mortgage Assets is increased by
non-cash income from, among other things, the accretion of market discount on
the Mortgage Instruments securing or underlying Mortgage Securities and is
decreased by non-cash expenses, including, among other things, the amortization
of the issuance costs of Mortgage Securities and the accretion of original issue
discount on certain Classes of Mortgage Securities. The taxable income of the
Company will differ from its net income for financial reporting purposes
principally as a result of the different method used to determine the effect and
timing of recognition of such non-cash income and expenses.
Because the Company must distribute to its stockholders an amount equal to
substantially all of its net taxable income (computed after taking into account
any net operating loss carryforwards that are available) so long as it elects to
qualify as a REIT, the Company may be required to distribute a portion of its
working capital to its stockholders, borrow funds or sell assets to make
required distributions in years in which the non-cash items of taxable income
exceed the Company's non-cash expenses. In the event that the Company is unable
to pay dividends equal to substantially all of its taxable income, it will not
continue to qualify as a REIT.
The Company's Articles of Incorporation, as amended to date (the "Articles of
Incorporation"), prohibit ownership of its Common Stock by tax-exempt entities
that are not subject to tax on unrelated business taxable income and by certain
other persons (collectively "Disqualified Organizations"). Such restriction on
ownership exists so as to avoid imposition of a tax on a portion of the
Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are designed to
prevent concentrated ownership of the Company which might jeopardize its
qualification as a REIT under the Code. Among other things, these provisions
provide (i) that any acquisition of shares that would result in the
disqualification of the Company as a REIT under the Code will be void, and (ii)
that in the event any person acquires, owns or is deemed, by operation of
certain attribution rules set out in the Code, to own a number of shares in
excess of 9.8% of the outstanding shares of the Company's Common Stock ("Excess
Shares"), the Board of Directors, at its discretion, may redeem the Excess
Shares. In addition, the Company may refuse to effectuate any transfer of Excess
Shares and certain stockholders and proposed transferees of shares may be
required to file an affidavit with the Company setting forth certain information
relating, generally, to their ownership of the Company's Common Stock. These
provisions may inhibit market activity and the resulting opportunity for the
Company's stockholders to receive a premium for their shares that might
otherwise exist if any person were to attempt to assemble a block of shares of
the Company's Common Stock in excess of the number of shares permitted under the
Articles of Incorporation. Such provisions also may make the Company an
unsuitable investment vehicle for any person seeking to obtain (either alone or
with others as a group) ownership of more than 9.8% of the outstanding shares of
Common Stock. Investors seeking to acquire substantial holdings in the Company
should be aware that this ownership limitation may be exceeded by a stockholder
without any action on such stockholder's part if the number of outstanding
shares of the Company's Common Stock is reduced. On December 13, 1993, the Board
of Directors approved the adoption of a program to repurchase up to 2,000,000
shares of the Company's Common Stock in open market conditions. The decision to
repurchase shares pursuant to the program, and the timing and amount of such
purchases, will be based upon market conditions then in effect and other
corporate considerations. As of December 31, 1995, 15,200 shares of common stock
have been repurchased under such program.
35
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by, and
should be read in conjunction with, the financial statements and notes thereto
appearing elsewhere herein. The data has been derived from the financial
statements of the Company audited by Ernst & Young LLP, independent certified
public accountants, as indicated by their report thereon as specified therein
which also appears elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------
1995 1994 1993 1992 1991
--------- ----------- ------------ ------------ ----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME (LOSS) DATA:
Income (Loss) From Mortgage Assets ......$ 3,564 $ (1,203) $ (21,814) $ (14,068) $ 15,507
Interest Expense ......................... 868 1,383 2,274 2,750 4,535
Other Expense (Hedging, Management,
General and Administrative) .............. 1,599 1,938 1,822 2,315 2,945
--------- ----------- ------------ ------------ ----------
Income (Loss) Before Cumulative Effect of
Accounting Change ........................ 1,097 (4,524) (25,910) (19,133) 8,027
Cumulative Effect of Accounting Change .. -- -- (6,078) -- --
--------- ----------- ------------ ------------ ----------
Net Income (Loss) ........................$ 1,097 $ (4,524) $ (31,988) $ (19,133) $ 8,027
========= =========== ============ ============ ==========
Income (Loss) Per Share Before Cumulative
Effect of Accounting Change ..............$ .11 $ (.47) $ (2.66) $ (1.93) $ .81
Cumulative Effect of Accounting Change
Per Share ................................ -- -- (.63) -- --
--------- ----------- ------------ ------------ ----------
Net Income (Loss) Per Share ..............$ .11 $ (.47) $ (3.29) $ (1.93) $ .81
========= =========== ============ ============ ==========
Dividends Per Share ......................$ .03 $ .02 $ .03 $ .40 $ 1.70
========= =========== ============ ============ ==========
</TABLE>
At December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
--------- --------- -------- -------- ---------
(In Thousands)
BALANCE SHEET DATA:
Real Estate Loans .........$ 4,048 $ 9,260 $ 320 $ -- $ --
Residual Interests ........ 5,457 7,654 17,735 66,768 112,988
Total Assets .............. 27,816 31,150 43,882 87,063 121,502
Long-Term Debt ............ 7,819 11,783 19,926 31,000 16,450
Total Liabilities ......... 9,368 13,508 21,505 32,357 43,462
Total Stockholders' Equity 18,448 17,642 22,377 54,706 78,040
36
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND INTEREST RATES AND OTHER INFORMATION
Results of Operations -- 1995 Compared to 1994
The Company had net income of $1,097,000 or $.11 per share in 1995 compared
to a net loss of $4,524,000 or $.47 per share in 1994.
The Company's income from Mortgage Assets was $3,564,000 in 1995 compared to
a loss of $1,203,000 in 1994. The above amounts include a net charge of
$3,343,000 in 1994 to write down the Company's investments in several of its
residual interests. There were no write-downs of residual interests in 1995.
See "Interest Rates and Prepayments."
Interest income on real estate loans increased from $1,113,000 in 1994 to
$1,618,000 in 1995 due to the expansion of the Company's real estate lending
program. See "Liquidity, Capital Resources and Commitments."
The Company's interest expense declined from $1,383,000 in 1994 to $868,000
in 1995 due to a reduction of the average aggregate long-term debt.
General and administrative expenses in 1994 include $340,000 of legal and
investment banking expenses related to merger negotiations with a privately held
company which were subsequently terminated.
Results of Operations -- 1994 Compared to 1993
The Company incurred a net loss of $4,524,000 or $.47 per share in 1994
compared to a net loss of $31,988,000 or $3.29 per share in 1993.
The Company's loss from Mortgage Assets was $1,203,000 in 1994 compared to a
loss of $21,814,000 in 1993. The above amounts include net charges of $3,343,000
in 1994 and $22,312,000 in 1993 to write down the Company's investments in
several of its residual interests. Write-downs of residual interests declined in
1994 as compared to 1993 because of a decrease in the average balance of
residual interests owned by the Company and a decline in projected prepayment
rates. See "Interest Rates and Prepayments."
Interest income on real estate loans increased from $29,000 in 1993 to
$1,113,000 in 1994 due to the expansion of the Company's real estate lending
program. See "Liquidity, Capital Resources and Commitments."
The Company's interest expense declined from $2,274,000 in 1993 to $1,383,000
in 1994 due to a reduction of the average aggregate long-term debt.
General and administrative expenses in 1994 include $340,000 of legal and
investment banking expenses related to merger negotiations with a privately held
company which were subsequently terminated.
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. At December 31, 1995, all of the Company's loans are secured by
properties located in Arizona. As a result of this geographic concentration,
unfavorable economic conditions in Arizona could increase the likelihood of
defaults on these loans and affect the Company's ability to protect the
principal
37
<PAGE>
and interest on such loans following foreclosures upon the real properties
securing such loans. The Company may, in the future, make loans on properties
located outside of Arizona. At December 31, 1995 the Company's real estate loans
outstanding total $4,048,000 and bear interest at 16%, payable monthly, with all
principal due within one year.
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 bear interest at 7.81% and require quarterly
payments of principal and interest with the balance due on February 15, 1998.
The Notes are 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 has a specified maximum balance of $7,750,000,
and is to be used to make the scheduled principal and interest payments on the
Notes if the cash flow available from the collateral is 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 is remitted to the Company. At December 31, 1995, $5,638,000 is held
by the Note Trustee in the reserve and other funds under the Indenture.
Under a revolving line of credit agreement with a bank, the Company may
borrow up to $5,000,000, upon payment of a 1/2 % commitment fee with interest
payable monthly at prime plus 1/2 %. Such advances are to be secured by certain
of the Company's real estate loans with the amount advanced equal to between 40%
to 60% of the principal amount of the real estate loans pledged. Only real
estate loans approved by the bank are eligible for advances. The agreement
contains certain financial covenants and expires on May 5, 1996. Through
December 31, 1995, the Company has not drawn upon the line of credit.
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.
The Company anticipates that future cash flow from operations will be used
for payment of operating expenses and debt service with the remainder, if any,
available for investment in mortgage or real estate related assets. The Company
is also exploring other strategic options including the possible termination of
the REIT status in conjunction with the possible purchase of an operating
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 December 31, 1995, the Company's proportionate share of floating-rate CMOs
and MPCs in the eight REMICs is $36,550,000 in principal amount that pays
interest based on LIBOR and $4,427,000 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:
AT DEC. 31,
1995 1994 1993 1995
------- ------- ------- -------------
LIBOR ....... 6.00% 4.33% 3.22% 6.00%
COFI ........ 4.96% 3.83% 4.16% 5.12%
38
<PAGE>
On May 12, 1992, the Company entered into a LIBOR ceiling rate agreement with
a bank for a fee of $245,000. The agreement, which had a term of two years
beginning July 1, 1992, required the bank to pay a monthly amount to the Company
equal to the product of $175,000,000 multiplied by the percentage, if any, by
which actual one-month LIBOR (measured on the first business day of each month)
exceeded 9.0%. Through the expiration of the agreement on July 1, 1994, LIBOR
remained under 9.0% and, accordingly, no amounts were paid under the agreement.
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 residual from 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 underlying 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. During 1994 and 1993 high
prepayment rates resulted in the Company incurring net charges of $3,343,000 and
$22,312,000, respectively, to write down its residual interests. Prepayment
rates slowed in 1995 and there were no write-downs of residual interests.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon and the
notes thereto commencing at page F-1 of this report, which financial statements,
report and notes are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position(s) Held
- ------------------ ----- -------------------------------------------------------
Alan D. Hamberlin 47 Chairman of the Board of Directors, Director and Chief
Executive Officer
Jay R. Hoffman ...41 Director, President, Secretary, Treasurer and Chief
Financial and Accounting Officer
Larry E. Cox ......47 Director
Mark A. McKinley .49 Director
Gregory K. Norris 45 Director
Alan D. Hamberlin has been a Director and Chief Executive Officer of the
Company since its organization and Chairman of the Board of Directors of the
Company since January 1990. Mr. Hamberlin also served as the President of the
Company from its organization until September 1995. Mr Hamberlin served as the
President and Chief Executive Officer of the managing general partner of the
Company's former Manager. Mr. Hamberlin has been President of Courtland Homes,
Inc. since July 1983. Mr. Hamberlin has served as a Director of American
Southwest Financial Corporation and American Southwest Finance Co., Inc. since
their organization in September 1982. Mr. Hamberlin also has served as a
Director of American Southwest Affiliated Companies since its organization in
March 1985 and of American Southwest Holdings, Inc. since August 1994.
Jay R. Hoffman has been the President and a Director of the Company since
September 1995 and the Secretary, Treasurer and Chief Financial and Accounting
Officer of the Company since July 1988. Mr. Hoffman also served as the Vice
President of the Company from July 1988 to September 1995. Mr. Hoffman, a
certified public accountant, engaged in the practice of public accounting with
Kenneth Leventhal & Company from March 1987 through June 1988 and with Arthur
Andersen & Co. from June 1976 through March 1987.
Larry E. Cox has been a Director of the Company since November 1995. Mr. Cox
is currently the managing member of Taro Properties Arizona, L.L.C. and
President of Taro Properties Arizona, Inc., land development and investment
companies. Prior to that, Mr. Cox was Vice President of Forward Planning for A-M
Homes, a residential homebuilder, from August 1989 to January 1992. Mr. Cox is
also on the Community Relations Board of the Bank of Arizona.
Mark A. McKinley has been a Director of the Company since May 1988. Mr.
McKinley is currently Senior Vice President of NationsBanc Mortgage Corporation.
Prior to that, he was the Co-Founder, President and Director of Cypress
Financial Corporation organized in 1983 and Managing Director of Rancho Santa
Margarita Mortgage Corporation, organized in 1990. From 1968 through 1983, Mr.
McKinley served as Senior Vice President of The Colwell Company, a publicly held
mortgage banking corporation and was responsible for administration of secondary
marketing, hedging operations and loan sales.
Gregory K. Norris has been a Director of the Company since June 1990. Mr.
Norris has been the President of Norris & Benedict Associates P.C., certified
public accountants, or its predecessor firms since November 1979. Mr. Norris
previously was engaged in the practice of public accounting with Bolan, Vassar
and Borrows, certified public accountants, from December 1978 until November
1979 and with Ernst & Whinney (now Ernst & Young) from July 1974 until December
1978.
Messrs. Cox, McKinley and Norris are members of the Company's Audit
Committee.
40
<PAGE>
The Board of Directors held a total of ten meetings during the fiscal year
ended December 31, 1995. One director was absent for one of the ten meetings.
The Audit Committee met separately at one formal meeting during the year ended
December 31, 1995. One director was absent for such Audit Committee meeting.
All directors are elected at each annual meeting of the Company's
stockholders for a term of one year, and hold office until their successors are
elected and qualified. All officers serve at the discretion of the Board of
Directors.
The Bylaws of the Company provide that, if the Company elects to be treated
as a REIT, the majority of the members of the Board of Directors and of any
committee of the Board of Directors will at all times be persons who are not
"Affiliates" of "Advisors of the Company." An Advisor is defined in the Bylaws
as a person or entity responsible for directing or performing the day to day
business affairs of the Company, including a person or entity to which an
Advisor subcontracts substantially all such functions. An "Affiliate" of another
person is defined in the Bylaws to mean any person directly or indirectly
owning, controlling or holding the power to vote 5% or more of the outstanding
voting securities of such other person or of any person directly or indirectly
controlling, controlled by or under common control with such other person; 5% or
more of whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by such other person; any person directly
or indirectly controlling, controlled by or under common control with such other
person; and any officer, director, partner or employee of such other person. The
term "person" includes a natural person, a corporation, partnership, trust
company or other entity.
Vacancies occurring on the Board of Directors may be filled by the vote of a
majority of the directors. If the Company seeks to remain qualified as a REIT,
then any replacement of an Unaffiliated Director shall be nominated by a
majority of any Unaffiliated Directors remaining on the Board of Directors. All
transactions involving the Company in which an Advisor has an interest must be
approved by a majority of the Unaffiliated Directors.
The Articles of Incorporation and Bylaws of the Company provide for the
indemnification of the directors and officers of the Company to the fullest
extent permitted by Maryland law. Maryland law generally permits indemnification
of directors and officers against certain costs, liabilities and expenses which
such persons may incur by reason of serving in such positions unless it is
proved that: (i) the act or omission of the director or officer was material to
the cause of action adjudicated in the proceeding and was committed in bad faith
or was the result of active and deliberate dishonesty; (ii) the director or
officer actually received an improper personal benefit in money, property or
services; or (iii) in the case of criminal proceedings, the director or officer
had reasonable cause to believe that the act or omission was unlawful. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act of 1933 and is therefore
unenforceable.
The Articles of Incorporation of the Company provide that the personal
liability of any director or officer of the Company to the Company or its
stockholders for money damages is limited to the fullest extent allowed by the
statutory or decisional law of the State of Maryland as amended or interpreted.
Maryland law authorizes the limitation of liability of directors and officers to
corporations and their stockholders for money damages except (a) to the extent
that it is proved that the person actually received an improper benefit in
money, property, or services for the amount of the benefit or profit in money,
property or services actually received; or (b) to the extent that a judgment or
other final adjudication adverse to the person is entered in a proceeding based
on a finding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated. Maryland law does not affect the potential liability of directors
and officers to third parties, such as creditors of the Company.
41
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Officers
The following table sets forth compensation received by the Company's Chief
Executive Officer and its other executive officer for the Company's last three
fiscal years ending December 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation ---------------------------
------------------------------------------ Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Position Salary Bonus Compensation Awards Options/SARS (#) Compensation
- ------------------------------- ------ ---------- ---------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan D. Hamberlin, 1995 $240,000 $ -- $ -- -- 820,014 $ --
Chairman and 1994 250,000 2,100 -- -- 4,642 --
Chief Executive Officer 1993 250,000 4,100 -- -- 5,439 --
Jay R. Hoffman, President, 1995 $183,000 $25,000 $ -- -- 1,240 $ --
Secretary, Treasurer and Chief 1994 175,000 15,000 -- -- 1,216 --
Accounting and Financial 1993 175,000 -- -- -- 1,425 --
Officer
</TABLE>
Officers and key personnel of the Company are eligible to receive stock
options under the Company's stock option plan. Officers serve at the discretion
of the Board of Directors.
Compensation of Directors
The Company pays an annual director's fee to each Unaffiliated Director equal
to $20,000, a fee of $1,000 for each meeting of the Board of Directors attended
by each Unaffiliated Director and reimbursement of costs and expenses for
attending such meetings. During 1995, the Unaffiliated Directors also accrued
dividend equivalent rights, in the amounts of 932 with respect to Mr. McKinley,
228 with respect to Mr. Norris, and 200 with respect to Mr. Cox. The dividend
equivalent rights accrued to Messrs. Hamberlin and Hoffman during 1994 are
included in the table on options granted to the Company's executive officers
below. In addition, the Company's Directors are eligible to participate in the
Company's stock option plan described below.
In addition, during 1995, Mr. Cox was granted 10,000 stock options at $1.50
per share under the Company's stock option plan. One-third of the options are
currently exercisable, one-third become exercisable on December 13, 1996 and the
remaining one-third become exercisable on December 13, 1997.
Employee Agreements
Hamberlin Employment and Stock Option Agreements
In order to more closely align Alan D. Hamberlin's compensation with the
interests of the Company's shareholders, the Company entered into an Employment
Agreement with Mr. Hamberlin on December 21, 1995, which superseded the previous
Employment Agreement that was to expire on April 30, 1996. The term of the
Employment Agreement is for the period from December 21, 1995 through December
20, 1998. The Employment Agreement provides for the employment of Mr. Hamberlin
as the chief executive officer of the Company and for Mr. Hamberlin to perform
such duties and services as are customary for such a position. The Employment
Agreement provides for Mr. Hamberlin to receive an annual base salary of $1.00.
Mr. Hamberlin will not be entitled to any bonuses except as granted by the Board
of Directors in its absolute sole discretion. In lieu of the annual base salary,
the Company and Mr. Hamberlin entered into a Stock Option Agreement dated
December 21, 1995 pursuant to which the Company granted an option to Mr.
Hamberlin to purchase 750,000 shares of the Common Stock of the Company at $1.50
per share, which was the fair market value per share of the Common Stock on
December 21, 1995. A corporation owned by Mr. Hamberlin also is entitled to the
payment of $15,000 annually as reimbursement for expenses incurred by such
company and providing support to Mr. Hamberlin in connection with the
performance of his duties.
42
<PAGE>
The Employment Agreement terminates (a) upon the death or disability of Mr.
Hamberlin, (b) by the Company for "Cause" (as defined in the Employment
Agreement), (c) by mutual agreement following a "Change in Control" (as defined
in the Employment Agreement) that is unanimously approved by a Board of
Directors constituted entirely of the directors serving as of December 21, 1995
and/or new directors approved by such directors (a "Consented Termination") and
(d) upon the election of Mr. Hamberlin. Prior to a Change in Control, if the
Employment Agreement terminates for any reason other than "Cause," Mr. Hamberlin
will be entitled to his salary and fringe benefits through the date of
termination. In addition, if the Stock Option Agreement has not been approved by
the Company's shareholders as of the date of termination, Mr. Hamberlin will be
entitled to certain phantom stock rights. As discussed below, the type of
phantom stock rights to which he will be entitled will depend on the reason for
the termination. If the Employment Agreement is terminated for Cause, Mr.
Hamberlin will be entitled to his salary and fringe benefits through the date of
termination but will have no further rights in the Stock Option Agreement or in
any phantom stock rights. The Employment Agreement also provides that if a
Change in Control occurs on or before December 20, 1998 that has not been
unanimously approved by the Board as described in (c) of this paragraph (a
"Non-Approved Change in Control") and if Mr. Hamberlin's employment has not been
previously terminated, the Company will pay $500,000 to Mr. Hamberlin within 10
days of such Change in Control as well as maintain in full force and effect
until December 20, 1998 all plans, programs or benefits provided to employees,
including those plans, programs or benefits in which Mr. Hamberlin was entitled
to participate immediately prior to the Change in Control. The Employment
Agreement also provides that in the event that the Company declares a dividend
through which all or substantially all of the assets of the Company are
distributed to its shareholders (a "Liquidating Dividend"), then Mr. Hamberlin
will receive a bonus in the amount of $20,833 multiplied by each full or partial
month of that Mr. Hamberlin was employed by the Company since December 21, 1995.
The Stock Option Agreement is subject to approval by the shareholders of the
Company. Mr. Hamberlin has also been conditionally granted 750,000 phantom stock
rights ("PSRs" or "SARs"). If approval of the Stock Option Agreement is not
obtained (a) at the Company's shareholder meeting in which the Stock Option
Agreement is the subject of a shareholder vote, (b) on or before December 20,
1998; (c) on or before a day prior to a Change in Control, or (d) on or before
any date prior to the termination of the Employment Agreement (other than a
termination of the Employment Agreement occurring as a result of termination of
Mr. Hamberlin for cause), then on the earliest of the foregoing dates, the Stock
Option Agreement will terminate and the PSRs granted to Mr. Hamberlin will
become effective. PSRs vest according to the following schedule: (a) 200,000 of
the PSRs vested on December 21, 1995; (b) 275,000 of the PSRs vest on December
21, 1996 provided Mr. Hamberlin is either employed by the Company on that date
or has left employment pursuant to a Consented Termination; and (c) 275,000 of
the PSRs vest on December 21, 1997 provided Mr. Hamberlin is either employed by
the Company on that date or has left the employment of the Company pursuant to a
Consented Termination. Notwithstanding the foregoing, all PSRs will vest upon a
Non-Approved Change in Control or upon a termination of Mr. Hamberlin's
employment (without his consent) by the Company for any reason other than death,
disability or Cause. Once the PSRs have become effective, all or any portion of
the vested PSRs may be exercised by Mr. Hamberlin upon written notice to the
Company. In general, after a Consented Termination, the PSRs remain outstanding
as if Mr. Hamberlin was still employed. Upon exercise of a PSR, the Company will
immediately pay to Mr. Hamberlin for each PSR exercised cash in an amount equal
to the excess of the fair market value of a share of the Common Stock of the
Company on the date of exercise over $1.50, which was the fair market value of a
share of the Common Stock of the Company on December 21, 1995. If Mr. Hamberlin
dies or becomes disabled during his employment after the PSRs have become
effective, but prior to the PSRs being exercised in full, the value of all
unexercised PSRs which had vested prior to the date of death or disablement will
be immediately paid to Mr. Hamberlin or his estate. If Mr. Hamberlin dies on or
after the PSRs have become effective and after the termination of this
employment pursuant to a Consented Termination, the value of all unexercised
PSRs that had vested prior to the date of death will be paid to Mr. Hamberlin's
estate.
The Employment Agreement also provides that to the extent that the Company at
any time declares and pays a dividend with respect to its Common Stock (other
than a Liquidating Dividend), the Company
43
<PAGE>
will make a cash payment to Mr. Hamberlin in an amount equal to the number of
PSR shares which have vested multiplied by the per-share dividend actually
declared and paid with respect to the Company's Common Stock. To the extent that
such dividends are declared prior to the effective date of the PSRs, such bonus
will be paid on the effective date of the PSRs. All PSRs to the extent not
previously exercised will terminate on December 20, 2000 or as earlier provided.
On December 21, 1995, the Company and Mr. Hamberlin entered into a Stock
Option Agreement pursuant to which the Company granted to Mr. Hamberlin an
option to purchase 750,000 shares of the Company's Common Stock at a price of
$1.50 per share, which was the fair market value of a share of the Company's
Common Stock on the date of grant. The options were granted in lieu of Mr.
Hamberlin receiving an annual base salary under his Employment Agreement and
were not granted under the Company's Plan. Therefore, the Stock Option Agreement
must be approved by the Company's shareholders before Mr. Hamberlin may exercise
his options. The options vest according to the following schedule: (a) 200,000
of the options vested on December 21, 1995; (b) 275,000 of the options vest on
December 21, 1996 provided Mr. Hamberlin is either employed by the Company on
that date or has left employment pursuant to a "Consented Termination" as that
term is defined in the Employment Agreement; and (c) 275,000 of the options vest
on December 21, 1997 provided Mr. Hamberlin is either employed by the Company on
that date or has left the employment of the Company pursuant to a Consented
Termination. Notwithstanding the foregoing, all options will vest upon a
Non-Approved Change in Control or upon a termination of Mr. Hamberlin's
employment (without his consent) by the Company for any reason other than death,
disability or cause. In addition, the options will vest in their entirety prior
to any merger or consolidation in which the Company is not the surviving entity
or any reverse merger in which the Company is the surviving entity. If Mr.
Hamberlin's employment with the Company is terminated pursuant to the Employment
Agreement upon the death or disablement of Mr. Hamberlin, the options that have
previously vested shall be exercisable within one year or until the stated
expiration date of the option, whichever occurs first. If Mr. Hamberlin dies
after a Consented Termination, the options that have vested as of the date of
death shall be exercisable within one year of such date of death or until the
stated expiration date of the option, whichever occurs first. In all instances
the options must be exercised on or before December 21, 2000. Mr. Hamberlin may
pay the exercise price of an option in cash, by check, or by delivery of
previously acquired shares of the Company's Common Stock. In the discretion of
the Company, Mr. Hamberlin may be provided with the election to pay the exercise
price by having the Company withhold, from the Common Stock otherwise issuable
pursuant to the option, a portion of those shares of Common Stock with an
aggregate fair market value equal to that portion of the exercise price
designated by Mr. Hamberlin.
Hoffman Severance Agreement
On September 1, 1995, the Company entered into a Severance Agreement with Jay
R. Hoffman pursuant to which, in the event a "Change in Control" (as defined in
the Severence Agreement) occurs prior to August 30, 1996, Mr. Hoffman will be
entitled to receive a severance bonus in an amount equal to Mr. Hoffman's annual
salary.
Employee Benefit Plans
Stock Option Plan
In May 1988, the Company's Board of Directors adopted a stock option plan
(the "Plan") which was amended on July 18, 1990 to limit the redemption price
available to optionholders as described below. Under the terms of the Plan, both
qualified incentive stock options ("ISOs"), which are intended to meet the
requirements of Section 422 of the Code, and non-qualified stock options may be
granted. ISOs may be granted to the officers and key personnel of the Company.
Non-qualified stock options may be granted to the Company's directors and key
personnel. The purpose of the Plan is to provide a means of performance-based
compensation in order to attract and retain qualified personnel and to provide
an incentive to others whose job performance affects the Company.
The maximum number of shares of the Company's Common Stock which may be
covered by options granted under the Plan is limited to 437,500. An option
granted under the Plan may be exercised in full
44
<PAGE>
or in part at any time or from time to time during the term of the option, or
provide for its exercise in stated installments at stated times during the term
of the option. The exercise price for any option granted under the Plan may not
be less than 100% of the fair market value of the shares of Common Stock at the
time the option is granted. The optionholder may pay the exercise price in cash,
bank cashier's check, or by delivery of previously acquired shares of Common
Stock of the Company. No option may be granted under the Plan to any person who,
assuming exercise of all options held by such person, would own directly or
indirectly more than 9.8% of the total outstanding shares of Common Stock of the
Company.
An optionholder also will receive at no additional cost "dividend equivalent
rights" to the extent that dividends are declared on the outstanding shares of
Common Stock of the Company on the record dates during the period between the
date an option is granted and the date such option is exercised. The number of
dividend equivalent rights which an optionholder receives on any dividend
declaration date is determined by application of a formula whereby the number of
shares subject to the option is multiplied by the dividend per share and divided
by the fair market value per share (as determined in accordance with the Plan)
to arrive at the total number of dividend equivalent rights to which the
optionholder is entitled.
The dividend equivalent rights earned will be distributed to the optionholder
(or his successor in interest) in the form of shares of the Company's Common
Stock when the option is exercised. Dividend equivalent rights will be computed
both with respect to the number of shares under the option and with respect to
the number of dividend equivalent rights previously earned by the optionholder
(or his successor in interest) and not issued during the period prior to the
dividend record date. Shares of the Company's Common Stock issued pursuant to
the exchange of dividend equivalent rights will not qualify for the favored tax
treatment afforded shares issued upon exercise of an ISO, notwithstanding the
character of the underlying option with respect to which the dividend equivalent
rights were earned. The number of shares issuable upon exchange of dividend
equivalent rights is not subject to the limit of the number of shares which are
issuable upon exercise of options granted under the Plan.
Under the Plan, an exercising optionholder 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 he 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 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 date the options were exercised.
The Plan is administered by the Board of Directors which will determine
whether such options will be granted, whether such options will be ISOs or
non-qualified stock options, which directors, officers and key personnel will be
granted options, and the number of options to be granted, subject to the
aggregate maximum amount of shares issuable under the Plan set forth above. Each
option granted must terminate no more than 10 years from the date it is granted.
Under current law, ISOs cannot be granted to directors who are not also
employees of the Company, or to directors or employees of entities unrelated to
the Company.
The Board of Directors may amend the Plan at any time, except that approval
by the Company's stockholders is required for any amendment that increases the
aggregate number of shares of Common Stock that may be issued pursuant to the
Plan, increases the maximum number of shares of Common Stock that may be issued
to any person, changes the class of persons eligible to receive such options,
modifies the period within which the options may be granted, modifies the period
within which the options may be exercised or the terms upon which options may be
exercised, or increases the material benefits accruing to the participants under
the Plan. Unless previously terminated by the Board of Directors, the Plan will
terminate in May 1998.
45
<PAGE>
The following table provides information on options and SARs granted to the
Company's executive officers during 1995.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percentage of Potential Realizable Value At
Total Options/SARs Assumed Annual Rates Of Stock
Number of Securities Granted to Exercise Appreciation for Option Term
Underlying Employees in Price Expiration -----------------------------
Name Options/SARs Granted Fiscal Year (Per Share) Date 0% 5% 10%
- ----------------- -------------------- ------------------ ----------- -------------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan D. Hamberlin.. 750,000(1) 91.3% $ 1.50 12/21/00 $ -- $310,000 $686,000
64,000(2) 7.8 1.50 12/13/00(4) -- 26,000 59,000
6,014(2) .7 (3) (3)(4) 9,000 12,000 15,000
Jay R. Hoffman..... 1,240(2) .1 (3) (3)(4) 1,800 2,000 3,000
<FN>
- ----------
(1) Granted in lieu of cash compensation pursuant to the terms of Alan
Hamberlin's three year Employment Agreement and the Stock Option Agreement.
See "-- Employee Agreements -- Hamberlin Employment and Stock Option
Agreements" for a description of Mr. Hamberlin's Employment Agreement and
the Hamberlin Stock Option Agreement.
(2) All of such options are currently exercisable.
(3) Represent dividend equivalent rights earned in 1995. Such rights expire at
the same time as the options on which they were earned, which expire at
various dates between July 26, 1999 and February 6, 2002.
(4) Options are subject to earlier expiration upon an optionee's termination for
cause or three months after any termination of employment.
</FN>
</TABLE>
The following table provides information on options and SARs exercised in
1995 by the Company's executive officers and the value of such officer's
unexercised options and SARs at December 31, 1995.
Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options/SARS In-the-money Options/SARs at
At December 31, 1995 December 31, 1995($)(1)
Shares Acquired Value At ----------------------------- -----------------------------
Name On Exercise(#) Exercise($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- --------------- ----------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Alan D. Hamberlin -- $ -- 306,723 750,000 $159,000 $ --
Jay R. Hoffman .. -- $ -- 63,269 -- $ -- $ --
<FN>
- ----------
(1) Calculated based on the closing price at December 31, 1995 of $1.50
multiplied by the number of applicable shares in the money (including
dividend equivalent rights), less the total exercise price per share.
</FN>
</TABLE>
SEP-IRA
On June 27, 1991, the Company established a simplified employee
pension-individual retirement account pursuant to Section 408(k) of the Code
(the "SEP-IRA"). Annual contributions may be made by the Company under the
SEP-IRA to employees. Such contributions will be excluded from each employee's
gross income and will not exceed the lesser of 15% of such employee's
compensation or $22,500. The Company did not make any contributions to the
SEP-IRA during 1995.
46
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
At March 25, 1996, there were 9,716,517 shares of Common Stock outstanding.
The table below sets forth, as of March 25, 1996, those persons known by the
Company to own beneficially five percent or more of the outstanding shares of
Common Stock, the number of shares of Common Stock beneficially owned by each
director and executive officer of the Company and the number of shares
beneficially owned by all of the Company's executive officers and directors as a
group, which information as to beneficial ownership is based upon statements
furnished to the Company by such persons.
<TABLE>
<CAPTION>
Number of
Shares Beneficially Percent of
Name and Address of Beneficial Owner Owned(1) Common Stock(2)
- ------------------------------------------------------------- ------------------- ---------------
<S> <C> <C>
Alan D. Hamberlin* ........................................... 344,623(3) 3.06%
Jay R. Hoffman* .............................................. 78,269(4) **
Mark A. McKinley* ............................................ 47,507(5) **
Gregory K. Norris* ........................................... 11,651(5) **
Larry E. Cox* ................................................ 3,400(5) **
All directors and executive officers as a group (five
persons) .................................................... 485,450(6) 4.78%
5% Stockholders:
Ira Sochet
5701 Sunset Drive, Suite 315
South Miami, Florida 33143 .................................. 559,800 5.76%
The Intergroup Corporation
and Mr. John V. Winfield
2121 Avenue of the Stars, Suite 2020
Los Angeles, California 90067 ................................ 859,000(7) 8.84%
<FN>
- ----------
* Each director and executive officer of the Company may be reached through the
Company at 5333 North Seventh Street, Suite 219, Phoenix, Arizona
85014.
** Less than 1% of the outstanding shares of Common Stock.
(1) Includes, where applicable, shares of Common Stock owned of record by such
person's minor children and spouse and by other related individuals and
entities over whose shares of Common Stock such person has custody, voting
control or the power of disposition.
(2) The percentages shown include the shares of Common Stock actually owned as
of March 25, 1996 and the shares of Common Stock which the person or group
had the right to acquire within 60 days of such date. In calculating the
percentage of ownership, all shares of Common Stock which the identified
person or group had the right to acquire within 60 days of March 25, 1996
upon the exercise of options are deemed to be outstanding for the purpose of
computing the percentage of the shares of Common Stock owned by such person
or group, but are not deemed to be outstanding for the purpose of computing
the percentage of the shares of Common Stock owned by any other person.
(3) Includes 37,900 shares of Common Stock indirectly beneficially owned by Mr.
Hamberlin through a partnership and 306,723 shares of Common Stock which Mr.
Hamberlin had the right to acquire within 60 days of March 25, 1996 by the
exercise of stock options (including dividend equivalent rights).
(4) Includes 15,000 shares of Common Stock owned by Mr. Hoffman and 63,269
shares of Common Stock which Mr. Hoffman had the right to acquire within 60
days of March 25, 1996 by the exercise of stock options (including dividend
equivalent rights).
(5) All of such shares of Common Stock are shares which Mr. McKinley, Mr. Norris
and Mr. Cox had the right to acquire within 60 days of March 25, 1996 by the
exercise of stock options (including dividend equivalent rights).
(6) Includes 432,550 shares of Common Stock which such persons had the right to
acquire within 60 days of March 25, 1996 by the exercise of stock options
(including dividend equivalent rights).
</FN>
</TABLE>
47
<PAGE>
(7) The nature of beneficial ownership of the 859,000 shares is 459,000 shares
are owned by the InterGroup Corporation and 400,000 shares are owned by John
V. Winfield. Mr. Winfield is Chairman of the Board and President of The
InterGroup Corporation. As of February 7, 1995, 427,406 shares of InterGroup
common stock, constituting 46% of the outstanding InterGroup shares, were
owned directly or beneficially by Mr. Winfield.
Other than options and dividend equivalent rights granted under the Company's
stock option plan or under the Hamberlin Employment Agreement, there are no
outstanding warrants, options or rights to purchase any shares of Common Stock
of the Company, and no outstanding securities convertible into Common Stock of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Potential Conflicts of Interest
The Bylaws of the Company provide that, if the Company elects to be treated
as a REIT, a majority of the Board of Directors (and a majority of each
committee of the Board of Directors) must not be "Affiliates" of "Advisors," as
these terms are defined in the Bylaws, and that the investment policies of the
Company must be reviewed annually by these directors (the "Unaffiliated
Directors").
Counsel to the Company has furnished, and in the future may furnish, legal
services to ASFS, ASFG and certain Issuers (including American Southwest
Financial Corporation, American Southwest Finance Co., Inc. and Westam Mortgage
Financial Corporation). There is a possibility that in the future the interests
of certain of such parties may become adverse, and counsel may be precluded from
representing one or all of such parties. If any situation arises in which the
interests of the Company appear to be in conflict with those of ASFS, ASFG or
any Issuer, additional counsel may be retained by one or more of the parties.
Certain Relationships
Alan D. Hamberlin, the Chairman of the Board of Directors, and Chief
Executive Officer of the Company, also is a director of American Southwest
Financial Corporation, American Southwest Finance Co., Inc., American Southwest
Affiliated Companies and American Southwest Holdings, Inc. and a
member of the management committee of ASFG.
Mr. Hamberlin directly and indirectly owns a total of 25% of the voting stock
of American Southwest Holdings, Inc. American Southwest Holdings, Inc. directly
or indirectly owns 100% of the voting stock of, among other entities, ASFS,
American Southwest Financial Corporation and Westam Mortgage Financial
Corporation. Mr. Hamberlin also directly and indirectly owns up to 25% of the
capital interest held by the common members of ASFG and indirectly owns up to
25% of the capital interest of the preferred members of ASFG. See "Business --
The Subcontract Agreement."
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
3(a) Amended and Restated Articles of Incorporation of the Registrant*
3(b) Amended and Restated Bylaws of the Registrant*****
4 Specimen Certificate representing $.01 par value Common Stock*
Subcontract Agreement between the Registrant and American Southwest Financial
10(a) Services, Inc.*
10(b) Form of Master Servicing Agreement*
10(c) Form of Servicing Agreement*
10(d) Stock Option Plan*
10(e) Amendment to Stock Option Plan**
10(g) Amended and Restated Employment Agreement and Addendum between the Registrant and Alan D. Hamberlin
10(h) Stock Option Agreement between the Registrant and Alan D. Hamberlin
10(i) Severance Agreement between the Registrant and Jay R. Hoffman
10(j) Indenture dated as of December 1, 1992 between EMIC Finance Corporation, as Note Issuer of the
Secured Notes, and State Street Bank & Trust Company, as Note Trustee****
Agreement and Certificate dated as of December 1, 1992 by Registrant for the benefit of the
10(k) Note Trustee****
10(l) Revolving Loan Agreement between the Registrant and Banc One*****
22 Subsidiaries of the Registrant***
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
<FN>
- ----------
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-11 (No. 33-22092) filed July 19, 1988 and declared
effective on July 20, 1988.
** Incorporated herein by reference to Registrant's Form 10-K for the fiscal
year ended December 31, 1990 filed March 31, 1991.
*** Incorporated herein by reference to Registrant's Form 10-K for the fiscal
year ended December 31, 1991 filed March 31, 1992.
**** Incorporated herein by reference to Registrant's Form 10-K for the fiscal
year ended December 31, 1992 filed March 30, 1993.
***** Incorporated herein by reference to Registrant's Form 10-Q for the quarter
ended June 30, 1995 filed August 11, 1995.
</FN>
</TABLE>
(b) Financial Statements and Financial Statement Schedules filed as part
of this report:
1. Financial Statements -- as listed in the "Index to Financial Statements"
on page F-1 of this Annual Report on Form 10-K.
2. Financial Statement Schedules -- no schedules are required because of the
absense of conditions under which they are required or because the
information is given in the financial statements and notes beginning on
page F-1 of this Annual Report on Form 10-K.
(c) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of 1995.
49
<PAGE>
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.
HOMEPLEX MORTGAGE
INVESTMENTS CORPORATION
Date: March 29, 1996
By: /s/ ALAN D. HAMBERLIN
------------------------------
Alan D. Hamberlin,
Chairman of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------- --------------------------------------------- ------------------
<S> <C> <C>
/s/ ALAN D. HAMBERLIN Chairman of the Board of Directors,
--------------------- Chief Executive Officer and Director
Alan D. Hamberlin (Principal Executive Officer) March 29, 1996
/s/ JAY R. HOFFMAN
--------------------- Director, President, Secretary, Treasurer
Jay R. Hoffman and Chief Financial and Accounting Officer March 29, 1996
/s/ LARRY E. COX
---------------------
Larry E. Cox Director March 29, 1996
/s/ MARK A. MCKINLEY
---------------------
Mark A. McKinley Director March 29, 1996
/s/GREGORY K. NORRIS
---------------------
Gregory K. Norris Director March 29, 1996
</TABLE>
50
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ........................................F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 .........F-3
Consolidated Statements of Net Income (Loss) for the Years
Ended December 31, 1995, 1994 and 1993 ...............................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993 .....................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 .....................................F-6
Notes To Consolidated Financial Statements ............................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Homeplex Mortgage Investments Corporation
We have audited the accompanying consolidated balance sheets of Homplex
Mortgage Investments Corporation and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of net income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. 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 also 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Homeplex Mortgage Investments Corporation and subsidiaries as of December 31,
1995 and 1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principals.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method for accounting for residual interests as of December 31,
1993.
ERNST & YOUNG LLP
Phoenix, Arizona
February 13, 1996
F-2
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and December 31, 1994
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Assets
Real estate loans (Note 3) ..........................................$ 4,048 $ 9,260
Short-term investments (Note 2) ..................................... 8,969 --
Funds held by Trustee (Note 5) ...................................... 5,638 6,720
Residual interests (Note 4) ......................................... 5,457 7,654
Cash and cash equivalents ........................................... 3,347 6,666
Other assets (Note 5) ............................................... 357 850
--------- ---------
Total Assets ........................................................$ 27,816 $ 31,150
========= =========
Liabilities
Long-term debt (Note 5) .............................................$ 7,819 $ 11,783
Accounts payable and other liabilities (Note 8) ..................... 1,182 1,416
Dividend payable .................................................... 291 194
Accrued interest payable ............................................ 76 115
--------- ---------
Total Liabilities ................................................... 9,368 13,508
--------- ---------
Stockholders' Equity
Common stock, par value $.01 per share; 50,000,000 shares
authorized;
issued and outstanding -- 9,875,655 shares (Note 8) ................ 99 99
Additional paid-in capital .......................................... 84,046 84,046
Cumulative net loss ................................................. (23,757) (24,854)
Cumulative dividends ................................................ (41,530) (41,239)
Treasury stock -- 159,138 shares .................................... (410) (410)
--------- ---------
Total Stockholders' Equity .......................................... 18,448 17,642
--------- ---------
Total Liabilities and Stockholders' Equity ..........................$ 27,816 $ 31,150
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
For the Years Ended December 31, 1995, 1994 and 1993
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Income (Loss) from Mortgage Assets
Interest income on real estate loans .............$ 1,618 $ 1,113 $ 29
Income (loss) from residual interests (Note 4) .. 1,283 (2,664) (22,312)
Other income ..................................... 663 348 469
---------- ---------- -----------
3,564 (1,203) (21,814)
---------- ---------- -----------
Expenses
Interest ......................................... 868 1,383 2,274
General, administration and other ................ 1,599 1,938 1,822
---------- ---------- -----------
Total Expenses ................................... 2,467 3,321 4,096
---------- ---------- -----------
Net Income (Loss) Before Cumulative Effect of
Accounting Change ............................... 1,097 (4,524) (25,910)
Cumulative Effect of Accounting Change (Note 4) . -- -- (6,078)
---------- ---------- -----------
Net Income (Loss) ................................$ 1,097 $ (4,524) $ (31,988)
========== =========== ===========
Per Share Data
Net Income (Loss) Per Share Before Cumulative
Effect of Accounting Change .....................$ .11 $ (.47) $ (2.66)
Cumulative Effect of Accounting Change Per Share -- -- (.63)
---------- ----------- -----------
Net Income (Loss) Per Share ......................$ .11 $ (.47) $ (3.29)
========== ========== ===========
Dividends Declared Per Share .....................$ .03 $ .02 $ .03
========== ========== ===========
Weighted Average Number of Shares of Common
Stock and Common Stock Equivalents Outstanding . 9,737,302 9,720,612 9,732,056
========== ========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<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, 1992 9,875,655 $ 99 $84,046 $ 11,658 $(40,753) $(344) $ 54,706
Treasury stock acquired --
20,368 shares ............... -- -- -- -- -- (49) (49)
Net loss ..................... -- -- -- (31,988) -- -- (31,988)
Dividend declared ............ -- -- -- -- (292) -- (292)
----------- ------- ------------ ------------ ------------ ---------- ----------
Balance at December 31, 1993 9,875,655 99 84,046 (20,330) (41,045) (393) 22,377
Treasury stock acquired --
15,200 shares ............... -- -- -- -- -- (17) (17)
Net loss ..................... -- -- -- (4,524) -- -- (4,524)
Dividend declared ............ -- -- -- -- (194) -- (194)
----------- ------- ------------ ------------ ------------ ---------- ----------
Balance at December 31, 1994 9,875,655 99 84,046 (24,854) (41,239) (410) 17,642
Net income ................... -- -- -- 1,097 -- -- 1,097
Dividend declared ............ -- -- -- -- (291) -- (291)
----------- ------- ------------ ------------ ------------ ---------- ----------
Balance at December 31, 1995 9,875,655 $ 99 $84,046 $ (23,757) $(41,530) $(410) $ 18,448
=========== ======= ============ ============ ============ ========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994 and 1993
Increase (Decrease) in Cash
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................$ 1,097 $ (4,524) $ (31,988)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
(Increase) decrease in other assets .................. 390 (343) (169)
Increase (decrease) in accounts payable
and other liabilities ................................ (234) 323 (129)
Amortization of debt costs ........................... 103 216 230
Increase (decrease) in accrued interest payable ..... (39) (79) 59
Net write-downs and non-cash losses on
residual interests ................................... -- 3,343 22,312
Amortization of hedging costs ........................ -- 96 138
Cumulative effect of accounting change ............... -- -- 6,078
-------- -------- ----------
Net Cash Provided by (Used in) Operating Activities . 1,317 (968) (3,469)
-------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on real estate loans .... 9,114 670 --
Increase in short-term investments ................... (8,969) -- --
Real estate loans funded ............................. (3,902) (9,610) (320)
Amortization of residual interests ................... 2,197 6,738 20,643
(Increase) decrease in funds held by Trustee ........ 1,082 2,041 (3,631)
-------- -------- ---------
Net Cash Provided (Used in) by Investing Activities . (478) (161) 16,692
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments made on long-term debt ............ (3,964) (8,143) (11,074)
Dividends paid ....................................... (194) (292) --
Repurchases of common stock, net of
common stock issuances ............................... -- (17) (49)
Capitalized debt costs ............................... -- -- (25)
------- -------- ---------
Net Cash Used in Financing Activities ................ (4,158) (8,452) (11,148)
------- -------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (3,319) (9,581) 2,075
Cash and Cash Equivalents at Beginning of Period .... 6,666 16,247 14,172
------- -------- ---------
Cash and Cash Equivalents at End of Period ..........$ 3,347 $ 6,666 $ 16,247
======= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ...............................$ 804 $ 1,246 $ 2,103
======= ======== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 -- ORGANIZATION
Homeplex Mortgage Investments Corporation, a Maryland corporation, (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).
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. The $.03 dividend
declared in 1993 consisted of $.0276 of ordinary income and $.0024 of return of
capital; the $.02 dividend declared in 1994 consisted of $.0142 of ordinary
income and $.0058 of return of capital, and the $.03 dividend declared in 1995
was all ordinary income to the recipients for federal income tax purposes.
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 (loss) reported in the accompanying financial statements is
different than taxable income (loss) 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.
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.
Amortization of Hedging
The cost of the Company's LIBOR ceiling rate agreements (see Note 7) was
amortized using the straight-line method over the life of the agreements. Other
expense includes $96,000 and $138,000, respectively, related to amortization of
hedging costs for the years ended December 31, 1994 and 1993.
Net Income (Loss) Per Share
Primary net income (loss) 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 (loss) per share is
the same for both primary and fully diluted calculations.
F-7
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
Short-Term Investments
At December 31, 1995, short-term investments consist of a Treasury Bill with
a face amount of $9,000,000, maturity date of January 25, 1996 and an estimated
yield to maturity of 5.30%.
Reclassification
Certain balances in the prior year have been reclassified to conform to the
current year's presentation.
NOTE 3 -- REAL ESTATE LOANS
The following is a summary of real estate loans at December 31, 1995:
<TABLE>
<CAPTION>
Interest Payment Principal and
Description Rate Terms Carrying Amount(1)
- --------------------------------- ---------- ------------------------------------ -----------------
<S> <C> <C> <C>
First Deed of Trust on 41 acres 16% Interest only monthly, principal due $1,278,000
of land in Gilbert, Arizona. October 18, 1996; may be extended
for one year under certain terms and
conditions.
First Deed of Trust on 33 acres 16% Interest only monthly, principal due 2,272,000
of land in Tempe, Arizona. November 21, 1995; extended for one
year on November 21, 1995 under the
same terms and conditions.
First Deed of Trust on 21.4 acres 16% Interest only monthly, principal due 498,000
of land in Tempe, Arizona. January 6, 1996; extended for six
months on January 6, 1996 under the
same terms and conditions. -----------------
$ 4,048,000
=================
<FN>
- --------
(1) Also represents cost for federal income tax purposes.
</FN>
</TABLE>
Each of the preceding loans was current as of December 31, 1995. The
following summarizes real estate loan activity for 1995 and 1994:
1995 1994
------------- ------------
Balance at beginning of year $ 9,260,000 $ 320,000
Real estate loans funded .... 3,902,000 9,610,000
Principal repayments ......... (9,114,000) (670,000)
------------- ------------
Balance at end of year .......$ 4,048,000 $ 9,260,000
============= ============
At December 31, 1995, all of the Company's loans are secured by properties
located in Arizona. As a result of this geographic concentration, unfavorable
economic conditions in Arizona could increase the likelihood of defaults on
these loans and affect the Company's ability to protect the principal and
interest on such loans following foreclosures upon the real properties securing
such loans.
F-8
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
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.
Prior to December 31, 1993, the Company accounted for its investment in these
five REMICs using the equity method of accounting. Accordingly, the Company
consolidated the financial statements of the REMICs in its financial statements
and included the respective REMICs income or loss in its consolidated statement
of net income (loss). In the event the undiscounted estimated future net cash
flows from the residual interest were less than the Company's financial
reporting basis, the residual interest was considered to be impaired and the
Company established a reserve for the difference. The reserves were then
amortized to income as the loss actually occurred.
F-9
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
Effective December 31, 1993, the Company adopted the prospective net level
yield method with respect to these investments. The cumulative effect of the
change of $6,078,000 was recorded as of December 31, 1993. Income for the years
ended December 31, 1995 and 1994 has been determined using the prospective net
level yield method. The following summarizes the Company's combined loss from
these five REMICs for the year ended December 31, 1993 (in thousands) prior to
the cumulative effect of the change in accounting principle:
Interest income, including amortization of mortgage premium
or discount, and reinvestment income from mortgage
collateral ..................................................$ 57,029
CMO interest, including amortization of debt discount, and
administration expense ...................................... (69,076)
Write-down of investment to estimated undiscounted cash
flows, net of amortization .................................. (2,320)
----------
Loss from residual interest certificates .....................$(14,367)
==========
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 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
December 31, 1995:
Type Of Company's Company's Percentage
Series Investments Amortized Cost Ownership
- -------------- ----------------------------- -------------- --------------------
(In Thousands)
Westam 1 Residual Interest Certificate $ 703 100.00%
Westam 3 Residual Interest Certificate 30 100.00%
Westam 5 Residual Interest Certificate 204 100.00%
Westam 6 Residual Interest Certificate 12 100.00%
ASW 65 Residual Interest Certificate 2,521 100.00%
FHLMC 17 Interest in MPCs 140 100.00%
FNMA 1988-24 Interest in MPCs 1,220 20.20%
FNMA 1988-25 Interest in MPCs 627 45.07%
------
$5,457
======
F-10
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
The following summarizes the Company's proportionate interest in the
aggregate assets and liabilities of the eight residual interests at December 31,
1995 (in thousands):
Assets:
Outstanding Principal Balance of Mortgage Certificates $ 357,084
Funds Held By Trustee and Accrued Interest Receivable 9,913
---------
$ 366,997
=========
Range of Stated Coupon of Mortgage Certificates ......9.0% - 10.5%
Liabilities:
Outstanding Principal Balance of CMOs and MPCs:
Fixed Rate ............................................$ 320,238
Floating Rate -- LIBOR Based .......................... 36,550
Floating Rate -- COFI Based ........................... 4,427
---------
Total ............................................. 361,215
Accrued Interest Payable .............................. 2,441
---------
$ 363,656
=========
Range of Stated Interest Rates on CMOs and MPCs ......0% to 9.9%
The average LIBOR and COFI rates used to determine income from residual
interests were as follows:
1995 1994 1993 AT DEC. 31, 1995
------- ------- ------- ----------------
LIBOR ....6.00% 4.33% 3.22% 6.00%
COFI .....4.96% 3.83% 4.16% 5.12%
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.
F-11
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
In May 1993 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 is applicable
to debt securities including investments in REMIC residual interests and
requires all investments to be classified into one of three categories: held to
maturity, available for sale, or trading. The Company acquired its residual
interests without the intention to resell the assets. The Company has both the
intent and ability to hold these investments to maturity and believes these
investments meet the "held to maturity" criteria of SFAS No. 115. Under SFAS No.
115, if a residual interest is determined to have other than temporary
impairment, the residual interest is written down to fair value. For the years
ended December 31, 1994 and 1993, the Company incurred net charges of $3,343,000
and $22,312,000, respectively, to write down its residual interests. There were
no charges for the year ended December 31, 1995.
At December 31, 1995, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 23% without early redemptions
or terminations being considered and 57% if early redemptions or terminations
are considered. At December 31, 1995, the estimated fair value of the Company's
residual interests, in the aggregate, approximates the Company's aggregate
carrying value.
The projected yield and estimated fair value of the Company's residual
interests are based on prepayment and interest rate assumptions at December 31,
1995. 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.
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 bear interest at 7.81% and require 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 are
included in other assets in the accompanying consolidated balance sheet and are
being amortized to interest expense over the life of the financing. The Notes
are 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 has a specified maximum balance of
$7,750,000, is to be used to make the scheduled principal and interest payments
on the Notes if the cash flow available from the collateral is 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 prepay the Notes at par, increase the reserve fund up to
its $7,750,000 maximum or is remitted to the Company. At December 31, 1995,
Funds held by Trustee consists of $5,122,000 in the reserve fund and $516,000 of
other funds pledged under the Indenture.
NOTE 6 -- SHORT-TERM BORROWINGS
Under a revolving line of credit agreement with a bank, the Company may
borrow up to $5,000,000, upon payment of a 1/2 % commitment fee with interest
payable monthly at prime plus 1/2 %. Such advances are to be secured by certain
of the Company's real estate loans with the amount advanced equal to between 40%
to 60% of the principal amount of the real estate loans pledged. Only real
estate loans approved by the bank are eligible for advances. The agreement
contains certain financial covenants and expires on May 5, 1996. Through
December 31, 1995, the Company has not drawn upon the line of credit.
F-12
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
NOTE 7 -- HEDGING
On May 12, 1992, the Company entered into a LIBOR ceiling rate agreement with
a bank for a fee of $245,000. The agreement, which had a term of two years
beginning July 1, 1992, required the bank to pay a monthly amount to the Company
equal to the product of $175,000,000 multiplied by the percentage, if any, by
which actual one-month LIBOR (measured on the first business day of each month)
exceeded 9.0%. Through the expiration of the agreement on July 1, 1994, LIBOR
remained under 9.0% and, accordingly, no amounts were paid under the agreement.
NOTE 8 -- 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.
Optionholders 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 December 31, 1995 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 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. During 1993, 20,368 shares were repurchased by the
Company in connection with this provision of the plan. For the year ended
December 31, 1993 approximately $66,000 related to the repurchase of the shares
is included in general and administrative expenses in the accompanying
consolidated statements of net income (loss).
13
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
The following summarizes stock option activity under the Stock Option Plan:
<TABLE>
<CAPTION>
For The Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------- -------- --------- ---------
<S> <C> <C> <C>
Options granted ......................................... 74,000 -- --
Exercise price per share of options granted .............$ 1.50 $ -- $ --
Dividend equivalent rights granted ...................... 8,728 7,779 9,115
Options cancelled (including dividend equivalent rights) 34,273 -- --
Options exercised (including dividend equivalent rights) -- -- --
Exercise price per share of options exercised
(excluding dividend equivalent rights) .................$ -- $ -- $ --
AT DECEMBER 31, 1995 1994
---- ----
Options outstanding ............................................285,769 231,769
Dividend equivalent rights outstanding .........................159,408 164,953
--------- ---------
Total options and dividend equivalent rights outstanding ......445,177 396,722
========= =========
</TABLE>
At December 31, 1995, 438,376 of the options, including dividend equivalent
rights, were exercisable at effective exercise prices ranging from $1.22 per
share to $4.48 per share. At December 31, 1995 and 1994, 357 and 54,357 common
shares, respectively, were reserved for future grants.
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 December 31, 1995, 200,000 of the
options were vested, with 275,000 vesting in 1996 and the remaining 275,000
vesting in 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 9 -- 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 loans are all short-term
(one year or less) and considered to be fully collectible. The terms and
conditions of such loans are the same as would be used by the Company to
fund similar type loans at December 31, 1995. As such, fair value
approximates cost.
F-14
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
(b) Short-term Investments -- Short-Term Investments consist of a Treasury
Bill with a fair value that approximates cost.
(c) Cash And Cash Equivalents/funds Held By Trustee -- Cash and cash
equivalents and funds held by Trustee 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.
(e) Fair Value/long Term Debt -- The estimated fair value of the Company's
long-term debt is estimated to be its carrying value at December 31,
1995 plus the prepayment penalty the Company would be required to make
to repay the debt in its entirety prior to its scheduled maturity.
Based on these assumptions the Company estimates the fair value of its
financial instruments at December 31, 1995 to be as follows (in thousands):
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ------------
Real Estate Loans .........$ 4,048 $ 4,048
Short-term Investments ... 8,969 8,969
Funds held by Trustee .... 5,638 5,638
Residual Interests ........ 5,457 5,457
Cash and Cash Equivalents 3,347 3,347
Long-term Debt ............ (7,819) (8,001)
F-15
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1995
NOTE 10 -- QUARTERLY FINANCIAL DATA (Unaudited)
(In Thousands Except Per Share Amounts)
Net Income
Net (Loss) Dividends
Income (Loss) Per Share Per Share
------------- --------------- -----------
1993
- ----
First ........ $(10,824) $ (1.11) $ --
Second ....... (8,148) (.84) --
Third ........ (4,050) (.42) --
Fourth (1) .. (8,966) (.93) .03
1994
- ----
First ........ $ (675) $ (.07) $ --
Second ....... (1,094) (.11) --
Third ........ 409 .04 --
Fourth (2) .. (3,164) (.33) .02
1995
- ----
First ........ $ 462 $ .05 $ --
Second ....... 335 .03 --
Third ........ 58 .01 --
Fourth ....... 242 .02 .03
- ----------
(1) Net loss in the fourth quarter of 1993 includes a charge of $6,078,000 or
$.63 per share, for the cumulative effect of an accounting change.
(2) Net loss in the fourth quarter of 1994 includes a charge of $3,212,000, or
$.33 per share, to record impaired residual interests at fair market value.
F-16
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement")
is dated as of the 21st day of December, 1995, by and between HOMEPLEX MORTGAGE
INVESTMENTS CORPORATION, a Maryland corporation ("Homeplex"), and ALAN D.
HAMBERLIN ("Hamberlin").
WHEREAS, Hamberlin is an employee of Homeplex and has served
as Chief Executive Officer of Homeplex since its organization;
WHEREAS, Hamberlin is a party to an employment agreement dated
as of November 1, 1992 (the "1992 Employment Agreement") pursuant to which
Hamberlin has served as the Chief Executive Officer of Homeplex pursuant to the
terms thereof;
WHEREAS, the 1992 Employment Agreement provides for an
employment term ending on August 31, 1996;
WHEREAS, Homeplex desires to continue to have the benefits of
Hamberlin's knowledge and experience and considers his continued employment a
vital element in protecting and enhancing the best interests of Homeplex and its
stockholders;
WHEREAS, Hamberlin has agreed to continue to serve as Chief
Executive Officer of Homeplex and to fulfill, with the other employees of
Homeplex, the functions performed by him under the 1992 Employment Agreement on
the terms and conditions contracted hereinafter; and
WHEREAS, Homeplex desires to continue to employ Hamberlin and
Hamberlin desires to continue to be employed by Homeplex upon the terms and
conditions contained hereinafter, which Homeplex and Hamberlin agree will
supersede, amend and restate the terms and conditions of the 1992 Employment
Agreement effective as of the date hereof;
NOW, THEREFORE, in consideration of the promises and of the
mutual covenants herein contained, the parties hereto have agreed and do agree
as follows:
1. Employment. Homeplex hereby employs Hamberlin and Hamberlin
hereby accepts employment by Homeplex upon the terms and conditions set forth
herein.
2. Services Required.
(a) Chief Executive Officer. Hamberlin shall be
employed as the Chief Executive Officer of Homeplex and shall perform such
duties and services as are customary for such a position. Such services shall
include the services currently being rendered by Hamberlin.
(b) Expense Reimbursement. Hamberlin shall devote
that portion of his time required to perform his duties hereunder in a competent
manner. Because some of Hamberlin's duties under this paragraph will, from time
to time, be performed by him while he is physically located in the offices of
Courtland Homes, Homeplex hereby agrees to pay Courtland $15,000 annually as
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<PAGE>
reimbursement for expenses incurred by Courtland in providing support to
Hamberlin during the time he performs work for Homeplex. Such payment shall be
made in quarterly increments.
3. Term of Employment. The term of this Agreement shall be for
a period of three years commencing as of the date hereof; provided, however, the
rights of Hamberlin and the obligations of Homeplex under the Addendum shall
continue during the "PSR Exercise Period" as defined in Section 6 of the
Addendum.
4. Change in Control. The term "Change in Control" of Homeplex
shall mean a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934 as in effect on the date of this Agreement or,
if Item 6(e) is no longer in effect, any regulations issued by the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934 which
serve similar purposes; provided that, without limitation, such a Change in
Control shall be deemed to have occurred if and when (a) any person (as such
term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) directly or indirectly of equity securities of
Homeplex representing 9.8 percent or more of the combined voting power of
Homeplex's then outstanding equity securities except that this provision shall
not apply to an acquisition which has been approved by at least 75 percent of
the members of the Board of Directors who are not affiliates or associates of
such person and by at least 80 percent of the issued and outstanding shares of
Homeplex common stock beneficially owned by non-affiliates of such person; (b)
during the period of this Agreement, individuals who, at the beginning of such
period, constituted the Board of Directors of Homeplex (the "Original
Directors"), cease for any reason to constitute at least a majority thereof
unless the election or nomination for election of each new director was approved
(an "Approved Director") by the unanimous vote of a Board of Directors
constituted entirely of Existing Directors and/or previously Approved Directors;
(c) a tender offer or exchange offer is made whereby the effect of such offer is
to take over and control Homeplex; and such offer is consummated for the equity
securities of Homeplex representing 20 percent or more of the combined voting
power of Homeplex's then outstanding voting securities; (d) Homeplex is merged,
consolidated or enters into a reorganization transaction with another person and
as the result of such merger, consolidation or reorganization less than 75
percent of the outstanding equity securities of the surviving or resulting
person shall then be owned in the aggregate by the former stockholders of
Homeplex; or (e) Homeplex transfers substantially all of its assets to another
person or entity which is not a wholly- owned subsidiary of Homeplex; provided,
however, that notwithstanding the foregoing no Change of Control shall be deemed
to have occurred if such a Change of Control is a "Consented Change of Control."
A "Consented Change of Control" is any transaction described in Sections 4(a),
(c) or (d) if such transaction has been unanimously approved by a Board of
Directors constituted entirely of Existing Directors and/or previously Approved
Directors.
5. Compensation.
(a) Salary. Homeplex will pay Hamberlin an annual
base salary of One Dollar ($1.00) for the term of this Agreement. This annual
base salary shall be payable in annual installments.
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<PAGE>
(b) Bonuses. Hamberlin shall not be entitled to any
bonus except as granted by the Board of Directors in its absolute sole
discretion.
(c) Options/PSRs. As of the date of this Agreement,
Homeplex has granted an option to Hamberlin to purchase common stock of Homeplex
pursuant to a Stock Option Agreement executed by and between Homeplex and
Hamberlin as of the date hereof (the "Stock Option Agreement"). Under the terms
of the Stock Option Agreement, Hamberlin may not exercise any options thereunder
until that Stock Option Agreement has been approved by the shareholders of
Homeplex as required in the Stock Option Agreement ("Shareholder Approval"). If
Shareholder Approval has not been obtained (i) at a Homeplex shareholders'
meeting in which the Stock Option Agreement is the subject of a shareholder
vote; (ii) on or before the day prior to the third anniversary date of this
Agreement; (iii) on or before the day prior to a Change in Control; or (iv) on
or before the day prior to any Date of Termination (not including a Date of
Termination occurring as a result of the termination of Hamberlin for Cause),
then on the earliest of the foregoing dates, Hamberlin shall have the phantom
stock rights ("PSRs") described in this Agreement and the Addendum attached
hereto which by this reference is incorporated herein.
(d) Fringe Benefits. Hamberlin shall be entitled to
participate in any group insurance, pension, retirement, vacation, expense
reimbursement or other plans, programs or benefits approved by the Board of
Directors and made available from time to time to employees of Homeplex
generally during the term of Hamberlin's employment hereunder. The foregoing
shall not obligate Homeplex to adopt or maintain any particular plan, program or
benefit.
6. Termination of Employment. Hamberlin's employment shall
terminate during the term of this Agreement under any of the following
circumstances:
(a) Death. Hamberlin's employment shall terminate
upon Hamberlin's death.
(b) Disability. Hamberlin's employment shall
terminate in the event Hamberlin becomes physically or mentally disabled so as
to be unable, for a period of more than 120 consecutive calendar days or for
more than 180 calendar days in the aggregate during any twelve-month period, to
perform his duties hereunder in a timely and competent manner, and Homeplex
thereafter gives written notice of termination to Hamberlin. Hamberlin's failure
to present himself for work for either of the periods described above shall be
presumptive evidence of his disability. The first day of any 120 or 180 day
period described above shall be referred to as the "Disablement Commencement
Date."
(c) Termination For Cause. Homeplex may terminate
Hamberlin's employment hereunder for Cause. For the purposes of this Agreement,
Homeplex shall have "Cause" to terminate Hamberlin's employment hereunder only
if termination shall have been the result of an act or acts of dishonesty by
Hamberlin constituting a felony and resulting or intended to result directly or
indirectly in substantial gain or personal enrichment at the expense of
Homeplex. Notwithstanding the foregoing, Hamberlin shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
Hamberlin a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the Homeplex Board of
Directors (excluding Hamberlin if he is then a director) at a meeting of the
Board called and held for the purpose (after
3
<PAGE>
reasonable notice to Hamberlin and an opportunity for Hamberlin, together with
his counsel, to be heard before the Board), finding that in the good faith
opinion of the Board Hamberlin was guilty of conduct meeting the criteria set
forth above and specifying the particulars thereof.
(d) Notice of Termination. Any termination by
Homeplex pursuant to Section 6(b) or 6(c) above shall be communicated by written
Notice of Termination. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Hamberlin's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination shall be effective without such Notice of
Termination.
(e) Termination by Mutual Agreement. Within 90 days
of a Consented Change of Control, Homeplex may send a written "Notice of
Requested Termination" to Hamberlin asking him to terminate his employment.
Hamberlin shall have 30 days to respond in writing to the Notice of Requested
Termination. A termination of Hamberlin's employment pursuant to this Section
6(e) shall be referred to herein as a "Consented Termination."
(f) Termination by Hamberlin. Hamberlin may at any
time during the term of this Agreement terminate his employment hereunder for
any reason or no reason by giving Homeplex notice in writing not less than 120
days in advance of such termination, provided that in the event of a Change in
Control such notice must be not less than 30 days in advance of termination. The
Date of Termination shall be the date specified in the written Notice of
Termination unless otherwise agreed and Hamberlin shall have no further
obligations to Homeplex after the effective date of termination. Notwithstanding
the foregoing, in the event any "person" (as defined in Section 4 above) begins
a tender or exchange offer, circulates a proxy to shareholders or takes other
steps to effect a Change of Control, Hamberlin agrees that he will not
voluntarily leave the employ of Homeplex, and will render services to Homeplex
commensurate with his position, until such "person" has abandoned or terminated
efforts to effect a Change of Control or until a Change of Control has occurred.
(g) Date of Termination. "Date of Termination" shall
mean (i) if the Agreement is terminated as a result of Hamberlin's death, the
date of Hamberlin's death, (ii) if the Agreement is terminated by Hamberlin, the
date on which he delivers a Notice of Termination to Homeplex, (iii) if this
Agreement is terminated by Homeplex for Disability, 30 days after a Notice of
Termination is given (provided that Hamberlin shall not have returned to the
performance of Hamberlin's duties on a full-time basis during such 30-day
period), (iv) if the Agreement is terminated as a result of a Consented
Termination, the date as agreed to by Hamberlin and Homeplex, or (v) if
Hamberlin's employment is terminated by Homeplex for any other reason, the date
on which a Notice of Termination is given; provided that if within 30 days after
any Notice of Termination is given by Homeplex, Hamberlin notifies Homeplex that
a dispute exists concerning the termination, the Date of Termination shall be
the earlier of the third anniversary date of this Agreement or the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
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<PAGE>
7. Compensation in the Event of Termination Prior to a Change
in Control. If Hamberlin's employment is terminated prior to a Change in
Control, the following provisions shall apply.
(a) Death or Disability. If Hamberlin's employment is
terminated under Section 6(a) or 6(b) hereof, Homeplex will pay Hamberlin or his
estate (i) his salary and fringe benefits to the Date of Termination and (ii) if
Shareholder Approval of the Stock Option Agreement has not occurred as of the
Date of Termination, an amount equal to the Excess Value of each vested PSR. For
purposes of the foregoing, the Excess Value of each vested PSR shall be
calculated (i) as of the Date of Termination if Hamberlin is deceased or (ii) as
of the Disablement Commencement Date if Hamberlin is disabled. The foregoing
amounts shall be paid to Hamberlin in a lump sum within 10 days after the Date
of Termination.
(b) For Cause. If Hamberlin's employment is
terminated under Section 6(c) hereof, Homeplex will immediately pay Hamberlin
his salary and fringe benefits to the Date of Termination and Hamberlin shall
not be entitled to any other salary or fringe benefits or PSR Exercise or DER
Payments (whether vested or unvested).
(c) Other. If Hamberlin's employment is terminated by
Homeplex for any reason other than death, disability, Cause, or a Consented
Termination, Homeplex will pay Hamberlin (i) his salary and fringe benefits for
the balance of the term of this Agreement and (ii) if Shareholder Approval of
the Stock Option Agreement has not occurred as of the Date of Termination, all
PSR DER Payments occurring during the PSR Exercise Period, and such PSR Exercise
Payments as elected by Hamberlin during the PSR Exercise Period. All salary and
fringe benefits shall be paid to Hamberlin in a lump sum within 10 days after
the Date of Termination. All PSR DER Payments shall be paid at such time as
required by the Addendum, and all PSR Exercise Payments shall be paid at such
time as such PSRs are exercised by Hamberlin during the PSR Exercise Period.
(d) By Hamberlin. If Hamberlin's employment is
terminated under Section 6(f) hereof, Homeplex will pay Hamberlin only his
salary and fringe benefits which become payable on or prior to the Date of
Termination. All such salary and fringe benefits shall be paid to Hamberlin in a
lump sum within 10 days after the Date of Termination. In addition, if
Shareholder Approval of the Stock Option Agreement has not occurred as of the
Date of Termination, with respect to those PSRs that vested prior to the Date of
Termination, Hamberlin shall thereafter be entitled during the PSR Exercise
Period to all PSR DER Payments and such PSR Exercise Payments as elected by
Hamberlin.
(e) No Mitigation. Hamberlin shall not be required to
mitigate the amount of any payment provided for in this paragraph by seeking
other employment or otherwise, nor shall the amount of any payment provided for
in this paragraph be reduced by any compensation earned by Hamberlin as the
result of employment by another employer.
8. Compensation in the Event of a Consented Termination. If
Hamberlin's employment is terminated pursuant to a Consented Termination,
Homeplex will pay Hamberlin only the salary and fringe benefits that become
payable on or prior to the Date of Termination. All such salary and fringe
benefits shall be paid to Hamberlin in a lump sum within 10 days after the Date
of Termination. In addition, if Shareholder Approval of the Stock Option
Agreement has not occurred as of the Date of Termination, Hamberlin shall
thereafter be entitled during the PSR Exercise Period to all PSR
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<PAGE>
DER payments and all such PSR Exercise payments as elected by Hamberlin with
respect to all PSRs as those PSRs vest as if Hamberlin were still employed.
9. Effect of Change in Control. If a Change in Control occurs
on or before the third anniversary date of this Agreement and if there
previously shall have been a Consented Termination of Hamberlin, and if
shareholder approval of the Stock Option Agreement has not occurred as of the
day prior to the Change in Control, all PSRs shall immediately vest, all PSR DER
payments shall be paid at such times as required by the Addendum, and all PSR
Exercise Payments shall be paid at such time that such PSRs are exercised by
Hamberlin during the PSR Exercise Date. If a Change in Control occurs during the
term of this Agreement and Hamberlin's employment shall not have been terminated
previously, notwithstanding any other provision of this Agreement to the
contrary, the following provisions shall apply:
(a) Benefit Plans. Homeplex shall maintain in full
force and effect, for Hamberlin's continued benefit until the earlier of the
third anniversary of the date of this Agreement, or the date Hamberlin becomes
entitled to participate in similar plans, programs or benefits provided by a
subsequent employer, all life, accident, medical and dental insurance plans,
programs or benefits, adopted from time to time by the Board of Directors, in
which he was entitled to participate immediately prior to the Change in Control
provided that his continued participation is possible under the general terms
and provisions of such plans, programs and benefits. The foregoing shall not
obligate Homeplex to adopt or maintain any particular plan, program or benefit.
In the event that his participation in any such plan, program or benefit is
barred, Homeplex shall arrange to provide him with benefits substantially
similar to those to which he would have been entitled to receive under such
plans and programs. At the end of the period of coverage, Hamberlin shall have
the option to have assigned to him at no cost and with no apportionment of
prepaid premiums, any assignable insurance policy owned by Homeplex and relating
specifically to him.
(b) Acceleration of PSRs. As provided in the
Addendum, if Shareholder Approval of the Stock Option Agreement has not occurred
as of the day prior to the Change in Control, all PSRs shall immediately vest,
all PSR DER Payments shall be paid at such times as required by the Addendum,
and all PSR Exercise Payments shall be paid at such time as such PSRs are
exercised by Hamberlin during the PSR Exercise Period.
(c) Change in Control Bonus. Within 10 days after a
Change in Control, Homeplex will pay $500,000 to Hamberlin as well as all unpaid
fringe benefits. If Hamberlin remains employed by Homeplex following a Change in
Control he shall be entitled to receive such other compensation, if any, as
Homeplex and Hamberlin shall then agree.
(d) No Mitigation. Hamberlin shall not be required to
mitigate the amount of any payment provided for in this paragraph by seeking
other employment or otherwise, nor shall the amount of any payment provided for
in this paragraph be reduced by any compensation earned by Hamberlin as the
result of employment by another employer.
10. Liquidation of Homeplex. In the event that no Change in
Control has occurred and the Board of Directors has elected to declare a
Liquidating Dividend, then notwithstanding the Addendum hereof, no PSR DER
Payment shall be made to Hamberlin. Instead, regardless of whether or not
Shareholder Approval of the Stock Option Agreement has occurred, Hamberlin shall
receive on
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or before the date of the Liquidating Dividend a bonus in an amount equal to
$20,833 multiplied by each full or partial month that Hamberlin has been
employed by Homeplex since the date of this Agreement. For purposes of this
Agreement, a "Liquidating Dividend" shall mean a dividend through which all or
substantially all of the assets of Homeplex are distributed to its shareholders.
11. Surrender of Books and Records. Hamberlin acknowledges
that all files, lists, books, records, literature, products and any other
materials owned by Homeplex or used by it in connection with the conduct of its
business shall at all times remain the property of Homeplex and that upon
termination of employment hereunder, irrespective of the time, manner or cause
of said termination, Hamberlin will surrender to Homeplex all such files, lists,
books, records, literature, products and other materials.
12. Notices. All notices, requests, demands and other
communications required under this Agreement shall be in writing and shall be
deemed duly given and received (i) if personally delivered, on the date of
delivery, (ii) if mailed, three days after deposit in the United States mail,
registered or certified, return receipt requested, postage prepaid and addressed
as provided below, or (iii) if by a courier delivery service providing overnight
or "next-day" delivery, on the next business day after deposit with such service
addressed as follows:
If to Homeplex: Homeplex Mortgage Investments
Corporation
5333 North 7th Street, Suite 219
Phoenix, Arizona 85014
If to Hamberlin: Alan D. Hamberlin
5333 North 7th Street, Suite 310
Phoenix, Arizona 85014
Any party may change its above-designated address by giving the other party
written notice of such change in the manner set forth herein.
13. Waiver. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver, and no waiver shall be binding unless executed in writing by the party
making the waiver.
14. Integration, Modification and Amendment. This Agreement
(which includes the Addendum) and the Stock Option Agreement embody the full
understanding of the parties with respect to the subject matter hereof,
superseding any and all prior agreements, including the 1992 Employment
Agreement, and no amendment or modification thereof shall be effective unless
the same shall be in writing and signed by both of said parties.
15. Governing Law. Except as the corporate law of the State of
Maryland expressly applies hereto, this Agreement shall be construed in
accordance with, and governed by, the laws of the State of Arizona, without
regard to application of conflicts of law principles.
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<PAGE>
16. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
17. Severability. Each provision of this Agreement is
severable from every other provision and is enforceable to the full extent that
it is valid without regard to the invalidity of any portion hereof or of any
other provision and without regard to any claim or cause of action Hamberlin may
have against Homeplex under this Agreement or otherwise.
18. Successors And Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the parties hereto;
provided that because the obligations of Hamberlin hereunder involve the
performance of personal services, such obligations shall not be delegated by
Hamberlin. For purposes of this Agreement successors and assigns shall include,
but not be limited to, any individual, corporation, trust, partnership, or other
entity which acquires a majority of the stock or assets of Homeplex by sale,
merger, consolidation, liquidation, or other form of transfer. Homeplex will
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of Homeplex to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that Homeplex would be required to
perform it if no such succession had taken place.
19. Attorneys' Fees. Homeplex agrees to reimburse Hamberlin
for his legal fees and costs in connection with the negotiation of this
Agreement. In the event an action or suit is brought by any party hereto to
enforce any of the terms of this Agreement, the prevailing party shall be
entitled to the payment of reasonable attorneys' fees and costs, as determined
by the judge of the court.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION, a Maryland
corporation
By: _______________________________________________
Name: _____________________________________________
Its: ______________________________________________
___________________________________________________
Alan D. Hamberlin
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<PAGE>
ADDENDUM TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
1. Addendum to Employment Agreement. This Addendum is attached
to an Amended and Restated Employment Agreement between Alan D. Hamberlin and
Homeplex Mortgage Investments Corporation dated as of December 21, 1995 (the
"Employment Agreement) and is intended to be incorporated in such Employment
Agreement as if it was a part thereof. All capitalized terms included in this
Addendum and not defined shall have the definitions given such term in the
Employment Agreement.
2. Conditional Grant of PSRs.
(a) Grant. Homeplex conditionally grants to
Hamberlin, as of December 21, 1995 (the "Grant Date"), the right, privilege and
option (the phantom stock right or "PSR") to be paid the appreciation occurring
with respect to 750,000 shares of the common stock of Homeplex ("PSR Shares"),
subject in all respects to the terms, conditions and provisions of this
Addendum. As of the Grant Date, Homeplex has also granted to Hamberlin an option
to purchase common stock of Homeplex pursuant to the Stock Option Agreement.
Under the terms of the Stock Option Agreement, Hamberlin may not exercise any
options thereunder prior to Shareholder Approval. If Shareholder Approval has
not been obtained (i) at a Homeplex shareholders' meeting in which the Stock
Option Agreement is the subject of a shareholder vote; (ii) on or before the day
prior to the third anniversary date of this Agreement; (iii) on or before the
day prior to a Change in Control; or (iv) on or before the day prior to any Date
of Termination (not including a Date of Termination occurring as a result of the
termination of Hamberlin for Cause), then on the earliest of the foregoing dates
(the "Effective Date"), Hamberlin shall have the PSRs described in the
Employment Agreement and this Addendum. If Shareholder Approval of the Stock
Option Agreement occurs prior to any Effective date, then this Addendum shall be
void and no PSRs shall be issued hereunder.
(b) PSR Shares. The PSR Shares shall be deemed to
become issued and outstanding for purposes of this Addendum (including Section 5
hereof) when the related PSRs vest, although the PSR Shares shall be only
phantom shares of common stock of Homeplex and shall not become actually issued
and outstanding. The number of PSR Shares deemed outstanding for purposes of
this Addendum (and the related PSRs held by Hamberlin) shall be reduced by the
number of PSRs exercised for cash under Section 4 and as provided in Section 6
hereof.
3. Vesting of PSRs. The PSRs shall vest according to following
schedule:
(a) 200,000 of the PSRs shall vest immediately;
(b) 275,000 of the PSRs shall vest on the first
anniversary of the Grant Date provided Hamberlin is either employed by Homeplex
on that date or has left the employment of Homeplex pursuant to a Consented
Termination as described in Section 6(e) of the Employment Agreement; and
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<PAGE>
(c) 275,000 of the PSRs shall vest on the second
anniversary of the Grant Date provided Hamberlin is either employed by Homeplex
on that date or has left the employment of Homeplex pursuant to a Consented
Termination as described in Section 6(e) of the Employment Agreement.
Notwithstanding the foregoing, all PSRs shall vest upon a Change in Control or
upon the termination of Hamberlin's employment (without his consent) by Homeplex
for any reason other than death, disability or Cause. From and after the
Effective Date, Hamberlin may exercise vested PSRs with respect to any
outstanding PSR Shares at any time, and from time to time, in whole or in part,
during the PSR Exercise Period, as defined in Section 6 hereof.
4. Exercise of PSRs. From and after the Effective Date, all or
any portion of the vested PSRs may be exercised by Hamberlin upon written notice
to Homeplex, addressed to Homeplex at its principal place of business. Such
notice shall be signed by Hamberlin and shall state the election to exercise
PSRs and specify the number of PSR Shares with respect to which the PSRs are
being exercised. Upon the exercise of PSRs, Homeplex shall immediately pay to
Hamberlin for each PSR exercised cash in an amount equal to the difference
between the Base Price of an PSR Share and the current FMV Price of an PSR Share
(an "PSR Exercise Payment"). The amount by which the FMV Price exceeds the Base
Price shall be referred to as the "Excess Value." For purposes of the foregoing,
the "Base Price" of a PSR Share shall be equal to $1.50, which is the market
price (as determined pursuant to Section 10 below) of a PSR Share as of the
Grant Date and the "FMV Price" value of a PSR Share shall be equal to its market
price (as determined pursuant to Section 10 below) as of any applicable date.
5. PSR DER Payments. From and after the Effective Date, except
as provided in Section 10 of the Employment Agreement, to the extent that
Homeplex at any time declares and pays a dividend with respect to its shares of
common stock (the "Common Stock"), Homeplex shall also make a cash payment to
Hamberlin (the "PSR DER Payment") of an amount equal to the number of PSR Shares
deemed to be outstanding under Section 2 hereof on the date of such dividend
declaration multiplied by the per share dividend actually paid with respect to
the Common Stock. If Homeplex declares a dividend after the Grant Date but prior
to the Effective Date ("Interim Dividends"), Homeplex shall pay to Hamberlin on
the Effective Date the PSR DERs occurring with respect to such Interim
Dividends.
6. Termination of PSRs. All PSRs, to the extent not previously
exercised, shall terminate (and any remaining PSR Shares shall no longer be
considered to be outstanding hereunder) upon the fifth anniversary of the Grant
Date or as earlier provided in the Employment Agreement (such termination date
shall be referred to as the "PSR Termination Date"). The period from the Grant
Date to the PSR Termination date shall be referred to as the "PSR Exercise
Period."
7. Death or Disability of Hamberlin. If Hamberlin dies or
becomes disabled on or after the Effective Date and prior to the PSRs being
exercised in full but during his employment, the Excess Value (as calculated on
the date of death or on the Disablement Commencement Date, whichever is
applicable) of all unexercised PSRs which had vested prior to the date of death
or the Disablement Commencement Date shall be immediately paid to Hamberlin or
his estate as provided in Section 7(a) of the Employment Agreement. If Hamberlin
dies on or after the Effective Date but after the termination of his employment
pursuant to a Consented Termination, the Excess Value (as
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<PAGE>
calculated on the date of death) of all unexercised PSRs that had vested prior
to the date of death shall be paid to Hamberlin's estate within 10 days.
8. No Privilege of Common Stock Ownership. The holder of the
PSRs granted hereunder shall not have any of the rights of a stockholder with
respect to the PSR Shares.
9. Capital Adjustments. The number of PSR Shares deemed
outstanding (and the Base Price) shall be proportionately adjusted for any
increase or decrease in the number of outstanding shares of Common Stock of
Homeplex resulting from a subdivision or consolidation of the Common Stock or
any other capital adjustment or the payment of a stock dividend or any other
increase or decrease in the number of such shares effected without Homeplex's
receipt of consideration therefor in money, services or property.
10. Calculation of Fair Market Value of Common Stock. The
market value of an PSR Share shall be the same as the market value of a share of
Common Stock. The market value of a share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(a) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded in the over-the-counter
market, the fair market value shall be the mean between the highest bid and
lowest asked prices (or, if such information is available, the closing selling
price) per share of Common Stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system. If there are no
reported bid and asked prices (or closing selling price) for the Common Stock on
the date in question, then the mean between the highest bid price and lowest
asked price (or the closing selling price) on the last preceding date for which
such quotations exist shall be determinative of fair market value.
(b) If the Common Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market value shall be
the closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Board to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of Common Stock on
such exchange on the date in question, then the fair market value shall be the
closing selling price on the exchange on the last preceding date for which such
quotation exists.
(c) If the Common Stock at the time is neither listed
nor admitted to trading on any stock exchange nor traded in the over-the-counter
market, then the fair market value shall be determined by the Board after taking
into account such factors as the Board shall deem appropriate, including one or
more independent professional appraisals.
11. Compliance With Laws and Regulations. The exercise of an
PSR and the payment of cash hereunder upon such exercise shall be subject to
compliance by Homeplex and Hamberlin with all applicable requirements of law
relating thereto.
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<PAGE>
12. Nonassignability. Neither the PSRs nor any rights or
privileges conferred thereby shall be assignable or transferable by Hamberlin
other than by will or by the laws of descent and distribution, and the PSRs
shall be exercisable only by Hamberlin during Hamberlin's lifetime.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Addendum as of the same date as the Employment Agreement.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION, a
Maryland corporation
By: ___________________________________________
Name: _________________________________________
Its: __________________________________________
Alan D. Hamberlin
-----------------------------------------------
v
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
STOCK OPTION AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 21st day of
December, 1995, by and between HOMEPLEX MORTGAGE INVESTMENTS CORPORATION, a
Maryland corporation ("Homeplex"), and ALAN D. HAMBERLIN ("Hamberlin").
WHEREAS, Hamberlin is an employee of Homeplex and has served
as its Chief Executive Officer since its organization;
WHEREAS, Hamberlin and Homeplex have entered into an Amended
and Restated Employment Agreement as of the same date hereof (the "Employment
Agreement"); and
WHEREAS, Homeplex considers it desirable and its best interest
that in lieu of a regular salary Hamberlin be given an inducement to acquire a
proprietary interest in Homeplex and added incentive to advance the interest of
Homeplex by possessing an option to purchase shares of the common stock of
Homeplex (the "Stock").
NOW, THEREFORE, in consideration of the promises and of the
mutual covenants herein contained, it is agreed by and between the parties as
follows:
1. Grant of Option. Homeplex grants to Hamberlin, as of the
date of this Agreement (the "Grant Date"), the right, privilege and option (the
"Option") to purchase 750,000 shares of Stock (the "Optioned Shares"), subject
in all respects to the terms, conditions and provisions of this Agreement.
2. Option Price. The purchase price of the Optioned Shares
(the "Option Price") is $1.50, which is 100 percent of the fair market value per
share of the Stock on the date of grant of this option.
3. Vesting of Option.
(a) Vesting Schedule. Optioned Shares that have
vested may be acquired in accordance with the terms of this Agreement at any
time, and from time to time, in whole or in part, until the Option expires as
provided in Section 5 hereof. The time at which the Optioned Shares vest and the
Hamberlin or his permitted assignee(s) (each, an "Optionholder") may thereafter
exercise this Option with respect to such Optioned Shares shall be as follows:
(i) 200,000 of the Optioned Shares shall
vest immediately;
(ii) 275,000 of the Optioned Shares shall
vest on the first anniversary of the Grant Date provided Hamberlin is either
employed by Homeplex on that date or has left the employment of Homeplex
pursuant to a Consented Termination as described in Section 6(e) of the
Employment Agreement; and
<PAGE>
(iii) 275,000 of the Optioned Shares shall
vest on the second anniversary of the Grant Date provided Hamberlin is either
employed by Homeplex on that date or has left the employment of Homeplex
pursuant to a Consented Termination as described in Section 6(e) of the
Employment Agreement.
Notwithstanding the foregoing, all Optioned Shares shall accelerate and vest
upon a Change in Control (as defined in the Employment Agreement) or upon the
termination of Hamberlin's employment (without his consent) by Homeplex for any
reason other than death, disability, a Consented Termination, or Cause (as that
term is used in the Employment Agreement).
(b) Acceleration. Homeplex may, in its discretion,
allow the Optioned Shares to be purchased prior to any vesting date.
4. Exercise of Option. All or any portion of the vested
Optioned Shares may be purchased by an Optionholder upon written notice to
Homeplex, addressed to Homeplex at its principal place of business. Such notice
shall be signed by the Optionholder and shall state the election to exercise the
Option and the number of Optioned Shares with respect to which it is being
exercised. Such notice shall be accompanied by payment in full of the Option
Price for the number of shares of Stock being purchased. Payment may be made in
cash or by check or by tendering duly endorsed certificates representing shares
of Stock then owned by the Optionholder. In the sole discretion of Homeplex, an
Optionholder may be provided with the election to pay for the Option Price by
having Homeplex withhold, from the Stock otherwise issuable, a portion of those
shares of Stock with an aggregate fair market value equal to that portion of the
Option Price designated by the Optionholder (not to exceed 100% of the Option
Price). Upon the exercise of the Option, Homeplex shall deliver, or cause to be
delivered, to the Optionholder a certificate or certificates representing the
net shares of Stock purchased upon such exercise as soon as practicable after
payment for those shares has been received by Homeplex. All shares that are
purchased and paid for in full upon exercise of the Option shall be fully paid
and non-assessable but may not be transferred, sold, assigned or conveyed by
Optionholder for six months from the date of shareholder approval as required by
Section 22 hereof.
5. Termination of Option. This Option, to the extent not
previously exercised, shall terminate upon the fifth anniversary of the Grant
Date, or as otherwise set forth in this Agreement.
6. Death or Disability of Hamberlin. If Hamberlin's employment
with Homeplex is terminated pursuant to the Employment Agreement upon the death
or disablement of Hamberlin, the Optioned Shares that are vested as of the date
of death or Disablement Commencement Date (as defined in the Employment
Agreement), whichever is applicable, shall be exercisable within one year of the
Date of Termination (as defined in the Employment Agreement) or until the stated
expiration date of the Option, whichever occurs first, by an Optionholder in
accordance with Section 4 hereof. If Hamberlin dies after a Consented
Termination, the Optioned Shares that are vested as of the date of death shall
be exercisable within one year of such date of death or until the stated
expiration date of the Option, whichever occurs first, by Hamberlin's
successors-in-interest.
7. No Privilege of Stock Ownership. An Optionholder shall not
have any of the rights of a stockholder with respect to the Optioned Shares
until such Optionholder shall have
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<PAGE>
exercised the option, paid the Option Price, and received a stock certificate
for the purchased shares of Stock.
8. Compliance With Laws and Regulations. The exercise of this
Option and the issuance of the Stock upon such exercise shall be subject to
compliance by Homeplex and each Optionholder with all applicable requirements of
law relating thereto and with all applicable regulations of any stock exchange
in which the shares of the Stock may be listed at the time of such exercise and
issuance. In connection with the exercise of an Option hereunder, an
Optionholder shall execute and deliver to Homeplex such representations in
writing as may be requested by Homeplex in order for it to comply with
applicable requirements of federal and state securities laws.
9. Liability of Homeplex. The inability of Homeplex to obtain
approval from any regulatory body having authority deemed by Homeplex to be
necessary to the lawful issuance and sale of any Stock pursuant to this
Agreement shall relieve Homeplex of any liability with respect to the
nonissuance or sale of the Stock as to which such approval shall not have been
obtained. Homeplex, however, shall use its best efforts to obtain all such
approvals.
10. Capital Adjustments. The number of Optioned Shares shall
be proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of Homeplex resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of a
stock dividend or any other increase or decrease in the number of such shares
effected without Homeplex's receipt of consideration therefor in money, services
or property.
11. Mergers, Etc. If Homeplex is the surviving corporation in
any merger or consolidation (not including a Corporate Transaction), the Option
granted herein shall pertain to and apply to the securities to which a holder of
the number of shares of Stock subject to the Option or Award would have been
entitled prior to the merger or consolidation.
12. Corporate Transaction. In the event of stockholder
approval of a Corporate Transaction that is not a Change in Control, all
unvested Options shall automatically accelerate and immediately vest so that
each outstanding Option shall, one week prior to the specified effective date
for the Corporate Transaction, become fully exercisable for all of the Optioned
Shares. Upon the consummation of the Corporate Transaction, all Options shall,
to the extent not previously exercised, terminate and cease to be outstanding.
"Corporate Transaction" shall mean (a) a merger or consolidation in which
Homeplex is not the surviving entity or (b) any reverse merger in which Homeplex
is the surviving entity.
13. Assignment. The right to acquire Stock under this
Agreement may not be assigned, encumbered or otherwise transferred by
Optionholder other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Internal
Revenue Code of 1986, as amended, Title 1 of the Employment Retirement Income
Security Act, or the rules thereunder.
14. Securities Restrictions
(a) Legend on Certificates. All certificates
representing shares of Stock issued hereunder shall be endorsed with a legend
reading as follows:
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<PAGE>
The shares of Common Stock evidenced by this
certificate have been issued to the
registered owner in reliance upon written
representations that these shares have been
purchased solely for investment. These shares
may not be sold, transferred or assigned
unless in the opinion of Homeplex and its
legal counsel such sale, transfer or
assignment will not be in violation of the
Securities Act of 1933, as amended, and the
rules and regulations thereunder.
(b) Private Offering for Investment Only. If the
shares to be issued to an Optionholder upon the exercise of any Option have not
been registered under the 1933 Act, the Arizona Act or the securities laws of
any other jurisdiction, those shares will be "restricted securities" within the
meaning of Rule 144 under the 1933 Act and must be held indefinitely without any
transfer, sale or other disposition unless (a) the shares are subsequently
registered under the 1933 Act, the Arizona Act and the securities laws of any
other applicable jurisdiction, or (b) the Optionholder obtains an opinion of
counsel which is satisfactory to counsel for Homeplex that the shares may be
sold in reliance on an exemption from registration requirements. By the act of
accepting an Option, Hamberlin agrees (i) that, any shares of Stock acquired
will be solely for investment not with any intention to resell or redistribute
those shares and (ii) such intention will be confirmed by an appropriate
certificate at the time the Stock is acquired if requested by Homeplex. The
neglect or failure to execute such a certificate, however, shall not limit or
negate the foregoing agreement.
(c) Registration Statement. If a registration
statement covering the shares of Stock issuable hereunder as filed under the
Securities Exchange Act of 1933, as amended, and as declared effective by the
Securities Exchange Commission (the "Registration"), the provisions of Sections
14(a) and (b) shall terminate during the period of time that such registration
statement, as periodically amended, remains effective. The Company shall use its
best efforts to effect the Registration within six months after shareholder
approval is obtained as required by Section 22 hereof.
15. Tax Withholding.
(a) General. Homeplex's obligation to deliver Stock
under this Agreement shall be subject to Hamberlin's satisfaction of all
applicable federal, state and local income tax withholding requirements.
(b) Shares to Pay for Withholding. Homeplex may, in
its discretion and in accordance with the provisions of this Section 15(b) and
such supplemental rules as it may from time to time adopt (including any
applicable safe-harbor provisions of SEC Rule 16b-3), provide Hamberlin with the
right to use shares of Stock in satisfaction of all or part of the federal,
state and local income tax liabilities incurred by Hamberlin in connection with
the receipt of Stock ("Taxes"). Such right may be provided to Hamberlin in
either or both of the following formats:
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<PAGE>
(i) Stock Withholding. Hamberlin may be
provided with the election to have Homeplex withhold, from the Stock otherwise
issuable, a portion of those shares of Stock with an aggregate fair market value
equal to the percentage of the applicable Taxes (not to exceed 100 percent)
designated by Hamberlin.
(ii) Stock Delivery. Homeplex may, in its
discretion, provide Hamberlin with the election to deliver to Homeplex, at the
time the Option is exercised, one or more shares of Stock previously acquired by
Hamberlin (other than pursuant to the transaction triggering the Taxes) with an
aggregate fair market value equal to the percentage of the taxes incurred in
connection with such Option exercise (not to exceed 100 percent) designated by
Hamberlin.
16. Binding Effect. This agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
17. Defined Terms. All capitalized terms herein which are not
otherwise defined therein shall have the same meaning ascribed to such terms in
the Employment Agreement.
18. Notices. Any notice required to be given or delivered to
Homeplex under the terms of this Agreement shall be in writing and addressed to
Homeplex in care of the Corporate Secretary at its principal corporate offices.
Any notice required to be given or delivered to Hamberlin at the address
indicated on the signature page hereto. Any permitted assignee hereunder shall
notify the other party hereto of the permitted assignee's address for purposes
of this notice provision. All notices shall be deemed to have been given or
delivered upon personal delivery or upon deposit in the U.S. mail, postage
prepaid return receipt requested, and properly addressed to the party to be
notified.
19. Integration, Modification and Amendment. This Agreement
and the Employment Agreement embody the full understanding of the parties with
respect to the subject matter hereof, superseding any and all prior agreements,
and no amendment or modification thereof shall be effective unless the same
shall be in writing and signed by both of said parties. Notwithstanding the
foregoing, this Agreement may not be amended or modified more than once every
six months, other than to comport with changes in the Internal Revenue Code, the
Employee Retirement Income Security Act, or the rules thereunder. In addition,
any amendment to this Agreement shall be required to be approved by the
shareholders if the amendment would: (a) materially increase the benefits
accruing to Hamberlin; (b) materially increase the number of shares of Stock
which may be issued hereunder; or (c) materially modify the requirements for
Hamberlin's eligibility for participation hereunder.
20. Governing Law. Except as the corporate law of the State of
Maryland expressly applies hereto, this Agreement shall be construed in
accordance with, and governed by, the laws of the State of Arizona, without
regard to application of conflicts of law principles.
21. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
22. Shareholder Approval. The grant of this Option is subject
to approval by the shareholders of Homeplex. Such approval must be by a majority
of the votes cast provided that the
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<PAGE>
total vote cast on the proposal represents over 50 percent in interest of all
securities entitled to vote on the matter. Notwithstanding any provision of this
Agreement to the contrary, the Option may not be exercised in whole or in part
until such shareholder approval is obtained. In the event that such shareholder
approval is not obtained within three years of the Grant Date, then the Option
shall terminate and an Optionholder hereunder shall have no further rights under
this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this
Agreement or caused it to be executed on the day and year first above written.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION, a Delaware corporation
By: ________________________________________
Name: ______________________________________
Its: _______________________________________
____________________________________________
Alan D. Hamberlin
Address:
____________________________________
____________________________________
6
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") dated as of the first
day of September, 1995, by and between HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION, a Maryland corporation ("Homeplex"), and JAY R. HOFFMAN
("Employee").
WHEREAS, Employee is an employee of Homeplex on an at will
basis;
WHEREAS, if a Change in Control (as defined below) occurs
Employee may be terminated;
WHEREAS, Homeplex desires to continue to have the benefits of
Employee's knowledge and experience and considers his continued employment an
important element in protecting and enhancing the best interests of Homeplex and
its stockholders;
NOW, THEREFORE, in consideration of the promises and of the
mutual covenants herein contained, the parties hereto have agreed and do agree
as follows:
1. Employment. Employee shall continue to be an at will
employee of Homeplex.
2. Term of Employment. The term of this Agreement shall be for
a period on one year commencing as of the date hereof and ending on August 30,
1996.
3. Change in Control. The term "Change in Control" of Homeplex
shall mean a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934 as in effect on the date of this Agreement or,
if Item 6(e) is no longer in effect, any regulations issued by the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934 which
serve similar purposes; provided that, without limitation, such a Change in
Control shall be deemed to have occurred if and when (i) any person (as such
term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) directly or indirectly of equity securities of
Homeplex representing 9.8% or more of the combined voting power of Homeplex's
then outstanding equity securities except that this provision shall not apply to
an acquisition which has been approved by at least 75% of the members of the
Board of Directors who are not affiliates or associates of such person and by at
least 80% of the issued and outstanding shares of Homeplex common stock
beneficially owned by non-affiliates of such person; (ii) during the period of
this Agreement, individuals who, at the beginning of such period, constituted
the Board of Directors of Homeplex, cease for any reason to constitute at least
a majority thereof unless the election or nomination for election of each new
director was approved by the unanimous vote of the directors who were directors
at the beginning of the period; (iii) a tender offer or exchange offer is made
whereby the effect of such offer is to take over and control Homeplex; and such
offer is consummated for the equity securities of Homeplex representing 20% or
more of the combined voting power of Homeplex's then outstanding voting
securities; (iv) Homeplex is merged, consolidated or
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<PAGE>
enters into a reorganization transaction with another person and as the result
of such merger, consolidation or reorganization less than 75% of the outstanding
equity securities of the surviving or resulting person shall then be owned in
the aggregate by the former stockholders of Homeplex; or (v) Homeplex transfers
substantially all of its assets to another person or entity which is not a
wholly-owned subsidiary of Homeplex. The term "Approved Change in Control" shall
be a Change in Control that has been approved by the Board of Directors by
written notice to the Employee prior to the Change in Control.
4. Effect of Change in Control.
(a) Severance Bonus. If during the term of this
Agreement a Change in Control has occurred, Employee shall be entitled to
receive a severance bonus in an amount equal to the Employee's annual salary as
of the date of the Change in Control (the "Severance Bonus"). Except as provided
in Section 4(b) hereof, the Severance Bonus shall be payable within 10 days
after the Change in Control.
(b) Approved Change in Control. Notwithstanding
Section 4(a) hereof, if the Change in Control is an Approved Change in Control
and if Employee continues his employment with Homeplex after the Change in
Control at an annual salary at least equal to Employee's annual salary before
the Change in Control, the Severance Bonus shall be payable in four installments
with the first installment commencing on the 90th day after the Change in
Control and each successive installment occurring every 90 days thereafter.
Notwithstanding the foregoing, the Severance Bonus shall be accelerated and paid
immediately upon the termination of the Employee by Homeplex for any reason
other than for Cause or upon a reduction in Employee's salary. If the Employee
is terminated for Cause or voluntarily terminates his own employment, Homeplex
shall not be required to pay any portion of the Severance Bonus unpaid as of the
date of termination. For purposes of this Agreement, "Cause" shall mean (i) the
willful and continued failure by Employee to substantially perform his duties
hereunder, after written demand for substantial performance is delivered by
Homeplex specifically identifying the manner in which Homeplex believes Employee
has not substantially performed, or (ii) Employee's willful misconduct which
materially injuries Homeplex, monetarily or otherwise. For purposes of this
Section 4(b), no explicit act, or failure to act, on Employee's part shall be
considered willful if done, or omitted to be done, in good faith and with a
reasonable belief that the action or omission was in the best interests of
Homeplex. Notwithstanding the foregoing, cause shall not be deemed to exist
unless Homeplex has given written notice to Employee setting forth Homeplex's
intention to terminate Employee and the deficiencies in Employee's performance
which establish the cause for Employee's termination. Employee in such period
shall have the right to correct any such deficiencies in performance. The date
of termination shall be 30 days after written notice of intent to terminate
unless the deficiencies in performance are corrected by Employee during such 30
day period. If the deficiencies in performance are timely corrected, Employee
may not be terminated.
(c) Bonus not in Lieu of Salary. In the event that
Employee continues his employment with Homeplex after a Change in Control, the
Severance Bonus (whether payable pursuant to Sections 4(a) or (b)) shall be paid
in addition to the Employee's regular compensation.
2
<PAGE>
5. Surrender of Books and Records. Employee acknowledges that
all files, lists, books, records, literature, products and any other materials
owned by Homeplex or used by it in connection with the conduct of its business
shall at all times remain the property of Homeplex and that upon termination of
employment hereunder, irrespective of the time, manner or cause of said
termination, Employee will surrender to Homeplex all such files, lists, books,
records, literature, products and other materials.
6. Notices. All notices, requests, demands and other
communications required under this Agreement shall be in writing and shall be
deemed duly given and received (i) if personally delivered, on the date of
delivery, (ii) if mailed, three (3) days after deposit in the United States
mail, registered or certified, return receipt requested, postage prepaid and
addressed as provided below, or (iii) if by a courier delivery service providing
overnight or "next-day" delivery, on the next business day after deposit with
such service addressed as follows:
If to Homeplex: Homeplex Mortgage Investments
Corporation
5333 N. 7th Street, Suite 219
Phoenix, Arizona 85014
If the Employee: Jay R. Hoffman
8606 East Larkspur Drive
Scottsdale, Arizona 85260
Any party may change its above-designated address by giving the other party
written notice of such change in the manner set forth herein.
7. Waiver. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver, and no waiver shall be binding unless executed in writing by the party
making the waiver.
8. Integration, Modification and Amendment. This Agreement
embodies the full understanding of the parties with respect to all severance
matters, superseding any and all prior agreements, and no amendment or
modification thereof shall be effective unless the same shall be in writing and
signed by both of said parties. This Agreement does not confer any employment
rights upon Employee beyond those rights which may currently exist as the result
of Employee's at will employment relationship with Homeplex.
9. Governing Law. Except as the corporate law of the State of
Maryland expressly applies hereto, this Agreement shall be construed in
accordance with, and governed by, the laws of the State of Arizona, without
regard to application of conflicts of law principles.
9.
<PAGE>
10. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
11. Severability. Each provision of this Agreement is
severable from every other provision and is enforceable to the full extent that
it is valid without regard to the invalidity of any portion hereof or of any
other provision and without regard to any claim or cause of action Employee may
have against Homeplex under this Agreement or otherwise.
12. Successors And Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the parties hereto;
provided that because the obligations of Employee hereunder involve the
performance of personal services, such obligations shall not be delegated by
Employee. For purposes of this Agreement successors and assigns shall include,
but not be limited to, any individual, corporation, trust, partnership, or other
entity which acquires a majority of the stock or assets of Homeplex by sale,
merger, consolidation, liquidation, or other form of transfer. Homeplex will
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of Homeplex to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that Homeplex would be required to
perform it if no such succession had taken place.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
HOMEPLEX MORTGAGE INVESTMENTS
CORPORATION, a Maryland corporation
By: _______________________________________
Name: _____________________________________
Its: ______________________________________
EMPLOYEE:
___________________________________________
Jay R. Hoffman
4
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-38230) of Homeplex Mortgage Investments Corporation of our
report dated February 13, 1996, with respect to the consolidated financial
statements of Homeplex Mortgage Investments Corporation included in this Annual
Report (Form 10-K) for the year ended December 31, 1995.
ERNST & YOUNG LLP
Phoenix, Arizona
March 25, 1996
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
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<SECURITIES> 8,969
<RECEIVABLES> 0
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<COMMON> 99
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